<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
FORM 10-KSB/A2
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-22172
------------------------
MIDISOFT CORPORATION
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
WASHINGTON 91-1345532
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
</TABLE>
1605 NW SAMMAMISH ROAD, SUITE 205,
ISSAQUAH, WASHINGTON 98027
(Address of principal executive offices)
(425) 391-3610
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ----------------------------------------------- -----------------------------------------------
<S> <C>
None N/A
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. /X/
Issuer's revenues for its most recent fiscal year were $3,004,224.
Aggregate market value of voting stock held by non-affiliates of the
registrant as of March 2, 1998 was $5,309,218 (based upon the closing sale price
of $0.843 per share on such date). Number of shares of Common Stock outstanding
as of March 2, 1998: 6,298,005 shares.
DOCUMENTS INCORPORATED BY REFERENCE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MIDISOFT CORPORATION
ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PART I
Item 1. Business........................................................................................... 3
Item 2. Description of Property............................................................................ 11
Item 3. Legal Proceedings.................................................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders................................................ 11
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.............................. 12
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 12
Item 7. Financial Statements and Supplementary Data........................................................ 17
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 36
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the
Exchange Act....................................................................................... 36
Item 10. Executive Compensation............................................................................ 37
Item 11. Security Ownership of Certain Beneficial Owners and Management.................................... 39
Item 12. Certain Relationships and Related Transactions.................................................... 40
Item 13. Exhibits and Reports on Form 8-K.................................................................. 40
SIGNATURES................................................................................................. 42
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Midisoft was founded in 1986 and is a prominent provider of innovative music
applications and utilities for the control and use of sound on personal
computers. Over the past twelve years the total available market for these types
of products has expanded dramatically from a very small segment of PCs used
mainly by computer hobbyists into virtually each computer that ships from every
system manufacturer. Sound on the PC has changed from a differentiating feature
into a standard component on most hardware platforms and product lines.
Emergence of the Internet has amplified this expansion and created the backbone
with which sound and music can now be sent globally to enhance communication
world-wide. As new technologies evolve, the Company believes it can continue to
provide leading edge music applications and audio control expertise.
The Company's strengths in design of sound and sound-related applications
positions its product strategy to exploit rapid advancements in hardware
capabilities. In 1997, the Company completed the major development task of a
comprehensive re-write of its flagship music sequencing product, MIDISOFT STUDIO
RECORDING SESSION, as well as release of its new music notation product,
MIDISOFT DESKTOP SHEET MUSIC. The Company has developed these products in an
effort to take advantage of advancements such as Microsoft DirectX and Microsoft
COM technologies.
Working closely with major hardware manufacturers to supply the control
software necessary to exploit the audio portion of their computers and
peripherals provides the Company with a road map that is as desirable as it is
unique. Alliances developed to supply audio control functionality in this manner
provide an entree for the presentation of music applications to product and
technology managers within these organizations. Supplying this audio control
capability, as well as audio software applications, to system makers, such as
Micron, contributes to strategic alliance opportunities and early access to
evolving computer designs.The Company aims to leverage these relationships into
new technologies and continuous improvements in its stand-alone software
products. These products are typically sold directly to end-users, through
traditional retail channels including the Company's web site.
MIDISOFT MUSIC PRODUCT LINE currently consists of MIDISOFT STUDIO RECORDING
SESSION, MIDISOFT PLAY PIANO, MIDISOFT MIDIKIT, MIDISOFT FAMILY MUSIC CENTER and
MIDISOFT DESKTOP SHEET MUSIC, the first in a new generation of Midisoft
scaleable applications. Targeted at the estimated $425 million per year category
of printed music (National Association of Music Merchants--1997 Statistical
Survey), MIDISOFT DESKTOP SHEET MUSIC features state of the art "Plug-in"
technology as well as a feature set that should meet even the most demanding
professionals needs. The Company's new technologies allow it to scale product
offerings and feature sets to the needs of specific market segments or to the
needs of individual OEM (original equipment manufacturer) customers. The Company
creates and markets these products to bring music education, music composition,
and professional quality music creation to the average users desktop. This goal
is complemented by the continued development of Midisoft's plug-in technology.
Because the development cycle for application "Plug-ins" is very short in
comparison to the development cycle for an application, the Company believes
that it will have a competitive advantage by having shorter development cycles
that bring new product offerings and new technologies to market faster than its
competition. As new categories such as Internet media grow, the Company expects
to aggressively pursue new music and audio opportunities.
MIDISOFT STRATEGIC PRODUCT LINE currently shipping consists of MIDISOFT
AUDIOPRO, MIDISOFT INTERNET AUDIO POSTCARD, MIDISOFT INTERNET MEDIA PLAYER and
MIDISOFT INTERNET SOUND BAR. MIDISOFT MEDIAWORKS '98 is in the stage of final
development and is scheduled to begin shipping to OEM customers during the
second
3
<PAGE>
quarter of 1998. Derivatives and sub-sets of these products are expected to
provide up to 45% of the Company's revenue, shipping under new and existing
contracts with OEMs.
MARKET OVERVIEW
Audio capabilities have moved from being a product differentiator to a base
line standard for PC manufacturers. Traditionally the Company provided enabling
software for audio to OEMs and music application software to end-users. The
Company has expanded its market vertically to integrate its enabling products
back to the chip and card manufacturers and horizontally to third-party vendors.
The Company does not attempt to create a market for its technology and instead
focuses on trends established by industry leaders to create the direction for
new products.
By establishing sales programs which focus on the chip manufacturer, the
Company has expanded its market while maintaining its aim to be on all of the 85
million PCs estimated to ship in 1998. The explosive growth of the Internet with
seemingly endless content potential further affirms the Company's product
strategy, especially as blurring between computer and consumer uses as DVD,
Digital Cameras and radio over the Internet become commonplace.
MARKET SIZE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
COMPUTERS IN USE, NEW SHIPMENTS
<S> <C> <C> <C> <C> <C>
millions
1996 1997 1998 1999 2000
PC Unit Shipments 69 77 85 94 102
PC's in Use 222 256 290 324 358
Morgan Stanley
</TABLE>
The potential market for the Company's audio/media control software is
virtually every PC that ships into a home or business. The majority of PCs
shipped today include not only a microphone but also a set of built-in speakers.
Most of these PCs have little in the way of software that fully takes advantage
of this incredible functionality. In fact, at this point many users are unaware
of the full spectrum of media files that ship on hard drive of each new
computer. Within this base of computer users there exists a sizable segment to
be targeted as customers for music applications. As increasing numbers of
computers enter the home, consumers are looking for more and better ways to
utilize them. Music tutorial, productivity, appreciation and enjoyment have
become an excellent way to make computer investment useful to the entire family.
4
<PAGE>
As more office computer users become aware of sound and music as powerful
additions to business presentations, needs for easy-to-use software to
accomplish this task become apparent. Thousands of free sound and music files
are available on the web today, creating quick and easy access to this
component. Midisoft products are easy to learn, easy to use and provide an
excellent way to make memorable presentations. Sound effects and background
music provide audio dimensions which complete and complement professional
presentations.
PRODUCTS AND PRODUCT DESIGN
Continued growth of the Intel architecture has fueled needs for professional
quality applications at the consumer level. Professional users, such as graphic
and audio designers, are migrating to the Intel platform in greater numbers as
the power of Intel offerings surpasses that of other platforms. There is also
migration of professional music studio users, a traditional Macintosh
stronghold, to the Intel platform. The Company believes that its products, which
are designed for the latest Intel technologies and offer ease of use which is
superior to that of the Macintosh, are positioned to embrace these migrating
users.
STRATEGY
The Company's strategy is to develop friendly, easy-to-use software that
offers integrated access to a broad range of PC features not currently in use,
because end-users are either unaware of their existence or are incapable of
utilizing them. This strategy is built on six fundamentals:
EMPHASIZE SOFTWARE, NOT HARDWARE. The Company concentrates its development
efforts on modular software to enable core functionality for the OEM and
products for the end-user that can be quickly enhanced.
USE STANDARD OPEN SYSTEMS. The Company's products use standard, rather than
proprietary technology. As a result, the Company can rapidly adopt new PC based
technologies and thereby leverage the substantial expenditures made by third
parties who develop new technologies for the general PC environment.
MAKE PRODUCTS EASY TO USE AND INSTALL. The Company strives to maximize ease
of use for the end-user. The products are designed to be "intuitive" with
features that can be readily used without special training or manuals.
DEVELOP PRODUCTS CONCURRENT WITH MARKET LEADERS. By beginning the product
development cycle with design sessions with industry leaders, like Micron and
Diamond Multimedia the Company obtains access to the latest technology trends
and can begin creating product interfaces at the earliest point in the market
adaptation of a new technology.
INCREASE MARKET VISIBILITY. The Company has increased visibility to its
products by inclusion in chip manufacturers' reference kits and expects to
pursue this channel of distribution as opportunities arise. The Company achieves
broad market coverage for its retail products primarily through regional
manufacturers' representative firms and large retail distributors, such as
Ingram Micro.
INCREASE TARGETED MARKETING AND MINIMIZE DISTRIBUTION OVERHEAD. The
Internet presents the Company with additional sources of distribution because
sound and music software provide excellent targeted selling opportunities to web
savvy computer users. This translates to nearly immediate electronic product
distribution and cash payment. Also, the Company licenses its products
internationally to in-country re-publishers who translate, manufacturer and
distribute the products while paying the Company a royalty per unit.
5
<PAGE>
The following table provides the name, a short description, the target
markets and channels of distribution for the Company's 1998 product line.
STRATEGIC PRODUCTS
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION MARKET INT'L CHANNELS
- --------------------------------------------------------------------------- ------------------ ------ ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSUMER BUSINESS OEM RETAIL DIRECT
-------- -------- ------ ------ ------
Midisoft MIDI, wave audio and CD audio are all supported in this X X X X X X
AUDIOPRO OEM program. The familiar stereo rack provides many
Q1, 1998 software sound tools, plus the flexibility to manage
and edit the entire spectrum of interactive multimedia
audio data.
Midisoft Audio Postcard delivers the ability to embed audio X X X X X X
INTERNET AUDIO notes into pictures. Users can add voice to digital
POSTCARD snapshots or video files. It includes a player to send
March, 1997 these files over the Internet in a simple manner.
Midisoft This product is a player for the largest base of live X X X X X X
INTERNET MEDIA or on demand audio files on the Internet, Streamed
PLAYER files. This player includes enhanced functionality
Q2, 1998 superior to competing products and allows the user to
organize audio playback over the web.
Midisoft This product provides the ability to control sound from X X X X X X
INTERNET SOUND BAR the desktop. Users can send Audio Mail, create Audio
March, 1997 Notes, annotate digital pictures and video with sound
and send them through the Internet, play CDs and find
any sound or music file on their system instantly, all
from a Windows 95 style task bar positioned on the edge
of the screen.
Midisoft This DVD player was created to ship with DVD card X X X X X X
DVD PLAYER makers who must have a utility to facilitate the
April, 1997 complete control of the video files on DVDs. It
includes a wide range of functions as well as heads-up
display capabilities to make DVD use easy and powerful.
Midisoft MediaWorks '98 is a unified media player that features X X X X
MEDIAWORKS '98 easy yet powerful access to the many different types of
mid-Q2 1998 media that are available today. Its sleek single
transport differentiates the player from the home
stereo rack model. It plays wav, midi, audio CD, video
and other files.
</TABLE>
6
<PAGE>
MUSIC PRODUCTS
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION MARKET INT'L CHANNELS
- ----------------------------------------------------------------- ------------------ -------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSUMER BUSINESS OEM RETAIL DIRECT
-------- -------- -------- -------- --------
Midisoft Studio Recording Session features real-time X X X X X
STUDIO RECORDING notation display of MIDI input, as well as
SESSION 1.01 innovative software and multi-track digital
1.0 June 1997 audio recording and playback. It includes
2.0 mid-June '98 multiple screen views to enhance the users
ability to fine tune their music, and a
professional quality digital audio editor.
Midisoft State of the art music publishing is the X X X X X X
DESKTOP SHEET MUSIC focus of SHEET MUSIC, with a user interface
1.0 June 1997 that is friendly to software novices. SHEET
2.0 mid-June '98 MUSIC features exceptional transcription
ability that takes Studio's "Real-time sheet
music" to a new level of excellence while
Midisoft's PERFORMANCE SEQUENCER-TM-
technology turns Midi playback into an
experience that is as intimate and real as a
live band in your living room.
Midisoft The MIDI Kit's universal MIDI connector and X X X X X X
MIDI KIT 3.0 MIDI editor allow the sound card owner to
MIDI KIT 4.0 transform a PC into a recording studio.
late-Q4, 1998 Cables connect the PCs sound card to a MIDI
musical instrument. Recording Session Plus
provides immediate MIDI recording, composing
and editing capability, as well as digital
audio recording.
Midisoft This product features a mixture of both core X X X X X
PLAY PIANO 2.0 Midisoft technologies and new proprietary
1996 technologies to create a truly interactive
learning experience. Lessons are created in
real-time, based on the student's needs. Any
MIDI file can be imported and Play Piano's
artificial intelligence instantly turn it
into a custom lesson for the student.
Midisoft This product incorporates MIDISOFT PLAY PIANO X X X X X
FAMILY MUSIC CENTER and MIDISOFT STUDIO with a high quality
1996 keyboard, MIDI connector and a Connect and
Play video to become an all-in-one music
solution.
Midisoft This MIDI sequencer was originally created to X X X X
RECORDING SESSION serve the needs of OEM customers. Its many
1995 features allow flexibility in editing,
recording and playback using MIDISOFT
STUDIO'S proprietary auto-notation and
animated note highlighting. It is available
translated in other languages including:
German, French, Spanish and Japanese.
</TABLE>
7
<PAGE>
MARKETING, SALES AND DISTRIBUTION
The principal elements of the Company's marketing, sales and distribution
strategy are as follows.
PRODUCT OFFERINGS
CHIP MANUFACTURERS--The Company has developed enabling software to enhance
the unique functionality of chips.
OEMS--The OEM product offerings continue to include the music products which
are gaining in popularity as a product differentiator. All of the products are
compatible and allow the OEM a virtual menu from which to enhance their lines of
PCs.
THIRD PARTY MANUFACTURERS--Use of audio to increase product effectiveness
and marketability has allowed the Company to leverage its audio expertise into
digital camera applications with its MIDISOFT AUDIO POSTCARD and into Internet
applications with its MIDISOFT INTERNET MEDIA PLAYER.
END-USERS--The products offered to end-users include a major upgrade to the
Company's flagship music products, MIDISOFT STUDIO RECORDING SESSION and
MIDISOFT DESKTOP SHEET MUSIC, INTERNET SOUND BAR AND INTERNET MEDIA PLAYER.
DISTRIBUTION
CHIP MANUFACTURERS, OEMS, THIRD PARTY MANUFACTURERS--Distribution is direct
through the Company's OEM sales force. The Company customarily supplies one
master disk which the chip manufacturer, OEM or third party manufacturer
duplicates.
RETAIL CHANNEL--Distribution is direct through the Company's Retail Channel
Sales group which is supplemented by third party Manufacturers' Representatives
and large Distributors/Resellers. The Company has a stock-balancing program for
its retail products that, under certain circumstances, allows for the exchange
of products by resellers. The Company monitors and manages the volume of its
sales to retailers and distributors and their inventories as substantial
overstocking in the distribution channel can result in high returns or the
requirement of substantial price protection in subsequent periods. There is also
a price protection program that allows the reseller a price reduction from the
Company for unsold product. The Company believes that it provides adequate
reserves for returns and price protection which are based on estimated future
returns of products, taking into account promotional activities, the timing of
new product introductions, distributor and resellers inventories and other
factors, and that its current reserves will be sufficient to meet return and
price protection requirements for the foreseeable future. Internationally,
retail products are generally sold through republishers.
The Company has an established base within computer software retail stores.
In 1997 the Company expanded its presence into Musical Instrument ("MI") stores.
The Company currently has shelf space in two of the largest MI chains, Sam Ash
and Guitar Center, as well as prominent regional MI resellers. Although the
total MI channel approximates only 600 additional shelves. The Company believes
that MI retailers generate higher sales per store for these types of products
than computer software retailers.
DIRECT SALES--The Company also has an inside sales group that sells product
directly to end-users through a toll-free number listed in advertising by the
Company. This group is also responsible for targeted direct mail marketing and
sells product upgrades and accessories to registered customers. Web sales are an
increasingly important channel for the Company. The Company has developed its
Internet web site to promote the complete product line and conduct secured
on-line transactions. In addition, the Company has sublicensed certain of its
downloadable software products to other Internet stores such as Digital River
and c--net.
8
<PAGE>
CUSTOMER SUPPORT
The Company provides a high level of support across the distribution
spectrum. Support includes on-site training for OEMs and Third Party
Manufacturers, as well as on-going telephone support. In turn, these groups
provide support for their customers directly. The Company also offers free
support to end-users of its retail products.
As part of its sales efforts, the Company generates a marketing database of
registered users for direct mail opportunities. Further, the surveying of
current users, collation of user feedback from technical support calls, input by
OEM customers and the Company's sales force is evaluated in determining the
features and function of the next set of product releases in the context of the
Company's own strategic planning.
The Company markets its products principally by attending trade shows,
advertising in periodicals oriented toward retailers and end-users, Web
advertising and direct mailings.
COMPETITION
The software market for audio and music on the PC is highly competitive and
rapidly changing. The Company's competitors, many of which have greater
financial, marketing and technical resources than the Company, offer similar
products and target the same customers. The Company believes its ability to
compete depends upon many factors within and outside its control, including the
ability to offer product enhancements, functionality, performance, price,
reliability, customer support, sales and marketing efforts and distribution.
Although the Company believes it now has the products and employees to favorably
compete on the basis of these factors, there can be no assurance that
competition will not adversely affect future operating results or financial
condition
MANUFACTURING
The Company utilizes a third-party contractor for assembly and outbound
distribution. The Company uses in-house capability for customer order
processing, component inventory procurement, material requirements planning and
production scheduling. The manufacturing process for software involves
duplication of software code onto floppy diskettes or CDs, printing of packaging
and documentation and assembly of final packaged products. Manufacturing output
can generally be increased rapidly to respond to increases in demand. The
Company has not encountered material difficulties or delays in manufacturing its
products and has not experienced unusual levels of returns resulting from
product defects.
The Company also generates and responds to customer demand through Web-based
distribution whereby customers order products and download the Company's
software directly to their PCs. This eliminates most of the traditional order
processing and manufacturing steps. OEM sales require duplication of the
Company's software code onto a CD, generally referred to as a "golden master."
OEMs then transfer the software code from golden masters onto their hardware.
PROPRIETARY RIGHTS
The Company relies primarily on trade secret, trademark and copyright laws,
treaties and contractual agreements, to protect its proprietary rights. The
Company attempts to keep results of its research and development programs
proprietary to protect its marketed software products against misappropriation
and infringement by third parties. However, there can be no assurance that the
Company will in all instances be able to prevent others from misappropriating or
infringing upon the Company's proprietary information and software products.
The Company intends to maintain the integrity of its tradename, trademarks,
copyrights and other proprietary rights against unauthorized use and to protect
against infringement and unfair competition where circumstances warrant.
9
<PAGE>
Although the Company believes that its products do not infringe on any
copyright or other proprietary rights of third parties, there are currently
significant legal uncertainties relating to the application of copyright and
patent law in the field of software. The Company has no assurance that third
parties will not obtain, or do not have, patents covering features of the
Company's products, in which event the Company or its customers might be
required to obtain licenses to use such features. If a patent holder refuses to
grant a license on reasonable terms or at all, the Company may be required to
alter certain products or stop marketing them.
EMPLOYEES
The Company, as of March 2, 1998, employed 27 employees. Of these, 8 are
employed in administration, 7 in product development and 12 in sales and
marketing. Employees are covered by confidentiality agreements, and no employee
has an employment contract. None of the Company's employees are represented by a
union or other bargaining group. The Company believes it maintains good employee
relations.
DIVIDENDS
The Company has declared no dividends on its Common Stock since its
inception. It is the present policy of the Company to retain earnings and
capital for use in its business. Any payment of dividends on the Common Stock in
the future will be dependent upon the Company's financial condition, results of
operations, current and anticipated cash requirements, plans for expansion,
restrictions, if any, under debt obligations, as well as other factors that the
Board of Directors may deem relevant.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, and such statements are subject to the safe harbors
created thereby. These forward-looking statements include the plans and
objectives of management for future operations, including plans and objectives
relating to (i) the development of new music and strategic software products,
(ii) the expansion of domestic and international marketing, sales and
distribution programs, (iii) the continued protection of proprietary
technologies and (iv) the ability to fund continued operations out of existing
working capital, additional capital infusion and cash flow from future
operations. The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements were based on assumptions that the Company would
continue to develop and introduce new music and strategic software products on a
timely basis, that rapid changes in technology would not make the Company's
products obsolete or otherwise reduce their ability to compete in the
marketplace, that competitive conditions within the industry would not change
materially or adversely, that the use of multimedia PCs in homes and small
offices would continue to grow, that management's decision to re-focus the
Company's resources on music and sound products would reduce certain expenses
from the levels which were experienced in 1996 and 1997, and that there would be
no material adverse change in the Company's operations or business. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and, there can be no
assurance that the forward-looking information will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
10
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal offices are located in approximately 17,000 square
feet of office space in Issaquah, Washington which the Company leases pursuant
to a lease expiring in April 2002. The Company currently pays $22,700 per month
under its lease agreement. The Company subleases approximately 5,700 square feet
to short-term tenants for periods of 12 to 18 months. The Company currently
receives $9,000 per month under sublease agreements. The Company considers its
leased properties to be in good condition, well maintained, and generally
suitable and adequate for its present and foreseeable future needs.
ITEM 3. LEGAL PROCEEDINGS
In 1997, an entity which sold substantially all of its assets to the Company
in 1995 demanded that the Company arbitrate certain claims arising from the
sale. The claims aggregate in excess of $1 million. The Company has denied the
allegations and has asserted counterclaims. The arbitration hearing was set for
April 22, 1998, but has been postponed until the week of July 6, 1998. The
ultimate outcome of this matter cannot be determined at this time; however, the
Company intends to defend the matter vigorously.
On April 3, 1997 the Company began arbitration proceedings against a former
customer. On September 24, 1997, the Company was awarded $194,983.37 against the
former customer. The amount of the award represents the sum of 1) $160,000.00,
the unpaid portion of the base annual license royalty under the Company's OEM
License Agreement and 2) $34,983.37, representing interest on the unpaid
installments from their respective due dates through the date of the award
computed at 12% per annum. The Company obtained a judgment in January, 1998 and
is awaiting the results of an appeal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
11
<PAGE>
PART II
ITEM 5. MARKET OF COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION. The Company's Common Stock is traded under the symbol
"MIDI". The Company's Common Stock was quoted on the Nasdaq National Market
through September 9, 1997. Since that time, the Common Stock has traded on the
OTC Bulletin Board. The following table sets forth the range of high and low
closing bid prices, as reported, from January 1, 1996 through December 31, 1997.
The prices set forth reflect inter-dealer quotations, without retail markups,
markdowns or commissions, and do not necessarily represent actual transactions.
As of March 2, 1998, the number of holders of record of the Company's Common
Stock was approximately 1,807. Since certain of the shares of Common Stock are
held in street name, there may be additional beneficial holders of the Company's
Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996
First quarter.................................................................... $ 3 1/2 $ 1 5/8
Second quarter................................................................... 9 3/8 2 3/16
Third quarter.................................................................... 5 7/8 3 1/4
Fourth quarter................................................................... 5 1/8 2 1/8
1997
First quarter.................................................................... $ 2 1/2 $ 1 1/8
Second quarter................................................................... 2 1 1/16
Third quarter.................................................................... 4 5/8 3 1/32
Fourth quarter................................................................... 1 5/8 7/16
</TABLE>
DIVIDENDS. The Company has declared no dividends on its Common Stock since
its inception. It is the present policy of the Company to retain earnings and
capital for use in its business. Any payment of dividends on the Common Stock in
the future will be dependent upon the Company's financial condition, results of
operations, current and anticipated cash requirements, plans for expansion,
restrictions, if any, under debt obligations, as well as other factors that the
Board of Directors may deem relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the Financial
Statements and notes thereto.
GENERAL
The Company's revenues include sales of software and software licenses net
of sales returns. Cost of revenues includes the costs of manuals, diskettes and
duplication, packaging materials, assembly, paper goods, shipping and
amortization of software development costs.
Research and development expenses consist primarily of personnel and
equipment costs required to conduct the Company's development effort. Software
development costs are expensed as incurred, until technological feasibility is
established, after which any additional costs are capitalized until the software
is available for release to customers. Capitalized software development costs
consisted of salaries and related benefits incurred in developing computer
software after technological feasibility has been established. Amortization of
capitalized software development costs begins when the related product was
available for release to customers. As a result of the highly competitive nature
of the software business and rapid product development life cycles, no
additional software development costs were capitalized in 1996 or 1997.
Purchased contract software technology costs represent development costs
incurred by contract software engineers in developing computer software. The
Company has eliminated third party contract development, intending to focus on
maintaining development expertise within the Company.
12
<PAGE>
Revenue from products licensed to OEMs consisting of one-time license fees
and contracts for minimum advances against future unit licenses are recognized
when the criteria for fixed fee revenue recognition under Statement of Position
No. 91-1 "Software Revenue Recognition" is satisfied. These criteria include,
but are not limited to, delivery of the software master, the Company's lack of
other significant obligations to the customer and a determination that the
collectability of the amount due is probable. Contracts that do not meet the
fixed fee revenue recognition criteria in SOP 91-1 included in deferred revenue
are recognized as revenue on the installment basis as payments from customers
are received, or until the Company has no significant obligations. Additional
royalty use or unit copy royalty fees are recognized when they are earned
pursuant to the license agreements and upon notification of shipment from the
OEMs. Revenue from sales to distributors, other resellers and end-users net of a
provision for anticipated returns, is recognized when the products are shipped.
The allowance for returns is evaluated each quarter taking into consideration,
among other things, known return requests from distributors, anticipated return
requests based on the distributor's rate of product sale, returns due to product
upgrades and historical distributor return patterns. American Institute of
Certified Public Accountants' SOP 97-2, SOFTWARE REVENUE RECOGNITION, will be
adopted by the Company during fiscal 1998. Revenue would not materially differ
from the amounts reported in the statement of operations as a result of applying
the provisions of SOP 97-2.
During 1996 and 1997, the Company's research and development, marketing and
sales efforts were focused upon the Company's core technologies in sound and
music. The Company has moved aggressively to reduce its reliance on technology
licensed from others through internal development of superior technologies or
through acquisition of desirable technologies.
At December 31, 1997, the Company had Federal net operating loss carryovers
of approximately $22.7 million, which expire beginning 2008. In certain
circumstances, as specified in Section 382 of the Internal Revenue Code, a 50%
or more ownership change by certain combinations of the Company's stockholders
during any three-year period would result in limitations on the Company's
ability to utilize its net operating loss carryforwards. An investor who owns
$2,000,000 in principal amount of convertible debentures and associated warrants
outstanding, has the right to purchase an additional $1,000,000 of convertible
debentures in June, 1998 and an additional $1,000,000 of convertible debentures
in June, 1999. If the debenture holder were to exercise all its warrants and
convert all the debt it holds and has a right to acquire, a change in control of
the Company could result.
SEASONALITY
Sales to distributors tend to be greater in the third and fourth quarter as
consumers buy software to supplement their holiday computer hardware purchases.
OEM sales are concentrated in a small number of large customer contracts and
tend to occur sporadically. Direct sales generally increase when software
upgrades become available.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues for 1997 were $3.0 million compared to $3.1 million in 1996. Sales
to software distributors and resellers, together with direct sales, represented
70% and 67% of revenues for the years ended December 31, 1997 and 1996. OEM
sales represented 30% and 33% during the same periods. The slight decline both
in total sales, and in OEM relative contribution to total sales, may reflect
customer anticipation of a new software release from the Company in the fourth
quarter of 1997 and first quarter of 1998. International sales accounted for 13%
of the Company's revenues in 1997 compared to 19% of revenues in 1996 resulting
from the Company putting relatively more emphasis to US sales in 1997.
Gross profit for 1997 was $1.3 million, an increase of $0.2 million,
compared to $1.1 million for the prior year. As a percentage of revenues, gross
profit increased to 45% in 1997 from 37% in 1996. The increased gross profit
percentage is primarily a result of the decline in amortization expense for
previously
13
<PAGE>
capitalized software development costs. These costs have now been fully
amortized and will have no impact on future earnings. Costs of royalties also
fell as the Company has concentrated on internal development of sound and music
software. The retail channel and inside sales channel consist of boxed product.
OEM costs of sales generally consist of one master CD from which OEMs duplicate
the Company's software. Accordingly, gross profit is higher on OEM sales
compared to sales into other channels.
Research and development expenses for 1997 were $988,000, an increase of
$46,000 compared to $942,000 for 1996. As a percentage of revenues, research and
development expenses increased to 33% in 1997 from 30% in 1996. This increase
reflects the Company's commitment to the internal development of industry
leading software for the production and management of sound and music.
Sales and marketing expenses for 1997 were $1.8 million, a decrease of $1.8
million, compared to $3.6 million for 1996. As a percent of revenues, sales and
marketing expenses decreased to 61% in 1997 from 116% in 1996. This resulted
from the Company's decision to refocus on core technologies in sound and music.
The Company consolidated product lines and reduced associated selling and
marketing expenses. Principal cost reductions were in sales and marketing
employees, advertising, public relations and promotional materials.
General and administrative expenses for 1997 were $2.2 million, a decrease
of $200,000, compared to $2.4 million for 1996. As a percentage of revenues,
these expenses for 1997 decreased to 72% in 1997 from 78% in 1996. The decrease
is the result of eliminating the cost of a senior management position and lower
legal costs
Interest expense for 1997 was $1 million, an increase of $1 million compared
to $1,000 in 1996. The increase in interest expense results largely from an
$876,000 non-cash charge relating to the intrinsic value of in the money
conversion options related to the convertible debentures issued by the Company
in 1997. In addition there was a non-cash interest expense of $100,000 related
to the value of warrants issued in 1997 in connection with an unsecured loan to
the Company of $40,000 by the former Chief Financial Officer. The balance of
$18,000 was for interest expense incurred under the Company's bank line of
credit and convertible debentures in 1997. Interest income for 1997 was $6,000,
compared to $116,000 in 1996. The decrease in interest income in 1997 reflects a
decrease in the amount of cash available for investments resulting from the use
of cash in operations.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of $90,000 and net accounts receivable of
$574,000. As of December 31, 1997, working capital was negative $772,000.
The Company's operating activities used cash of $1.9 million for the year
ended December 31, 1997 due primarily to operating losses of $3.6 million.
Current assets decreased $2.2 million to $1.0 million at December 31, 1997
from $3.2 million at the end of 1996. The decrease was due to utilization of
cash in operations and the reduction of accounts receivable from reserves taken.
Long term assets decreased $392,000 to $484,000 at December 31, 1997 from
$877,000 at the end of 1996. This decrease resulted from depreciation of fixed
assets and the amortization of capitalized software costs totaling $657,000,
partially offset by an increase of $195,000 for a long term receivable. There
were no additions to capitalized software costs in 1997 and additions to fixed
assets totaled $20,000. The total of current liabilities and deferred revenue
were $1.7 million at December 31, 1997, a decrease of $76,000 from the balance
at December 31, 1996 of $1.8 million. A decrease of deferred revenue of $791,000
to $30,000 at the end of 1997 from $821,000 at year end 1996, was offset by an
increase in accounts payable, accruals for state taxes and other expenses and an
addition to the current portion of long term debt in 1997. Shareholders' equity
decreased $3.4 million to negative $1.1 million at December 31, 1997 from $2.3
million at the end of 1996. The change in equity resulted from a net loss
14
<PAGE>
recorded in 1997 of $4.7 million, partially offset by additions to equity of $1
million, reflecting fair value of warrants and the intrinsic value of
convertible debentures, both associated with the securities purchase agreement
executed October 28, 1997, as described below. Other changes to equity resulted
from stock subscriptions and stock dividends on the preferred stock.
On October 28, 1997, the Company entered into a Securities Purchase
Agreement, which was amended on January 7, 1998, (the "Agreement") with an
unrelated third party (the "Lender"). The Agreement provides for the sale of $2
million of convertible debentures. The Company sold $500,000 of debentures on
each of October 28, 1997, November 28, 1997, January 9, 1998 and January 28,
1998. The first $1 million in debentures sold are convertible into a total of
1,666,667 shares of Common Stock and were issued with warrants to purchase an
additional 833,333 shares of Common Stock at a price of $1.50 per share. The
second $1 million in debentures sold are convertible into a total of 1,923,077
shares of Common Stock and were issued with warrants to purchase an additional
961,538 shares of Common Stock at a price of $1.25 per share. The debentures
bear interest at the rate of 1% per annum payable in cash or, at the Company's
option, in shares of Common Stock. The Company is obligated to pay a finder's
fee of 3% of the money raised as that money is received by the Company. The
Company has the right to redeem these debentures at any time prior to conversion
for an amount equal to the sum of the outstanding principal amount plus accrued
interest plus a redemption premium which increases from 7% of the principal
amount if redeemed within 45 days from issuance to 25% of the outstanding
principal amount if the redemption date is more than 90 days from the issuance
date. For so long as the debentures are outstanding or the Lender owns at least
25% of the Company's outstanding Common Stock, the Lender shall have the right
to (i) approve certain merger or acquisition transactions, (ii) appoint two of
the Company's five directors with the Company's concurrence and (iii) purchase
any equity securities the Company may propose to sell. The first of the Lender's
two board positions has been filled by Mr. J. Larry Smart, President and Chief
Executive Officer of Visioneer, Inc., a public company. No appointment to the
second seat has been made.
The debenture holder has the right to purchase an additional $1,000,000 of
convertible debentures in each of June, 1998 and again in June, 1999. If the
debenture holder were to exercise all its warrants and convert all the debt it
holds and has a right to acquire, a change in control of the Company could
result.
The Company is in technical default of certain provisions of the debentures.
The Lender has granted forbearance of this default through December 31, 1998.
Under the Securities Purchase Agreement the Company is required to maintain
sufficient authorized and unissued shares as may be reasonably necessary to
effect the conversion of the debentures, including the $2 million of debentures
the Lender has a right to purchase in June, 1998 and June, 1999. The Company
does not currently have sufficient authorized and unissued shares to satisfy
this requirement. The Company's Board of Directors has approved an increase in
the number of authorized shares from 10 million to 25 million shares of Common
Stock, subject to shareholder approval at the next annual meeting.
Simultaneous with the execution of the Agreement, the Company entered into a
Registration Rights Agreement with the Lender, whereby the Company agreed to use
its reasonable best efforts to file a registration statement to register the
Common Stock which is issuable upon the conversion and exercise of the
debentures and warrants. The Company has agreed that it will bear all costs
associated with such registration, excluding underwriting commissions or
discounts.
In September, 1997 the Company received $250,000 for which it agreed to
issue a 5% debenture, due in one year, convertible into shares of common stock
at a price of $0.65 per share. The lender has requested changes in the terms of
the transaction, and definitive loan documentation has not been executed. The
Company expects that the final agreement will provide for a convertible note,
bearing interest from 5% to 8% with a conversion price of $0.65 per share
maturing in one to two years.
15
<PAGE>
The Company may continue to pursue other financing arrangements, as needed,
to increase its cash reserves in 1998. There can be no assurance the Company
will be capable of raising additional capital or that the terms upon which such
capital will be available to the Company will be acceptable.
TRADE DEBT AND OTHER MATTERS
As of December 31, 1997, the Company had $226,000 of accounts payable that
were current, $100,000 extended to between 31 and 60 days and $643,000 extended
over 60 days. The level of extended accounts payable results from the Company's
negative operating cash flow and from a decision by the Company to manage
closely both its cash resources and accounts payable. The Company has entered
into plans with many of these vendors to extend payments beyond due dates in the
original purchase orders. While the Company believes that the payment plans will
continue to be accepted, there is no certainty that the Company will be able to
continue to meet the extended payment terms. Some vendors have refused to make
any further sales to the Company and others have required the Company to pay
cash on delivery. The Company has not yet failed to meet a delivery commitment
due to supply problems from its vendors.
The Company has received demand letters from certain vendors requesting
immediate payment of amounts owing them totaling approximately $93,000. Five of
these vendors have initiated litigation and three of these have received
judgments totaling approximately $62,000.
NASDAQ
Effective with the close of business September 9, 1997 the Nasdaq delisted
the Company's Common Stock from the Nasdaq National Market. The Company was
unable to evidence a minimum of $2,000,000 in net tangible assets and compliance
with all the requirements for continued listing on the Nasdaq National Market.
Although the Common Stock trades on the OTC Bulletin Board, the Company believes
that the delisting of its stock has adversely affected its ability to raise
capital.
YEAR 2000 ISSUES
The Company has identified two systems that it relies upon for its
operations that are not currently year 2000 compliant. Both of these systems'
developers have made year 2000 compliant upgrades readily available. The Company
believes that all other systems used in its operations are year 2000 compliant
and plans to be fully compliant well before any necessary deadlines are
approached. The cost of the upgrades will have an immaterial impact on the cost
of operations.
SUBSEQUENT EVENTS
On January 28, 1998 the Company announced that it had signed a letter of
intent to acquire Passport Designs, Inc., a privately-held company in Foster
City, California. Subsequently, the parties discontinued negotiations and the
Company ceased activity related to acquisition of Passport Designs, Inc. The
Company may explore other opportunities to acquire the technology.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Midisoft Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in shareholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Midisoft
Corporation at December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Price Waterhouse LLP
Seattle, Washington
April 10, 1998
17
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Midisoft Corporation
We have audited the accompanying balance sheet of Midisoft Corporation as of
December 31, 1996 and the related statements of operation, shareholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present
fairly, in all material respects, the financial position of Midisoft Corporation
at December 31, 1996 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred recurring losses from operations and has negative operating
cash flows. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classifications of liabilities that
may result from the outcome of this uncertainty.
Ernst & Young LLP
Seattle, Washington
March 13, 1997
18
<PAGE>
MIDISOFT CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents....................................................... $ 90,000 $ 709,000
Accounts receivable, net of allowances of $493,000 in 1997 and $1,052,000 in
1996.......................................................................... 574,000 1,282,000
Inventories..................................................................... 222,000 942,000
Prepaids and other.............................................................. 82,000 282,000
-------------- --------------
Total current assets.......................................................... 968,000 3,215,000
Long-term receivable.............................................................. 195,000
Property and equipment, net....................................................... 239,000 421,000
Other assets...................................................................... 50,000 455,000
-------------- --------------
$ 1,452,000 $ 4,091,000
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Trade accounts payable.......................................................... $ 969,000 $ 691,000
Current portion of long-term debt............................................... 250,000
Accrued wages and payroll taxes................................................. 100,000 186,000
Other accrued expenses.......................................................... 391,000 118,000
Deferred revenue................................................................ 30,000 821,000
-------------- --------------
Total current liabilities..................................................... 1,740,000 1,816,000
-------------- --------------
Long-term debt, net of discount................................................... 740,000 --
-------------- --------------
Warrant obligations............................................................... 81,000 --
-------------- --------------
Commitments and contingencies (Notes 12, 13 and 14)
Shareholders' equity (deficit)
Preferred stock, Series A convertible, no par value; 2,500,000 shares
authorized, zero issued and outstanding in 1997 and 1,100 issued and
outstanding in 1996........................................................... 1,100,000
Common stock, no par value; 10,000,000 shares authorized, 6,359,000 issued and
outstanding in 1997 and 5,345,425 issued and outstanding in 1996.............. 20,165,000 18,733,000
Additional paid-in capital...................................................... 1,245,000
Notes receivable from shareholders.............................................. (191,000)
Retained deficit................................................................ (22,328,000) (17,558,000)
-------------- --------------
Total shareholders' (deficit) equity.......................................... (1,109,000) 2,275,000
-------------- --------------
$ 1,452,000 $ 4,091,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
MIDISOFT CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenues............................................................................ $ 3,004,000 $ 3,113,000
Cost of revenues.................................................................... 1,659,000 1,971,000
------------- -------------
Gross profit........................................................................ 1,345,000 1,142,000
------------- -------------
Operating expenses
Sales and marketing............................................................... 1,842,000 3,613,000
General and administrative........................................................ 2,151,000 2,421,000
Research and development.......................................................... 988,000 942,000
------------- -------------
Total operating expenses........................................................ 4,981,000 6,976,000
------------- -------------
Operating loss...................................................................... (3,636,000) (5,834,000)
Interest expense.................................................................... (1,035,000) (1,000)
Interest income..................................................................... 6,000 116,000
Other (expense) income.............................................................. (64,000) 3,000
------------- -------------
Net loss............................................................................ $ (4,729,000) $ (5,716,000)
------------- -------------
------------- -------------
Net loss per share.................................................................. $ (0.79) $ (1.22)
------------- -------------
------------- -------------
Weighted average shares outstanding................................................. 6,014,000 4,687,000
------------- -------------
------------- -------------
Net loss per share assuming dilution................................................ $ (0.79) $ (1.22)
------------- -------------
------------- -------------
Weighted average shares outstanding assuming dilution............................... 6,014,000 4,687,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
MIDISOFT CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTES TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE SHAREHOLDERS'
----------------------- --------------------- PAID-IN FROM RETAINED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDERS DEFICIT (DEFICIT)
----------- ---------- --------- ---------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1995.............. 4,662,000 $17,106,000 $(11,842,000) $ 5,264,000
Stock options
exercised......... 33,000 83,000 83,000
Common stock issued
in settlement of
litigation........ 650,000 1,544,000 1,544,000
Preferred stock
issued............ 1,100 $1,100,000 1,100,000
Net loss............ (5,716,000) (5,716,000)
----------- ---------- --------- ---------- ------------- -------------- ----------- -------------
Balance at
December 31,
1996.............. 1,100 1,100,000 5,345,000 18,733,000 (17,558,000) 2,275,000
Stock options
exercised in
exchange for a
note receivable... 175,000 191,000 $ (191,000)
Preferred stock
converted......... (1,100) (1,100,000) 776,000 1,141,000 (41,000)
Common stock
issued............ 63,000 100,000 100,000
Warrants issued with
convertible
debt.............. $ 273,000 273,000
In the money
conversion option
on convertible
debt.............. 862,000 862,000
Warrants issued for
debt and
services.......... 110,000 110,000
Net loss............ (4,729,000) (4,729,000)
----------- ---------- --------- ---------- ------------- -------------- ----------- -------------
Balance at
December 31,
1997.............. -- $ -- 6,359,000 $20,165,000 $ 1,245,000 $ (191,000) $(22,328,000) $(1,109,000)
----------- ---------- --------- ---------- ------------- -------------- ----------- -------------
----------- ---------- --------- ---------- ------------- -------------- ----------- -------------
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
MIDISOFT CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.......................................................................... $ (4,729,000) $ (5,716,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................... 657,000 1,002,000
Amortization of debt discount................................................... 875,000
Warrants issued for debt........................................................ 110,000
Changes in operating assets and liabilities
Decrease in accounts receivable, net.......................................... 708,000 1,047,000
Decrease (increase) in inventories............................................ 720,000 (448,000)
Decrease (increase) in prepaids and other..................................... 200,000 (16,000)
Increase in long-term receivable.............................................. (195,000)
Increase in trade accounts payable............................................ 278,000 262,000
Decrease in accrued wages and payroll taxes................................... (86,000) (74,000)
Increase (decrease) in other accrued expenses................................. 273,000 (142,000)
(Decrease) increase in deferred revenue....................................... (791,000) 14,000
Increase in warrant obligations............................................... 81,000
------------- -------------
Net cash used in operating activities......................................... (1,899,000) (4,071,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment............................................... (20,000) (86,000)
Redemption of short-term investments.............................................. 1,540,000
------------- -------------
Net cash (used in) provided by investing activities........................... (20,000) 1,454,000
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Stock options exercised........................................................... 83,000
Issuance of common stock.......................................................... 100,000
Sale of preferred stock........................................................... 1,100,000
Proceeds from issuance of long-term debt and warrants, net of debt issue costs.... 1,200,000
------------- -------------
Net cash provided by financing activities..................................... 1,300,000 1,183,000
------------- -------------
Net decrease in cash and cash equivalents........................................... (619,000) (1,434,000)
Cash and cash equivalents, beginning of year........................................ 709,000 2,143,000
------------- -------------
Cash and cash equivalents, end of year.............................................. $ 90,000 $ 709,000
------------- -------------
------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during year for interest.................................................. $ 58,000 $ 1,000
------------- -------------
------------- -------------
</TABLE>
See Note 16 for supplemental information of non-cash financing activities.
22
<PAGE>
MIDISOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Midisoft Corporation (the Company) is a leading provider of innovative
applications for the use of sound on the personal computer (PC). The Company was
incorporated in Washington in 1986 and introduced its first product, Midisoft
Studio, in that year. The Company has focused its product lines to include music
learning and creativity and the integration of sound and media in today's PC
environment. The Company divides these product lines into two development
categories, music products and strategic products. The Company's music products
enable users to enjoy, explore, learn, create and share music. The Company
pioneered the development of MIDI technology, including the ability of users to
instantly view musical notation of sounds played through a piano keyboard, or
other MIDI-equipped instrument, linked to a PC. Midisoft's strategic products
promote the convergence of sound with other technologies into the personal
computer desktop, allow users to enhance their computing experience, and
communicate more effectively with and through computers. The Company markets its
products on a worldwide basis to (i) original equipment manufacturers (OEMs),
which "bundle" one or more of Midisoft's products with their own products, (ii)
distributors and resellers, which directly supply the retail distribution
channel, and (iii) end users, catalog companies, and businesses.
GOING CONCERN AND LIQUIDITY
The Company has incurred substantial operating losses during the past
several years. The financial statements have been prepared assuming the Company
will continue as a going concern and do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
and liabilities that may result from this uncertainty.
The Company has required substantial working capital to fund its operations.
To date, the Company has financed its operations principally through the net
proceeds from its initial public offering and other debt and equity
transactions. The Company's ability to continue as a going concern is dependent
upon numerous factors, including its ability to obtain additional financing, the
level of future revenues and its ability to reduce operating expenses. The
Company is actively pursuing possible sources of additional working capital.
There can be no assurance that the Company will be able to obtain additional
financing.
If the Company is unable to obtain sufficient funds to satisfy its cash
requirements, it may be forced to curtail operations, dispose of assets or seek
extended payment terms from its vendors. Such events would materially and
adversely affect the value of the Company's equity securities. There can be no
assurance that the Company will be able to reduce expenses or successfully
complete other steps necessary to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from products licensed to OEMs consisting of one-time license fees
and contracts for minimum advances against future unit licenses are recognized
when the criteria for fixed fee revenue recognition under Statement of Position
No. 91-1, SOFTWARE REVENUE RECOGNITION, (SOP 91-1) are satisfied. These criteria
include, but are not limited to, delivery of the software master, the Company's
lack of other significant obligations to the customer and a determination that
collectability of the amount due is probable. Revenues on contracts which do not
meet the fixed fee revenue recognition criteria in SOP 91-1 are included in
deferred revenue in the accompanying balance sheet and are recognized as revenue
on the installment basis as payments are received or until the Company has no
significant obligations. Additional
23
<PAGE>
MIDISOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
royalty use or unit copy royalty fees are recognized when they are earned
pursuant to the license agreements and upon notification of shipment and payment
from the OEMs. Revenue from sales to distributors, other resellers and end
users, net of a provision for anticipated returns, is recognized when the
products are shipped. The allowance for returns is evaluated each quarter taking
into consideration, among other things, known return requests from distributors,
anticipated return requests based on the distributor's rate of product sale,
returns due to product upgrades and historical distributor return patterns.
American Institute of Certified Public Accountants' SOP 97-2, SOFTWARE REVENUE
RECOGNITION, will be adopted by the Company during fiscal 1998. Revenue would
not materially differ from the amounts reported in the accompanying statement of
operations as a result of applying the provisions of SOP 97-2.
WARRANTIES AND RETURNS
The Company warrants products against defects and has policies permitting
the return of products under certain circumstances. The Company's distributor
agreements provide for sales returns, stock rotation, cooperative advertising
and price protection. Customers are granted price protection for a period of up
to 60 days after the Company reduces the price of a product. The Company
provides for warranties and returns at the time of product sale.
ADVERTISING COSTS
The Company generally provides for cooperative advertising at agreed-upon
rates. Advertising costs, included in sales and marketing expenses, are expensed
as incurred and were $449,000 and $783,000 for the years ended December 31, 1997
and 1996, respectively.
RESEARCH AND DEVELOPMENT
Research and development expenses consist principally of payroll and related
expenses for design and development of the Company's products. Research and
development costs related to these activities are expensed until technological
feasibility has been achieved. Capitalized development costs are stated at the
less of cost or net realizable value and are amortized over the product's
estimated economic life.
INCOME TAXES
The Company provides for income taxes under the principles of Statement of
Financial Accounting Standards No. 109, which requires that income taxes be
provided for taxes currently due and for the expected future tax effects of the
temporary differences between the book and tax bases of assets and liabilities.
NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (FAS 128), EARNINGS PER SHARE. FAS 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Earnings per
share for 1996 have been restated to conform to the requirements of FAS 128. The
adoption of FAS 128 did not have a material impact on the Company's earnings per
share. Net loss per share assuming dilution for the years
24
<PAGE>
MIDISOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ended December 31, 1997 and 1996 is equal to net loss per share due to the fact
that the effect of common stock equivalents outstanding during the periods is
anti-dilutive.
The following table sets forth the computation of basic net loss per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Numerator:
Net loss......................................... $(4,729,000) $(5,716,000)
LESS: Preferred stock dividends.................. (41,000)
---------- ----------
$(4,770,000) $(5,716,000)
---------- ----------
---------- ----------
Denominator:
Weighted average shares.......................... 6,014,000 4,687,000
---------- ----------
---------- ----------
Basic net loss per share......................... $ (0.79) $ (1.22)
---------- ----------
---------- ----------
</TABLE>
Common stock equivalents, consisting of warrants, stock options and
convertible securities, are anti-dilutive, and are detailed in Note 11.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents. Short-term
investments classified as cash equivalents are stated at the lower of cost or
market, which approximates fair value.
INVENTORIES
Inventories are valued at the lower of cost or market using the first-in,
first-out method. The Company continuously reviews its inventories for obsolete,
slow-moving and non-salable items and establishes a reserve for such items.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation
and amortization, and are depreciated using the straight-line method over the
estimated useful lives of the related assets, which range from three to seven
years. Leasehold improvements are amortized over the term of the lease.
CONCENTRATION OF CREDIT RISK/FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of accounts receivable, for which collateral is
generally not required. The Company's trade receivables include amounts due from
U.S. and foreign customers in the computer software and hardware industry and
are derived from sales of products, OEM licensing fees and unit royalties (Note
3). The Company performs ongoing credit evaluations of its customers' financial
condition and limits its exposure to losses by limiting the amount of credit
extended whenever deemed necessary.
25
<PAGE>
MIDISOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The carrying values of cash and cash equivalents and other assets and
liabilities (such as accounts receivable and payable) approximate fair value at
December 31, 1997 and 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STOCK COMPENSATION
In October 1995 the Financial Accounting Standards Board issued FAS 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION (FAS 123), which establishes financial
accounting and reporting standards for stock-based employee compensation plans
and for the issuance of equity instruments to acquire goods and services from
non-employees.
The Company has elected to apply the disclosure-only provisions of FAS 123.
Accordingly, the Company accounts for stock-based compensation to employees
using the intrinsic-value method prescribed in Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations. Compensation cost for stock options is measured as the excess,
if any, of the fair market value of the Company's common stock at the date of
grant over the exercise price. The Company records the fair value of equity
securities issued to nonemployees in accordance with the provisions of FAS 123.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to 1997
presentation.
3. ACCOUNTS RECEIVABLE AND MAJOR CUSTOMER INFORMATION
The Company operates a single business segment. During 1997 and 1996, the
Company had revenue from foreign customers of $391,000 and $603,000,
respectively. Foreign sales as a percentage of the Company's total revenue in
1997 and 1996 were 13% and 19%, respectively. In 1997 and 1996, separate
domestic reseller customers accounted for revenues of $1,835,000 and $2,071,000,
respectively, equal to 61% and 67% of the Company's total revenue in the
periods. During 1997, one customer accounted for 13% of total revenue.
26
<PAGE>
MIDISOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTS RECEIVABLE AND MAJOR CUSTOMER INFORMATION (CONTINUED)
Accounts receivable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
OEMs................................................. $ 137,000 $1,600,000
Resellers and other.................................. 930,000 734,000
--------- ---------
1,067,000 2,334,000
LESS--Allowance for doubtful accounts................ (260,000) (781,000)
LESS--Allowance for warranty and returns............. (233,000) (271,000)
--------- ---------
$ 574,000 $1,282,000
--------- ---------
--------- ---------
</TABLE>
Accounts receivable consist principally of amounts due from OEMs and
reseller customers for licensing fees, royalties and direct sales of products.
OEM customer payment terms typically are one year in duration and require
payments to be made in quarterly installments. At December 31, 1997 and 1996,
OEM accounts receivable amounts not yet due were $16,000 and $173,000, equal to
12% and 11%, respectively, of total OEM receivables. At December 31, 1997 and
1996, reseller accounts receivable amounts not yet due were $425,000 and
$154,000 equal to 46% and 21%, respectively, of total reseller receivables.
The Company's primary credit concentrations involve domestic and foreign OEM
and reseller customers. Foreign customers are primarily located in Western
Europe, Taiwan, Singapore, Korea and Japan. Domestic customers comprised
$1,054,000 and $1,540,000 of accounts receivable at December 31, 1997 and 1996,
respectively. Foreign customers comprised $13,000 and $794,000 of accounts
receivable at December 31, 1997 and 1996, respectively. At December 31, 1997 and
1996, four customers accounted for an aggregate balance of $807,000 and
$1,033,000 of accounts receivable, respectively.
4. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Raw materials and work-in-process...................... $ 212,000 $ 760,000
Finished goods......................................... 75,000 287,000
LESS--Allowance for obsolescence....................... (65,000) (105,000)
--------- ---------
$ 222,000 $ 942,000
--------- ---------
--------- ---------
</TABLE>
27
<PAGE>
MIDISOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Equipment............................................ $ 925,000 $ 917,000
Furniture............................................ 93,000 81,000
Leasehold improvements............................... 30,000 30,000
--------- ---------
Property and equipment, at cost...................... 1,048,000 1,028,000
LESS--Accumulated depreciation....................... (809,000) (607,000)
--------- ---------
$ 239,000 $ 421,000
--------- ---------
--------- ---------
</TABLE>
6. OTHER ASSETS
Other assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
<S> <C> <C>
1997 1996
--------- ----------
Purchased software and technology; net of accumulated amortization of
$605,000 and $412,000, respectively, in 1997 and 1996................ $ 193,000
Purchase contract software technology, net of a accumulated
amortization of $495,000 and $380,000, respectively, in 1997 and
1996................................................................. 115,000
Capitalized software development costs, net of accumulated amortization
of $577,000 and $430,000, respectively, in 1997 and 1996............. 147,000
Debt issuance costs.................................................... $ 50,000
--------- ----------
$ 50,000 $ 455,000
--------- ----------
--------- ----------
</TABLE>
PURCHASED SOFTWARE TECHNOLOGY
The Company purchased software technology from various sources during 1995.
The estimated useful lives of the product costs ranged from eighteen months to
two years. Amortization expense related to purchased software technology for the
years ended December 31, 1997 and 1996 was $193,000 and $235,000, respectively.
PURCHASED CONTRACT SOFTWARE TECHNOLOGY
Purchased contract software technology costs represent contract software
development costs incurred for work performed by external contract software
engineers in developing computer software. Amortization expense related to
purchased contract software technology was $115,000 and $249,000 for 1997 and
1996, respectively.
28
<PAGE>
MIDISOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. OTHER ASSETS (CONTINUED)
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs represent software product
development and product enhancements consisting of salaries and related
benefits, incurred internally in developing computer software after
technological feasibility has been established. Amortization expense related to
capitalized software development costs was $147,000 and $291,000 for 1997 and
1996, respectively.
7. BANK CREDIT LINE FACILITY
The Company has a bank line-of-credit facility commitment letter from
Imperial Bank. Pursuant to the terms of the agreement, the Company may borrow up
to $400,000 at the bank's prime rate plus 1% and up to $120,000 on corporate
bank cards. The line of credit is secured by all assets of the Company. The
credit facility matures May 18, 1998, contains covenants not to encumber trade
accounts receivable and inventories and requires maintenance of certain
financial ratios. At December 31, 1997, the Company was in compliance with the
loan covenants and no amount was drawn on either credit facility.
8. OTHER ACCRUED EXPENSES
The following table summarizes the components of the other current
liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Accrued tax liabilities................................. $ 135,000
Other accrued expenses.................................. 256,000 $ 118,000
--------- ---------
$ 391,000 $ 118,000
--------- ---------
--------- ---------
</TABLE>
9. CONVERTIBLE DEBT
In September 1997, the Company received $250,000 for which it was to issue a
5% convertible note due September 1998 (the Note). The Note and accrued interest
were to be convertible into common stock at a conversion price of $0.65 per
share, at the option of the holder, at any time after October 30, 1997 through
maturity. A debt discount of $135,000 was recorded related to the conversion
option based upon the intrinsic value at the close of the debt transaction. The
discount was expensed on October 30, 1997. The note agreement has not been
executed and the lender has requested changes to certain terms of the agreement.
While negotiations continue, the Company expects that the final debt instruments
will be a convertible note, bearing interest from 5% to 8% with a conversion
price of $0.65 per share maturing in one to two years.
In both October and November 1997, the Company issued $500,000 of 1%
convertible debentures (the Debentures) due October and November 2000,
respectively, for a total of $1,000,000. The Debentures are convertible into
common stock at a conversion price of $0.60 per share at any time through
maturity, unless previously redeemed or repurchased. At any time, the entire
amount of the outstanding notes is redeemable at the Company's option at prices
ranging from 107% to 125% of the principal amount thereof, depending on the date
of redemption, together with accrued interest through the date the redemption
price is paid to the holder. The Debentures were issued with detachable warrants
that entitle the holders to purchase 833,333 shares of the Company's common
stock at a price of $1.50 per share, and
29
<PAGE>
MIDISOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. CONVERTIBLE DEBT (CONTINUED)
expire in October and November 2002. A debt discount of $273,000 has been
recorded related to the fair value of the warrants. The discount is amortized
using the effective interest method over the term of the debt. In addition, a
debt discount of $727,000 was recorded related to the intrinsic value of the
in-the-money conversion option. This discount was expensed immediately as the
Debentures may be converted at any time. Debt issue costs of $50,000 related to
the Debenture sale have been capitalized and will be amortized over the life of
the debt.
The Debentures include certain operating and financial covenants. The
Company was not in compliance with a covenant which requires the Company to have
sufficient authorized and unissued shares of common stock to convert all
traunches of the Debentures. The Company has received a waiver of this covenant
through December 31, 1998.
10. INCOME TAXES
There is no provision for income taxes for the years ended December 31, 1997
and 1996 due to the net losses incurred. A valuation allowance has been recorded
for deferred tax assets because realization is primarily dependent on generating
sufficient taxable income prior to the expiration of net operating loss
carry-forwards.
The components of deferred income taxes are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Deferred income tax assets
Net operating losses............................. $7,710,000 $6,152,000
Accrued liabilities and allowances............... 197,000 403,000
Capitalized software............................. 121,000 226,000
Equity instruments............................... 65,000
Other............................................ 236,000 214,000
---------- ----------
8,329,000 6,995,000
Deferred income tax liabilities
Other............................................ (12,000) (6,000)
Valuation allowance................................ (8,317,000) (6,989,000)
---------- ----------
$ -- $ --
---------- ----------
---------- ----------
</TABLE>
At December 31, 1997, the Company had federal net operating losses of
approximately $22,676,000 that expire beginning in 2008. In certain
circumstances, as specified in the Internal Revenue Code, a 50% or more
ownership change by certain combination of the Company's stockholders during any
three-year period would result in limitations on the Company's ability to
utilize its net operating loss carry-forward. The value of the Company's stock
at the time of the ownership change is the primary factor in determining the
limit on the Company's ability to utilize its net operating loss carry-forward.
Certain net operating losses arise from the deductibility for tax purposes
of compensation under nonqualified stock options equal to the difference between
the fair value of the stock on the date of exercise and the exercise price of
the options. For financial reporting purposes, the tax effect of this deduction
when recognized will be accounted for as a credit to shareholders' equity.
30
<PAGE>
MIDISOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY
In 1996, the Company's Board of Directors designated 1,100 shares of
preferred stock as Series A convertible preferred stock (the Series A Preferred
Stock). All 1,100 shares were issued at a price of $1,000 per share in an
off-shore private placement completed in October 1996. The Series A Preferred
Stock was convertible at the holder's option into shares of common stock at a
price equal to the lesser of 85% of the closing bid as of the date of conversion
or 100% of the closing bid price of the common stock as of the date of issuance
of the Series A Preferred Stock. Holders of the Series A Preferred Stock were
entitled to an 8% cumulative dividend payable in cash or common stock, at the
holder's option, at the time of conversion. All 1,100 shares, plus accrued
dividends, were converted to common stock over the six-month period from January
16 through July 17, 1997. The principal value of $1,100,000 and the accrued
dividends of $41,000 were converted to 747,797 and 28,408 shares of common
stock, respectively, at an average price of $1.56 per share.
At December 31, 1997, the Company has reserved the following shares of
common stock conditioned upon approval by the shareholders of an increase in the
authorized shares:
<TABLE>
<S> <C>
Warrants......................................................... 1,969,301
Stock options.................................................... 721,506
Convertible debentures........................................... 2,051,282
</TABLE>
WARRANTS
In connection with the July 26, 1994 and the July 19, 1993 public stock
offerings, the Company has agreed to issue the Underwriter Representatives, for
nominal consideration, warrants to purchase an aggregate of 38,000 and 100,000
shares of common stock at a price of $12.90 and $4.20, respectively. The
warrants expire in 1998.
In connection with the conversion of the Series A Preferred Stock, the
Company issued warrants to purchase an aggregate of 747,797 shares of common
stock at a price equal to $8.50 per share. The warrants expire in 1998.
Additionally, the Company agreed to issue the Placement Agent warrants to
purchase 25,000 shares of common stock at a price of $6.00 per share.
Additionally, a warrant to purchase 40,171 shares of the Company's common
stock at an exercise price of $1.17 was issued to Imperial Bank in connection
with the short-term bank borrowings described in Note 7. The warrant expires in
September 2002 and carries a right to require the Company to purchase the
warrant for $63,000 or the fair value of the warrant, at the holder's option, at
any time after December 31, 1997. The warrant is subject to certain
anti-dilution provisions. The fair value of the warrant of $81,000 was expensed
during 1997.
In connection with an attempt to arrange a private placement of equity
financing, the Company agreed to sell to the agent for nominal consideration, a
warrant to purchase 10,000 shares of common stock at a price of $1.25 per share.
The warrant expires in 1998. The fair value of the warrant of $10,000 was
expensed during 1997.
In connection with the sale of common stock, the Company issued warrants in
August 1997 to purchase 100,000 shares of common stock at a price of $1.25 per
share. These are two-year warrants expiring in 1999.
31
<PAGE>
MIDISOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
In connection with an unsecured loan of $40,000 from an officer, the Company
issued a warrant to purchase 75,000 shares of common stock at a price of $.75
per share. The warrant will expire in 2002. Interest expense of $100,000 was
recognized based on the fair value of the warrant. The loan was repaid during
1997.
As described in Note 9, during 1997 the Company issued warrants to purchase
833,333 shares of common stock to the holder of convertible debentures.
STOCK OPTION PLAN
The Company has adopted the 1989 Stock Option Plan (the Plan), as amended
September 28, 1994, to provide for the granting of both Incentive Stock Options
(ISOs) and Nonqualified Stock Options for employees, directors and consultants
of the Company to acquire ownership in the Company and provide them with
incentives for their service.
Under the terms of the Plan, 1,350,000 shares of common stock may be issued.
The Plan is currently administered by the Compensation and Option Committee of
the Board of Directors which determines the terms and conditions of the options
granted under the Plan, including exercise price, number of option shares
granted and the vesting period of such options. Upon termination of a
participant's employment or consulting relationship with the Company, unvested
options terminate and vested options remain exercisable for a period not to
exceed three months. The exercise price of all ISOs granted under the Plan must
be at least equal to the fair market value of the common stock of the Company on
the date of grant. The exercise price of all ISOs granted under the Plan are
determined by the Compensation and Option Committee and the term may not exceed
ten years.
At December 31, 1997 and 1996, options for 215,000 and 160,000 shares,
respectively, of common stock were exercisable and options for 160,000 and
195,000 shares, respectively, of common stock were available for future grants
under the Plan. Activity with respect to the Stock Option Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
---------- -----------
<S> <C> <C>
Options outstanding, December 31, 1995................................. 582,540 $ 2.48
Granted................................................................ 401,514 2.89
Exercised.............................................................. (32,984) 2.54
Canceled............................................................... (249,134) 2.68
----------
Options outstanding, December 31, 1996................................. 701,936 2.64
Granted................................................................ 468,000 1.33
Exercised.............................................................. (175,000) 1.09
Canceled............................................................... (433,014) 2.65
----------
Options outstanding, December 31, 1997................................. 561,922 $ 2.02
---------- -----
---------- -----
</TABLE>
32
<PAGE>
MIDISOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about fixed-price options
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------- ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
0.10-0.88 38,422 4.51 0.37 24,922 0.10
1.06-1.88 186,500 9.51 1.34 10,000 1.69
2.13-2.88 327,000 8.18 2.52 176,513 2.48
3.25-8.19 10,000 8.78 4.71 3,875 4.25
----------- -----------
561,922 2.02 215,310 2.20
----------- -----------
----------- -----------
</TABLE>
The Company follows the intrinsic-value method in accounting for its stock
options. Under this method, the Company recognized no compensation expense on
stock options issued to employees if the exercise price of the option equals or
exceeds the fair market value of the Company's common stock on the date of
grant. Had compensation cost been recognized based on the fair value at the
grant date for options awarded under the Plan, the pro forma amounts of the
Company's net loss and net loss per share for the years ended December 31, 1997
and 1996 would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
<S> <C> <C>
1997 1996
------------- -------------
Net loss as reported............................................ $ (4,729,000) $ (5,716,000)
------------- -------------
------------- -------------
Net loss pro forma.............................................. $ (5,030,000) $ (6,613,000)
------------- -------------
------------- -------------
Loss per share as reported...................................... $ (0.79) $ (1.22)
------------- -------------
------------- -------------
Loss per share pro forma........................................ $ (0.84) $ (1.41)
------------- -------------
------------- -------------
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: risk-free
interest rates of 4.934% to 6.748%; expected option life of five years; expected
volatilities of 84% to 125%; and no expected dividends. The weighted-average
fair value of options granted during the years 1997 and 1996 was $0.83 and
$2.88, respectively, for options with an exercise price equal to market. The
weighted-average fair value of options granted in 1997 at a price above market
was $0.87.
12. LICENSE AGREEMENTS
The Company has license agreements with various developers and producers of
computer software which require the Company to pay royalties. During the years
ended December 31, 1997 and 1996, total royalty expense was $5,000 and $48,000,
respectively.
33
<PAGE>
MIDISOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. LEASE COMMITMENTS
The Company leases office facilities for its operations. The lease contains
renewal and expansion provisions, exercisable at the discretion of the Company.
The Company's lease includes scheduled increases over the term of the lease. The
total payment amount is being recognized as expense on a straight-line basis
over the term of the lease. Future minimum lease commitments for all
noncancelable operating leases are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------------
<S> <C>
1998.............................................................................. $ 271,000
1999.............................................................................. 273,000
2000.............................................................................. 68,000
----------
$ 612,000
----------
----------
</TABLE>
Rent expense for 1997 and 1996 was $281,000 and $263,000, respectively. The
Company received $98,000 and $69,000 from sublease income for the years ended
December 31, 1997 and 1996, respectively.
14. CONTINGENCIES
In 1997, an entity which sold substantially all of its assets to the Company
in 1995 demanded that the Company arbitrate certain claims arising from the
sale. The claims aggregate in excess of $1 million. The Company has denied the
allegations and has asserted counterclaims. The arbitration hearing is set for
April 22, 1998. The ultimate outcome of this matter cannot be determined at this
time; however, the Company intends to defend the matter vigorously.
The Company is subject to various claims and lawsuits in the ordinary course
of business. In the opinion of management, the ultimate resolution of these
matters will not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
15. NOTES RECEIVABLE FROM STOCKHOLDERS
The Company has made advances and loans to employees in connection with the
purchase of common stock under the Employee Stock Option Plan. Promissory notes
totaling $191,000 are held by the Company from the Company's Chief Executive
Officer and former Chief Financial Officer. Interest on these loans is set at 8%
per annum. The officers have pledged the 175,000 shares of common stock as
collateral for these loans. The full unpaid principal and accrued interest
amounts are due and payable on August 1, 2000, but can be prepaid at any time.
The terms of these notes receivable cause the underlying shares to be considered
variable stock options. For variable stock options, compensation cost is
measured as the amount by which the quoted market value of the shares exceeds
the option price. At December 31, 1997, the quoted market price of the Company's
common stock was less than the option price. Accordingly, no compensation
expense was recorded.
34
<PAGE>
MIDISOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. SUPPLEMENTAL CASH FLOW INFORMATION
The following items are supplemental information of noncash financing
activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Common stock issued in settlement of claims.......... $ -- $1,544,000
--------- ---------
--------- ---------
Warrants issued with convertible debt................ $ 273,000 $ --
--------- ---------
--------- ---------
Preferred stock converted............................ $1,100,000 $ --
--------- ---------
--------- ---------
Stock options exercised in exchange for note
receivable......................................... $ 191,000 $ --
--------- ---------
--------- ---------
In the money conversion option on convertible debt... $ 862,000 $ --
--------- ---------
--------- ---------
</TABLE>
17. EMPLOYEE BENEFIT PLANS
In June 1996, the Company adopted a qualified profit-sharing plan under the
provisions of Internal Revenue Code 401(k). The plan is available to all
employees meeting the eligibility requirements. Contributions by the Company are
based on a matching formula as defined in the plan. The Company made no
contributions to the plan in 1996 or 1997.
18. SUBSEQUENT EVENTS
In connection with the Debentures as described in Note 9, in January 1998
the Company issued an additional 1% convertible debenture in exchange for
proceeds totaling $1,000,000. The debenture is convertible into a total of
1,923,077 shares of common stock and carries detachable warrants to purchase an
additional 961,538 shares of common stock at a price of $1.25 per share. The
debenture matures in January 2001. A debt discount of $278,000 has been recorded
related to the fair value of the warrant, which will be amortized to interest
expense over the term of the debt. An additional discount of $722,000 was
recorded related to the intrinsic value of the conversion option. The discount
related to the conversion option was expensed on the issue date.
On January 28, 1998 the Company announced that it had signed a letter of
intent to acquire Passport Designs, Inc., a privately-held company in Foster
City, California. Subsequently, the parties discontinued negotiations and the
Company ceased activity related to acquisition of Passport Designs, Inc. The
Company may explore other opportunities to acquire the technology.
35
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The resignation of Ernst & Young LLP was disclosed in a Form 8-K
filed by the Company on November 3, 1997.
The appointment of Price Waterhouse LLP was disclosed in a Form 8-K
filed by the Company on January 15, 1998.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
THE DIRECTORS.
INFORMATION ABOUT THE NOMINEES FOR TERMS EXPIRING 2001
LARRY FOSTER (age 53), has been a Director of the Company since May
1995. He has served as the Company's President and Chief Operating Officer
since September 1995 and as the Company's Chief Executive Officer and
Chairman of the Board since March 1996. From November 1992 until July,
1995, Mr. Foster served as President and Chief Executive Office of Remote
Input Solutions, Inc. Prior to that, Mr. Foster was the founder and Chief
Executive Officer of genSoft Corporation. From February 1985 to August 1990,
he was Senior Vice President of Merchandising for Egghead Software.
MARSHA MURRY, (age 50), has been a Director of the Company since July
1993. Ms. Murry is the principal of Accelerated Edge, a privately held
consulting firm which she founded in January, 1981. From May 1992 to August
1994, she was Strategic Product Manager for Autodesk, Inc. Ms. Murry served
as Vice President of Marketing and Business Development of the Company from
February 1988 to August 1990 and as its Secretary from February 1989 to July
1991. From August 1990 to October 1991, she was a Product Manager for
Teltone Corporation and between April 1985 and March 1987 a Resource Manager
for ESCA Corporation.
INFORMATION ABOUT DIRECTORS WHOSE TERMS OF OFFICE CONTINUE AFTER THE ANNUAL
MEETING
TERMS EXPIRE 1999:
A. PETER PARSONS, (age 52), has been a Director of the Company since
January, 1996. Mr. Parsons is a partner with the law firm Davis Wright
Tremaine LLP and is Chairman of their Technology Section. Mr. Parsons has
practiced law since 1973 and has been a partner with Davis Wright Tremaine
since January, 1988.
J. LARRY SMART, (age 50), has been a director since December, 1997.
Mr. Smart has served as President and Chief Executive Officer of Visioneer,
Inc. since April, 1997. Mr. Smart served as Chairman, President and Chief
Executive Officer of Micropolis/StreamLogic
<PAGE>
Corporation from July, 1995 to March, 1997. Mr. Smart served as President
and Chief Executive Officer of Maxtor Corporation from April, 1994 through
March, 1995. He also served as Chairman, President and Chief Executive
Officer of Savior Technologies and Southwall Technologies, Inc. Mr. Smart is
currently a Director of Savior Technology and International Manufacturing
Services.
TERM EXPIRES 2000:
JOHN BAUER (age 58), has been a Director of the Company since March,
1997. Mr. Bauer has been Executive Vice President and Chief Financial
Officer of Nintendo of America Inc. since May. 1994 From 1979 to 1994 he
served as Managing Partner of the Seattle office and Northwest region of
Coopers & Lybrand. Mr. Bauer is President of the Chief Seattle Council of the
Boy Scouts of America, and previously served as Chairman of the Board of
Trustees of Saint Edward's University in Austin, Texas. He is also a member
of the Board of Directors of Odyssey, a contemporary maritime museum, and the
Accounting Development Fund at the University of Washington.
EXECUTIVE OFFICERS
The executive officers of the Company, and their ages as of April, 1998,
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Larry Foster 53 President, Chief Executive Officer and Chairman
of the Board of Directors
Gary Cully 47 Vice President, Finance and Chief Financial
Officer
</TABLE>
For information regarding Mr. Foster see "--Information About
Directors --."
Gary Cully (age 47), Vice President, Finance and Chief Financial
Officer joined the Company in January, 1998. From 1996 to 1998, Mr. Cully
worked as a consultant to Mentor Graphics, a major developer of design
automation software, in M&A integration and information technology. Mr.
Cully was Chief Financial Officer of Prism Group, Inc. from 1994 to 1996.
After Mr. Cully's departure, certain subsidiaries of Prism filed for
protection under Chapter 7 of the bankruptcy code and Prism Group, Inc.
ceased all operations. Mr. Cully was also Chief Financial Officer of Omega
Environmental, where his responsibilities included financial controls, M&A
evaluation and establishing operations in Latin America. He was Corporate
Controller of North American Energy Services from 1989 to 1991 and Division
Controller with Fletcher International from 1991 to 1993. He was employed
by Tektronix, Inc. where he held financial management positions in
international operations, information systems development and manufacturing
operations from 1975 to 1988.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION
The following table sets forth certain information with respect to
compensation paid by the Company for the fiscal year ended December 31, 1997
and for the prior two fiscal years to Larry Foster, the Company's Chief
Executive Officer. No other executive officer received cash
<PAGE>
compensation in excess of $100,000 for services performed during the fiscal
year ended December 31, 1997.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
NAME & PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
<S> <C> <C> <C> <C> <C> <C>
Larry Foster, 1997 $120,000 -- -- 150,000 --
President, Chief 1996 $117,692 -- -- 75,000 --
Executive Officer & 1995 $26,126 -- -- 125,000 --
Chairman (1)
</TABLE>
(1) Mr. Foster has been a Board member since May, 1995 and an employee as
of September, 1995 in the position of President and Chief Operating
Officer. Effective March 1996, Mr. Foster was appointed as Chief
Executive Officer and Chairman.
GRANTS OF STOCK OPTIONS
The following table sets forth certain information regarding stock
options granted during the fiscal year ended December 31, 1997 to Mr. Foster.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
NUMBER OF SECURITIES PERCENT OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES IN
GRANTED (#) FISCAL YEAR EXERCISE PRICE($/SH) EXPIRATION DATE
<S> <C> <C> <C> <C>
Larry Foster 100,000 21.3% $1.09375 05/16/07
50,000 10.7% $1.09375 05/19/07
</TABLE>
EXERCISES OF STOCK OPTIONS AND YEAR-END VALUES
The following table sets forth certain information regarding stock
options exercised during the fiscal year ended December 31, 1997 and options
held as of December 31, 1997 by Mr. Foster.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997
SHARES
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Larry Foster 100,000 $78,125 (1) 81,250 168,750 -- --
</TABLE>
(1) Based on the closing bid price of the Common Stock on the date of
exercise minus the exercise price.
COMPENSATION OF DIRECTORS
No employee of the Company receives any additional compensation for
his services as a director. Non-management directors receive a fee of $500
per meeting attended in person, $250 for participating by telephone and $250
for attending committee meetings. In December, 1997 the Board of Directors
authorized a payment of a quarterly retainer of $1,500 to each independent
<PAGE>
director in addition to fees described above. The By-Laws provide for
payment of reasonable travel or other out-of-pocket expenses incurred by
non-management directors in attending meetings of the Board of Directors.
Upon being appointed or elected to the Board of Directors, a non-employee
director receives a one-time stock option grant to purchase 10,000 shares of
Common Stock at an exercise price which is equal to the market price of the
Common Stock as of the date of grant. At the end of each year of service on
the Board, non-employee directors receive an additional option to purchase
30,000 shares of Common Stock at an exercise price which is equal to the
market price of the Common Stock as of the date of grant. All options are
nonqualified stock options granted under the Company's 1989 Stock Option
Plan. A grant of 10,000 shares was awarded to Mr. Smart on December 16, 1997
upon his appointment to the Board. Messrs. Bauer and Parsons and Ms. Murry
each received grants of 30,000 shares on January 2, 1998 for compensation for
services during 1997.
For their service in 1997, Messrs. Bauer, Parsons, Stephen Sedmak, a
former director, and Smart received $1,500, $1,500, $1,500 and $500
respectively and Ms. Murry received $2,250 in compensation for Board meetings
and committee meetings attended.
In addition, Accelerated Edge, a firm in which Ms. Murry is a
principal, and Davis Wright Tremaine, a firm in which Mr. Parsons is a
partner, provided services to the Company totaling $1,371.27 and $15,907.02
respectively in 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning beneficial
ownership of the Common Stock by (i) persons known by the Company to
beneficially own 5% or more of the outstanding Common Stock as of March 2,
1998, (ii) each Director, (iii) each Executive Officer, and (iv) all
Executive Officers and Directors of the Company as a group. The Company
believes that the beneficial owners of the Common Stock listed below, based
on information furnished by such owners, have sole voting and investment
power with respect to such shares.
<PAGE>
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT OF
NAME AND ADDRESS OWNED CLASS
<S> <C> <C>
Larry Foster (1) 181,250 2.8%
Gary Cully 0 *
John Bauer(2) 40,000 *
Marsha Murry(3) 102,161 1.6%
A. Peter Parsons (4) 65,200 1.0%
J. Larry Smart (5) 10,000 *
B. P. Software, Ltd. (6)
15851 Dallas Parkway, St. 1120
Dallas, Texas 75248 5,384,615 46.1%
Dimensional Fund Advisors, Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401 334,400 5.3%
All directors and executive officers
as a group (six persons)(7) 398,611 6.3%
</TABLE>
* Less than 1%.
___________________________
(1) Includes 81,250 shares issuable upon exercise of options that are
exercisable within 60 days.
(2) Consists of shares issuable upon exercise of options that are
exercisable within 60 days.
(3) Includes 63,875 shares issuable upon exercise of options that are
exercisable within 60 days.
(4) Includes 50,000 shares issuable upon exercise of options that are
exercisable within 60 days.
(5) Consists of shares issuable upon exercise of options that are
exercisable within 60 days
(6) Consists of 3,589,744 shares issuable upon conversion of debentures
that are convertible within 60 days and 1,794,871 shares issuable upon
exercise of warrants that are exercisable within 60 days.
(7) Includes 245,125 shares issuable upon exercise of options that are
exercisable within 60 days.
BP Software, Ltd. has the right to purchase an additional $1,000,000 of
convertible debentures in June of 1998 and again in June, 1999. If BP
Software, Ltd. were to exercise all its warrants and convert all the debt it
holds and has a right to acquire, a change in control of the Company could
result.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Accelerated Edge, a firm in which director, Ms. Murry is a principal, and Davis
Wright Tremaine, a firm in which director, Mr. Parsons is a partner, provided
services to the Company totaling $1,371.27 and $15,907.02 respectively in 1997.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS: The following are filed as a part of this
report under ITEM 5.
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Price Waterhouse LLP................................... 17
Report of Ernst & Young LLP...................................... 18
Balance Sheet - At December 31, 1997 and 1996.................... 19
Statement of Operations - For the Years Ended December 31, 1997
and 1996......................................................... 20
Statement of Shareholders' Equity (Deficit) - For the Years Ended
December 31, 1997 and 1996....................................... 21
Statement of Cash Flows - For the Years Ended December 31, 1997
and 1996......................................................... 22
Notes to Financial Statements - For the Years Ended December
31, 1997 and 1996................................................ 23
</TABLE>
(b) REPORTS ON 8-K.
Report filed on November 3, 1997, concerning the withdrawal of Ernst
& Young LLP as auditors of the Company
Report filed on January 15, 1998, concerning engagement of Price
Waterhouse LLP as auditors of the Company
(c) EXHIBITS. The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------
<C> <S>
3.1.1 a Articles of Incorporation of the Company as filed on September 23, 1986
with the Secretary of State of the State of Washington.
3.1.2 b Articles of Amendment to Articles of Incorporation of the Company as filed
on February 22, 1989 with the Secretary of State of the State of Washington.
3.1.3 b Articles of Amendment to Articles of Incorporation of the Company as filed
on July 13, 1994 with the Secretary of State of the State of Washington.
3.2.1(b) By-laws of the Company.
3.2.2(a) Amended and Restated By-laws of the Company.
4.1(b) Form of specimen certificate for Common Stock of the Company.
4.2(f) Designation of Rights and Preferences of Series A Convertible Preferred Stock.
4.3(f) Designation of Rights and Preferences of Series A Convertible Preferred Stock.
4.5(h) Form of Securities Purchase Agreement dated October 28, 1997
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------
<C> <S>
4.6(h) Form of Registration Rights Agreement dated October 28, 1997
4.7(k) Form of Debenture dated October, 28, 1997
10.1.1(b) Employment Agreement, dated December 31, 1991, as further amended on May 5, 1994, by and between
Raymond Bily and the Company.
10.1.2(b) Employment Agreement, dated March 1, 1991, as further amended on May 5, 1994, by and between
Ronald E. Risdon and the Company.
10.1.3(b) Employment Agreement, dated May 15, 1991, as further amended on May 5, 1994, by and between Jerry
W. Schwartz and the Company.
10.1.4(c) Employment Agreement, dated July 19, 1994, by and between Calvin M. Dyer and the Company.
10.2(b) Combined Incentive and Nonstatutory Stock Option Plan, adopted February 22, 1989, and as amended
April 30, 1994 and September 28, 1994, authorizing 1,200,000 shares of Common Stock for issuance
pursuant to the combined Plan.
10.5.1(b) Industrial Lease, dated January 28, 1992, by and between the Teachers Insurance and Annuity
Association of America, as landlord, and the Company, as tenant.
10.5.2(c) Industrial Leases, dated July 9, 1994, by and between Teachers Insurance and Annuity Association
of America, as landlord, and the Company, as tenant.
10.5.3(c) Amendment to Industrial Leases, dated February 15, 1994, by and between Teachers and Annuity
Association of America, as landlord, and the Company, as tenant.
10.5.4(d) Industrial Lease, dated March 9, 1995, by and between I-90 Lake Place II Limited Partnership, as
landlord, and the Company, as tenant.
10.6.1(b) Software License Agreement, dated June 4, 1994, by and between Music Technology Associates and the
Company.
10.6.2(b) Software Rights Purchase Agreement, dated May 5, 1994, by and between Music Technology Associates
and the Company.
10.6.3(c) Software License Agreement, dated August 6, 1994 by and between Dennis McMahon d/b/a Asystem, and
the Company.
10.6.4(a) Software Purchase Agreement, dated April 15, 1994 by and between Dennis McMahon d/b/a Asystem, and
the Company.
10.6.5(d) Software Purchase Agreement, dated November 10, 1994 by and between Dennis McMahon d/b/a Asystem,
and the Company.
10.6.6(d) Software Purchase Agreement, dated December 22, 1994 by and between Dennis McMahon d/b/a Asystem,
and the Company.
10.7.1(b) Reseller Agreement, dated January 3, 1992, by and between WestPoint Creative Ltd. and the Company.
10.7.2(b) Reseller Agreement, dated December 31, 1991, by and between CPS Computer Distribution GmbH and the
Company.
10.7.3(b) Reseller Agreement, dated February 13, 1992, by and between Walop Electronics B.V. and the
Company.
10.8.1(b) Distribution Agreement, dated August 26, 1992, by and between Merisel, Inc. and the Company.
10.8.2(b) Distribution Agreement, dated July 14, 1992, by and between Ingram Micro Inc. and the Company.
10.9.1(b) OEM License Agreement, dated August 26, 1992, by and between MPC (Distribution) Ltd. and the
Company.
10.9.2(b) OEM License Agreement, dated January 8, 1994, by and between Ad Lib Multimedia Inc. and the
Company.
10.9.3(b) OEM License Agreement, dated October 26, 1994 by and between Media Vision Corporation
10.9.4(b) Form of OEM License Agreement between various OEM licensees and the Company.
10.9.5(a) OEM License Agreement, dated May 10, 1994, by and between International Business Machines and the
Company.
10.9.6(a) OEM License Agreement, dated May 17, 1994, by and between Gateway 2000 and the Company.
10.9.7(a) OEM License Agreement, dated May 20, 1994, by and between ASCII Corporation and the Company.
10.9.8(a) OEM License Agreement, dated May 20, 1994, by and between I-O Data Devices and the Company.
10.9.9(e) OEM License Agreement, dated March 6, 1995, by and between Genoa Systems Corporation and the
Company.
10.9.10(e) OEM License Agreement, dated June 2, 1995, by and between Acer America Corporation and the
Company.
10.9.11(e) OEM License Agreement, dated June 5, 1995, by and between NEC Technologies, Inc. and the Company.
10.10.1(b) Founders' Buy-Sell Agreement, dated February 22, 1989, by and among Mark R. McCulley, Raymond Bily
and the Company.
10.10.2(b) Addendum to Founder's Buy-Sell Agreement, dated April 30, 1994, by and among Mark R. McCulley,
Raymond Bily and the Company.
10.10.3(b) Shareholder Agreement, dated December 9, 1991, by and among Raymond Bily, Mark R. McCulley and
certain shareholders of the Company, on the one hand, and the Company, on the other hand.
10.10.4(e) Asset Purchase Agreement Among Midisoft Corporation, Knowledge Engineering, Inc. and certain
shareholders of Knowledge Engineering, Inc. dated January 18, 1995.
10.10.5(e) Asset Purchase and Sale Agreement by and among Midisoft Corporation, Ask Me Multimedia, Inc. and
Michael O'Donnell dated April 14, 1995.
10.11.1(c) U.S. Bank of Washington and the Company.
10.11.2(b) Loan and Security Agreement, dated June 1, 1994, by and between Silicon Valley Bank and the
Company.
10.12.1(e) Severance letter, dated July 24, 1995.
16.1(i) Letter of Price Waterhouse LLP, dated January 9, 1997 concerning change in certifying accountants
16.2(j) Letter of Ernst & Young LLP, dated October 31, 1997 concerning change in certifying accountants
23.1 Consent of Ernst & Young LLP
23.2 Consent of Price Waterhouse LLP
</TABLE>
- ------------------------
(a) Incorporated by reference from the Company's Registration Statement on Form
SB-2
(S.E.C. File No. 33-80064).
(b) Incorporated by reference from the Company's Registration Statement on Form
SB-2
(S.E.C. File No. 33-62468-5).
(c) Incorporated by reference from the Company's Form 10-KSB filed March 30,
1994
(S.E.C. File No. 000-22172).
(d) Incorporated by reference from the Company's Form 10-KSB filed April 13,
1995
(S.E.C. File No. 000-22172).
(e) Incorporated by reference from the Company's Form 10-KSB/A filed August 4,
1995
(S.E.C. File No. 000-22172).
(f) Incorporated by reference from the Company's Form 10-KSB filed April 15,
1997.
(S.E.C. File No. 000-22172).
(g) Incorporated by reference from the Company's Form 10-KSB/A filed June 20,
1997
(S.E.C. File No. 000-22172).
(h) Incorporated by reference from the Company's Form 10-QSB filed November 12,
1997
(S.E.C. File No. 000-22172).
(i) Incorporated by reference from the Company's Form 8-K filed January 9, 1997
(S.E.C. File No. 000-22172).
(j) Incorporated by reference from the Company's Form 8-K filed November 3, 1997
(S.E.C. File No. 000-22172).
(k) Incorporated by reference from the Company's Form 10-KSB filed April 15,
1998
(S.E.C. File No. 000-22172).
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MIDISOFT CORPORATION
(Registrant)
By: /s/ LARRY FOSTER
-----------------------------------------
Larry Foster,
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: April 30, 1998
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ LARRY FOSTER Chairman of the Board,
- ------------------------------ President and Chief April 30, 1998
Larry Foster Executive Officer
Vice President, Finance and
/s/ GARY M. CULLY and Chief Financial
- ------------------------------ Officer (Principal April 30, 1998
Gary M. Cully Accounting Officer)
/s/ JOHN BAUER
- ------------------------------ Director April 30, 1998
John Bauer
/s/ MARSHA MURRY
- ------------------------------ Director April 30, 1998
Marsha Murry
/s/ A. PETER PARSONS
- ------------------------------ Director April 30, 1998
A. Peter Parsons
/s/ J. LARRY SMART
- ------------------------------ Director April 30, 1998
J. Larry Smart
40
<PAGE>
EXHIBIT 4.7
DEBENTURE
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. AS AMENDED OR THE SECURITIES LAWS OF ANY STATE AND MAY
NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE
ACCEPTABLE TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
No. 101 U.S. $500,000
MIDISOFT CORPORATION
1% CONVERTIBLE DEBENTURE DUE OCTOBER 28, 2000
FOR VALUE RECEIVED, the Midisoft corporation (the "Company") promises to pay
to BP Software, Ltd. (the registered holder hereof (the "Holder"), the principal
sum of FIVE HUNDRED THOUSAND Dollars (US $500,000) on October 28, 2000 (the
"Maturity Date") and to pay interest on the principal sum outstanding from time
to time in arrears upon conversion as provided herein on October 28, 2000 at the
rate of 1% per annum accruing from the date of initial issuance. Accrual of
interest shall commence on the first such business day to occur after the date
hereof until payment in full of the principal sum has been made or duly provided
for. Subject to the provision of Section 4 below, the principal of, and interest
on this Debenture are payable at the option of the Company, in shares of Common
Stock, no par value per share, of the Company ("Common Stock"), or in such coin
or currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts, at the address of the Holder as
designated in writing by the Holder from time to time. To the extent paid in
shares of Common Stock, interest on this Debenture shall be paid at the Market
Price (as hereinafter defined) of the Common Stock on the Maturity Date. The
Company will pay the principal of and interest upon this Debenture on the
Maturity Date, less any amounts required by law to be deducted, to the
registered holder of this Debenture as of the tenth day prior to the Maturity
Date and addressed to such holder at the last address designated by the Holder
in writing. The forwarding of such check shall constitute a payment of principal
and interest hereunder and shall satisfy and discharge the liability for
principal and interest on this Debenture to the extent of the sum represented by
such check.
This Debenture is being issued pursuant to that certain Securities Purchase
Agreement dated October 28, 1997 between the Company and Holder (the "Purchase
Agreement"). This Debenture is subject to the following additional provisions:
1. The Debentures are exchangeable for an equal aggregate principal amount
of Debentures of different authorized denominations, as requested by the Holders
surrendering the same. No service charge will be made for such registration or
transfer or exchange.
2. The Company shall be entitled to withhold from all payments of principal
of and interest on this Debenture any amounts required to be withheld under the
applicable provisions of the United States income tax laws or other applicable
laws at the time of such payments and Holder shall execute and deliver all
required documentation in connection therewith.
3. This Debenture has been issued subject to investment representations of
the original purchaser hereof and may be transferred or exchanged only in
compliance with the Securities Act of 1933, as amended (the "Act"), and other
applicable state and foreign securities laws. In the event of any proposed
transfer of this Debenture the Company may require, prior to issuance of a new
Debenture in the name of such other person that it receive reasonable transfer
documentation including opinions that the issuance of the Debenture in such
other name does not and will not cause a violation of the Act or any applicable
state
41
<PAGE>
or foreign securities laws. Prior to due presentment for transfer of this
Debenture, the Company and any agent of the Company may treat the person in
whose name this Debenture is duly registered on the Company's Debenture Register
as the owner hereof for the purpose of receiving payment as herein provided and
for all other purposes whether or not this Debenture be overdue, and neither the
Company nor any such agent shall be affected by notice to the contrary.
4. A. Subject to Section 4B and 4C hereof, the Holder of this Debenture is
entitled, at its option to convert at any time the principal amount of this
Debenture, provided that the principal amount is at least US 10,000 (unless if
at the time of such election to convert the aggregate principal amount of all
Debentures registered to the Holder is less than Ten Thousand Dollars (US
$10,000), then the whole amount thereof) into shares of Common Stock of the
Company at a conversion price for each share of Common Stock equal to the price
for the October 28, 1997 Debenture of sixty cents ($0.60) per share. Conversion
shall be effectuated by surrendering the Debentures to be converted to the
Company with the form of conversion notice attached hereto as Exhibit A,
executed by the Holder of the Debenture evidencing such Holder's intention to
convert this Debenture or a specified portion (as above provided) hereof, and
accompanied, if required by the Company, by proper assignment hereof in blank.
Interest accrued or accruing from the date of issuance to the date of conversion
shall at the option of the Company be paid in cash or Common Stock upon
conversion at the Market Price. No fraction of Shares or scrip representing
fractions of shares will be issued on conversion, but the number of shares
issuable shall be rounded to the nearest whole share. The date on which notice
of conversion is given (the "Conversion Date") shall be deemed to be the date on
which the Holder has delivered this Debenture, with the conversion notice duly
executed, to the Company or, the date set forth in such facsimile delivery of
the notice of conversion if the Debenture is received by the Company within
three (3) business days therefrom. Facsimile delivery of the conversion notice
shall be accepted by the Company at telephone number (425-391-3610); ATTN:
President or Secretary. Certificates representing Common Stock upon conversion
will be within five (5) business days from the date the notice of conversion
with the original Debenture is delivered to the Company.
B. (I) NOTWITHSTANDING ANY OTHER PROVISION HEREOF TO THE CONTRARY, AT
ANY TIME PRIOR TO THE Conversion Date, the Company shall have the right to
redeem all but not less than all of the outstanding principal amount of the
Debentures then held by the Holder for an amount (the "Redemption Amount")
equal to the sum of (i) such outstanding principal of the Debentures plus
all accrued but unpaid interest thereof through the date the Redemption
Price is paid to the Holder (the "Redemption Payment Date"), plus (ii) the
Redemption Premium (as defined below).
(ii) The "Redemption Premium" shall be:
a. if the Redemption Payment Date is not more than 45 days from the
Issuance Date, [7%] of the outstanding principal of the Debentures;
b. if the Redemption Payment Date is more than 45 days but not more
than 90 days from the Issuance Date, [14%] of the outstanding principal
of the Debentures; and
c. if the Redemption Payment Date is more than 90 days from the
Issuance Date, [25%] of the outstanding principal of the Debentures.
iii. The Redemption Payment shall be paid to the Holder within ten (10)
days from the date of the Notice of Redemption. Furthermore, in the event
such payment is not timely made, any rights of the Company to redeem the
Debenture shall terminate, and the Notice of Redemption shall be null and
void.
C. The Company shall have the right to require, by written notice to
the Holder of this Debenture at least ten (10) days prior to the Maturity
Date, that the Holder of this Debenture exercise its right of conversion
with respect to all or that portion of the principal amount and interest
outstanding on the Maturity Date.
42
<PAGE>
5. No provision of this Debenture shall alter or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal of, and
interest on, this Debenture at the time, place, and rate, and in the coin or
currency, herein prescribed. This Debenture and all other Debentures now or
hereafter issued of similar terms are direct obligations of the Company.
6. No recourse shall be had for the payment of the principal of, or the
interest on, this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporate, shareholder, officer or director, as
such past, present or future, of the Company or any successor corporation,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
7. If the Company mergers or consolidates with another corporation or sells
or transfers all or substantially all of its assets to another person and the
holders of the Common Stock are entitled to receive stock, securities or
property in respect of or in exchange for Common Stock, then as a condition of
such merger, consolidated, sale or transfer, the Company and any such successor,
purchaser or transferee agree that the Debenture may thereafter be converted on
the terms and subject to the conditions set forth above into the kind and amount
of stock, securities or property receivable upon such merger, consolidation,
sale or transfer by a holder of the number of shares of Common Stock into which
this Debenture might have been converted immediately before such merger,
consolidation, sale or transfer, subject to adjustments which shall be as nearly
equivalent as may be practicable. In the event of any proposed merger,
consolidation or sale or transfer of all or substantially all of the assets of
the Company (a "Sale"), the Holder hereof shall have the right to convert by
delivering a Notice of Conversion to the Company within fifteen (15) days of
receipt of notice of such Sale from the Company. In the event the Holder hereof
shall elect not to convert, and without regard to Section 4(b) above, the
Company may prepay all outstanding principal and accrued interest on this
Debenture, less all amounts required by law to be deducted, upon which tender of
payment following such notice, the right of conversion shall terminate.
8. The Holder of the Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the Shares of Common Stock
issuable upon conversion thereof except under circumstances which will not
result in a violation of the Act or any applicable state Blue Sky or foreign
laws or similar laws relating to the sale of securities.
9. The indebtedness evidenced by this Debenture shall be subordinate and
subject in right of payment to the prior payment in full of the Company's Senior
Indebtedness. "Senior Indebtedness " shall mean the principal, unpaid interest
and any other amounts due and owing on (i) indebtedness of the Company, or
indebtedness on which the Company is a guarantor, whether outstanding on the
date hereof or hereafter created, to banks for money borrowed by the Company or
a subsidiary of the Company, whether or not secured, but in no event in excess
of Four Hundred Thousand Dollars ($400,000), and (ii) any deferrals, renewals,
refunds or extensions of such indebtedness or any debentures, notes or other
evidence of indebtedness issued in exchange for such indebtedness, but in no
event in excess of Four Hundred Thousand Dollars ($400,000).
10. This Debenture shall be governed by and construed in accordance with the
laws of the State of Washington for contracts to be wholly performed in such
state and without regard to the principles thereof regarding the conflict of
laws. Each of the parties consents to jurisdiction in King County, Washington in
connection with any dispute arising under this Agreement and hereby waives, to
the maximum extent permitted by law, any objection, including any objection
based on forum non conveniens, to the bringing of any such proceeding in such
jurisdictions.
43
<PAGE>
11. The following shall constitute an "Event of Default":
a. The Company shall default in the payment of principal or interest on
this Debenture and such default shall remain unremedied for five (5)
business days after the Company has been notified of the default in writing
by a Holder; or
b. Any of the representations or warranties made by the Company herein,
in the Purchase Agreement, or in any certificate or financial or other
written statements furnished by the Company in connection with the execution
and delivery of this Debenture or the Purchase Agreement shall be false or
misleading in any material respect at the time made; or
c. The Company fails to issue shares of Common Stock to the Holder or
to cause its Transfer Agent to issue shares of Common Stock upon exercise by
the Holder of the conversion rights of the Holder in accordance with the
terms of this Debenture, fails to transfer or to cause its transfer Agent to
transfer any certificate for shares of Common Stock issued to the Holder
upon conversion of this Debenture and when required by the Debenture or the
Purchase Agreement, or fails to remove any restrictive legend or to cause
its Transfer Agent to transfer on any certificate or any shares of Common
Stock issued to the Holder upon conversion of this Debenture as and when
required by this Debenture or the Securities Purchase Agreement and any such
failure shall continue uncured for five (5) business days after the Company
has been notified of such failure in writing by Holder; or
d. The Company shall fail to perform or observe, in any material
respect, any other covenant, term, provision, condition, agreement or
obligation of the Company under this Debenture and such failure shall
continue uncured for a period of thirty (30) days after written notice from
the Holder of such failure; or
e. The Company shall (1) after the date hereof, make an assignment for
the benefit of creditors or commence proceedings for its dissolution; or (2)
apply for or consent to the appointment of a trustee, liquidation or
receiver for all or a substantial part of its property or business; or
f. A trustee, liquidator or receiver shall be appointed for the Company
or for a substantial part of its property or business without its consent
and shall not be discharged within sixty (60) days after such appointment;
or
g. Any governmental agency or any court of competent jurisdiction at
the instance of any governmental agency shall assume custody or control of
the whole or any substantial portion of the properties or assets of the
Company and shall not be dismissed within sixty (60) days thereafter; or
h. Bankruptcy, reorganization, insolvency or liquidation proceedings or
other proceedings for relief under any bankruptcy law or any law for the
relief of debtors shall be instituted by or against the Company and, if
instituted against the Company, shall not be dismissed within sixty (60)
days after such institution or the Company shall by any action or answer
approve of, consent to, or acquiesce in any such proceedings or admit the
material allegations of, or default in answering a petition filed in any
such proceeding.
Then, or at any time thereafter, and in each and every such case, unless
such Event of Default shall have been waived in writing by the Holder (which
waiver shall not be deemed to be a waiver of any subsequent default), at the
option of the Holder and in the Holder's sole discretion, the Holder may
consider this Debenture immediately due and payable, without presentment,
demand, protest or notice of any kinds, all of which are hereby expressly
waived, anything herein or in any note or other instruments contained to the
contrary notwithstanding, and the Holder may immediately enforce any and all of
the Holder's rights and remedies provided herein or any other rights or remedies
afforded by law.
12. Nothing contained in this Debenture shall be construed as conferring
upon the Holder the right to vote or to receive dividends or to consent or
receive notice as a shareholder in respect of any meeting of
44
<PAGE>
shareholders or any rights whatsoever as a shareholder of the Company, unless
and to the extent converted in accordance with the terms hereof.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
<TABLE>
<S> <C>
Dated: , 199 MIDISOFT CORPORATION
By: ----------------------------------------
-------------------------------------------
(Print Name)
-------------------------------------------
(Title)
</TABLE>
45
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert $ of the
principal amount of the above Debenture No. into shares of Common Stock of
MIDISOFT CORPORATION (the "Company") according to the conditions hereof, as of
the date written below. In converting the Debenture No. , the undersigned
hereby confirms and acknowledges that the shares of Common Stock are being
acquired solely for the account of the undersigned and not a nominee for any
other party, and that the undersigned will not offer, sell or otherwise dispose
of any such shares of Common Stock, except under circumstances that will not
result in a violation of the Securities Act of 1933, as amended.
Date of Conversion _____________________________________________________________
Applicable Conversion Price ____________________________________________________
Signature ______________________________________________________________________
[Name]
Address: _______________________________________________________________________
________________________________________________________________________________
*This original Debenture and Notice of Conversion must be received by the
Company by the third business date following the Date of Conversion.
46
<PAGE>
WARRANT
THE REGISTERED OWNER OF THIS WARRANT, BY HIS ACCEPTANCE HEREOF, AGREES THAT
HE WILL NOT SELL, TRANSFER OR ASSIGN THIS WARRANT. TRANSFER OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN
ANNEX I TO WARRANT, STATEMENT OF RIGHTS; OF WARRANTHOLDER. NO TRANSFER OF THESE
SECURITIES OR OF THIS CERTIFICATE, OR OF ANY SECURITIES OR CERTIFICATES ISSUED
IN EXCHANGE THEREFOR, SHALL BE EFFECTIVE UNLESS THERE IS COMPLIANCE WITH THE
TERMS AND CONDITIONS OF SUCH RESTRICTIONS.
------------------------
WARRANT
FOR THE PURCHASE OF 416,666 SHARES OF COMMON STOCK OF
MIDISOFT CORPORATION
(A WASHINGTON CORPORATION)
THIS CERTIFIES THAT, for value received, BP Software, Ltd., as registered
owner (the "Owner") of this Warrant, is entitled, subject to Annex I hereto at
any time or from time to time on after October 28, 1997 and at or before 5:00
p.m., Pacific Time, October 28, 2002, subject to earlier expiration pursuant to
Section 2 of Annex I attached hereto (the "Expiration Date"), but not
thereafter, to subscribe for, purchase and receive fully paid and non-assessable
shares of common stock (the "Shares") of Midisoft Corporation, a Washington
corporation (the "Corporation"), at the price of $1.50 per Share (the "Exercise
Price"), upon presentation and surrender of this Warrant and upon payment of the
Exercise Price for the Shares to be purchased to the Corporation at the
principal office of the Corporation as more fully described in the Statement of
Rights of Warrantholder, a copy of which is attached as Annex I hereto and by
this reference made a part hereof; provided, however, upon the occurrence of the
events specified in Annex I, the rights granted by this Warrant shall be
terminated or adjusted as specified in Annex I. Upon exercise of this Warrant,
the form of election hereinafter provided must be duly executed and the
instructions for registration of the Shares acquired by such exercise must be
completed. If the subscription rights represented hereby shall not be exercised
at or before the Expiration Date, or such earlier date as may be applicable
pursuant to Section 2 of Annex I, this Warrant shall become and be void without
further force or effect, and all rights represented hereby shall cease and
expire.
Subject to the terms contained herein, this Warrant may be exercised in
whole or in part by execution by the Owner of the form of exercise attached
hereto. In the event of the exercise hereof in part only, the Corporation shall
cause to be delivered to the Owner a new Warrant of like tenor to this Warrant
in the name of the Owner evidencing the right of the Owner to purchase the
number of Shares purchasable hereunder as to which this Warrant has not been
exercised.
In no event shall this Warrant (or the Shares issuable upon full or partial
exercise hereof) be offered or sold except in conformity with the Securities Act
of 1933, as amended.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be signed by
its duly authorized officers.
MIDISOFT CORPORATION
By
--------------------------------------
President
By
--------------------------------------
Secretary
47
<PAGE>
Form to be used to exercise Warrant:
EXERCISE FORM
The undersigned hereby elects irrevocably to exercise this within Warrant
and to purchase shares of Common Stock of Midisoft Corporation, called for
hereby, and hereby makes payment of $ (at the rate of $1.50 per share)
in payment of the Exercise Price pursuant hereto. Please issue the shares as to
which this Warrant is exercised in accordance with the instructions given below.
Dated: , 19
Signature: ___________________________
Signature Guaranteed: ________________
INSTRUCTIONS FOR REGISTRATION OF SHARES
Name _________________________________
(Print in Block Letters)
Address ______________________________
48
<PAGE>
MIDISOFT CORPORATION
ANNEX I TO WARRANT
STATEMENT OF RIGHTS OF WARRANTHOLDER
1. EXCHANGE OF WARRANT. This Warrant, at any time prior to the exercise
hereof, upon presentation and surrender to the Corporation, may be exchanged,
alone or with other Warrants of like tenor registered in the name of the same
Owner, for another Warrant or other Warrants of like tenor in the name of such
Owner, exercisable for the same aggregate number of Shares as the Warrant or
Warrants surrendered.
2. PURCHASE AND EXERCISE OF WARRANT.
THIS WARRANT MAY NOT BE SOLD, ASSIGNED, HYPOTHECATED, TRANSFERRED, OTHER
THAN BY WILL OR PURSUANT TO THE LAWS OF DESCENT AND DISTRIBUTION. EACH
CERTIFICATE FOR WARRANTS ISSUED HEREUNDER SHALL BEAR A LEGEND READING
SUBSTANTIALLY AS FOLLOWS:
"TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
CERTAIN RESTRICTIONS SET FORTH IN ANNEX I TO WARRANT, STATEMENT OF RIGHTS OF
WARRANTHOLDER. NO TRANSFER OF THESE SECURITIES OR OF THIS CERTIFICATE, OR OF
ANY SECURITIES OR CERTIFICATES ISSUED IN EXCHANGE THEREFOR, SHALL BE
EFFECTIVE UNLESS THERE IS COMPLIANCE WITH THE TERMS AND CONDITIONS OF SUCH
RESTRICTIONS."
In case the Owner shall desire to exercise the purchase right evidenced by
this Warrant, the Owner shall surrender this Warrant with the form of exercise
attached hereto duly executed by the Owner, to the Corporation at the principal
office of the Corporation at 1605 NW Sammamish Road, Suite 205, Issaquah,
Washington 98027, attention of the President accompanied by payment by certified
funds, cashier's check or other form of payment acceptable to the Corporation of
the total Exercise Price (hereinafter defined) for the Shares to be purchased.
This Warrant may be exercised in whole or in part. In case of the exercise
hereof in part only the Corporation will deliver to the Owner a new Warrant of
like tenor in the name of the Owner evidencing the right to purchase the number
of Shares as to which this Warrant has not been exercised. Unless the
Corporation receives an opinion from counsel satisfactory to it that such a
legend is not required in order to assure compliance with the Securities Act of
1933, as amended (the "1933 Act"), or any applicable state securities laws, each
certificate for Shares issued hereunder shall bear a legend reading
substantially as follows:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
NOR HAVE THEY BEEN REGISTERED UNDER THE SECURITIES ("BLUE SKY") LAWS OF ANY
STATE. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, OR
HYPOTHECATED UNLESS THEY HAVE FIRST BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 AND UNDER THE APPLICABLE STATE SECURITIES ("BLUE SKY") LAWS OR
UNLESS THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND
LAWS IS ESTABLISHED TO THE SATISFACTION OF THE COMPANY, WHICH MAY
NECESSITATE A WRITTEN OPINION OF SELLER'S COUNSEL SATISFACTORY TO COMPANY
COUNSEL.
THE EXERCISE PRICE (THE "EXERCISE PRICE") PER SHARE ISSUABLE UPON THE
EXERCISE OF THIS WARRANT SHALL BE $1.50.
THE TERM OF THIS WARRANT (THE "WARRANT PERIOD") IS A FIVE YEAR PERIOD
COMMENCING ON OCTOBER 28, 1997 AND ENDING ON OCTOBER 28, 2002.
3. DISPOSITION OF SECURITIES
0 The registered owner of this Warrant, by acceptance hereof, agrees
that, before any disposition is made of any Warrant or underlying Share, the
Owner shall give written notice to the
49
<PAGE>
Corporation describing briefly the manner of any such proposed disposition.
No such disposition shall be made unless and until:
1 The Corporation has received an opinion from counsel for the Owner
of said securities stating that no registration under the 1933 Act or any
state securities law is required with respect to such disposition; or
2 A registration statement or post-effective amendment to a
registration statement under the 1933 Act has been filed by the Corporation
and made effective by the Securities and Exchange Commission covering such
proposed disposition and the securities have been registered under the
appropriate state securities laws or an exemption from registration is
available.
4. SHARE DIVIDENDS RECLASSIFICATION; REORGANIZATION PROVISIONS.
a. If, prior to the expiration of this Warrant by exercise or by its terms,
the Corporation shall issue shares of Common Stock as a share dividend or
subdivide the number of outstanding shares of Common Stock into a greater number
of shares, then, in either of such cases, the Exercise Price per Share
purchasable pursuant to this Warrant in effect at the time of such action shall
be proportionately increased; and conversely, if the Corporation shall contract
the number of outstanding shares of Common Stock by combining such shares into a
smaller number of shares, then, in such case, the Exercise Price per Share
purchasable pursuant to this Warrant in effect at the time of such action shall
be proportionately increased and the number of Shares at that time purchasable
pursuant to this Warrant shall be proportionately decreased. If the Corporation
shall, at any time during the life of this Warrant declare a dividend payable in
cash on its shares of Common Stock and shall at substantially the same time
offer to its shareholders a right to purchase new shares of Common Stock form
the proceeds of such dividend or for an amount substantially equal to the
dividend, all shares of Common Stock so issued shall, for the purpose of this
Warrant, be deemed to have been issued as a share dividend. Any dividend paid or
distributed upon the Common Stock in shares of any other class of securities
convertible into Common Stock shall be treated as a dividend paid in Common
Stock to the extent that shares of Common Stock are issuable upon the conversion
thereof.
b. If, prior to the expiration of this Warrant by exercise or by its terms,
the Corporation shall be re-capitalized by reclassifying its outstanding shares
of Common Stock into shares with a different par value, or the Corporation or a
successor corporation shall consolidate or merge with or convey all or
substantially all of its or of any successor corporation's property and assets
to any other corporation or corporations (any such corporation being included
within the meaning of the term "successor corporation" used above in the event
of any consolidation or merger of any such corporation with, or the sale of all
or substantially all of the property of any such corporation to another
corporation or corporations), the Owner of this Warrant shall thereafter have
the right to purchase, upon the basis and on the terms and conditions and during
the time specified in this Warrant, in lieu of the Shares theretofore
purchasable upon the exercise of this Warrant, such shares, securities, or
assets as may be issued or payable with respect to, or in exchange for, the
number of Shares theretofore purchasable upon the exercise of this Warrant had
such re-capitalization, consolidation, merger or conveyance not taken place,
and, in any such event, the rights of the Owner of this Warrant to an adjustment
in the number of Shares purchasable upon the exercise of this Warrant as herein
provided shall continue and be preserved in respect of any shares, securities,
or assets which the Owner of this Warrant becomes entitled to purchase.
c. If: (i) the Corporation shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend payable otherwise
than in cash, or any other distribution in respect of the Common Stock
(including cash), pursuant to, without limitation, any spin-off, split-off, or
distribution of the Corporation's assets; or (ii) the Corporation shall take a
record of the holders of its Common Stock for the purpose of entitling them to
subscribe for or purchase any shares of any class or to receive any other
rights; or (iii) in the event of any classification, reclassification, or other
reorganization of the shares which the Corporation is authorized to issue,
consolidation or merger of the Corporation with or into
50
<PAGE>
another corporation, or conveyance of all or substantially all of the assets of
the Corporation, or (iv) in the event of the voluntary or involuntary
dissolution, liquidation or winding up of the Corporation; then, and in any such
case, the Corporation shall mail to the Owner of this Warrant, at least thirty
(30) days prior thereto, a notice stating the date or expected date on which a
record is to be taken for the purpose of such dividend, distribution or rights,
or the date on which such classification, reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation, or winding up as
the case may be, will be effected. Such notice shall also specify the date or
expected date, if any is to be fixed, as of which holders of record shall be
entitled to participate in such dividend, distribution, or rights, or shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such classification, Reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up, as
the case may be.
IF THE CORPORATION, AT ANY TIME WHILE THIS WARRANT SHALL REMAIN UNEXPIRED
AND UNEXERCISED, SHALL SELL ALL OR SUBSTANTIALLY ALL OF ITS PROPERTY, DISSOLVE,
LIQUIDATE, OR WIND UP ITS AFFAIRS, THE OWNER OF THIS WARRANT MAY THEREAFTER
RECEIVE UPON EXERCISE HEREOF, IN LIEU OF EACH SHARE WHICH IT WOULD HAVE BEEN
ENTITLED TO RECEIVE, THE SAME KIND AND AMOUNT OF ANY SECURITIES OR ASSETS AS MAY
BE ISSUABLE, DISTRIBUTABLE, OR PAYABLE UPON ANY SUCH SALE, DISSOLUTION,
LIQUIDATION, OR WINDING UP WITH RESPECT TO EACH COMMON SHARE OF THE CORPORATION.
5. RESERVATION OF SHARES ISSUABLE ON EXERCISE OF WARRANTS. THE CORPORATION
WILL, AT ALL TIMES, RESERVE AND KEEP AVAILABLE OUT OF ITS AUTHORIZED SHARES,
SOLELY FOR ISSUANCE UPON THE EXERCISE OF THIS WARRANT SUCH NUMBER OF SHARES OF
COMMON STOCK AND OTHER SHARES AS FROM TIME TO TIME SHALL BE ISSUABLE UPON THE
EXERCISE OF THIS WARRANT.
6. LOSS, THEFT, DESTRUCTION OR MUTILATION. UPON RECEIPT BY THE CORPORATION
OF EVIDENCE SATISFACTORY TO IT (IN THE EXERCISE OF ITS REASONABLE DISCRETION) OF
THE OWNERSHIP OF AND THE LOSS, THEFT, DESTRUCTION, OR MUTILATION OF THIS
WARRANT, THE CORPORATION WILL EXECUTE AND DELIVER, IN LIEU THEREOF, A NEW
WARRANT OF LIKE TENOR.
7. WARRANTHOLDER NOT A SHAREHOLDER. THE OWNER OF THIS WARRANT, AS SUCH,
SHALL NOT BE ENTITLED BY REASON OF THIS WARRANT TO ANY RIGHTS WHATSOEVER OF A
SHAREHOLDER OF THE CORPORATION.
DATED THIS DAY OF , 199 .
MIDISOFT CORPORATION
BY: __________________________________
PRESIDENT
51
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-72324) pertaining to the Midisoft Corporation Incentive Stock
Option Plan and Nonstatutory Stock Option Plan of our report dated March 13,
1997, with respect to the financial statements of Midisoft Corporation included
in the Annual Report (Form 10-K) for the year ended December 31, 1997.
ERNST & YOUNG LLP
Seattle, Washington
April 28, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-72324) of Midisoft Corporation of our report dated
April 10, 1998 appearing in this Form 10-KSB/ A.
PRICE WATERHOUSE LLP
Seattle, Washington
April 28, 1998
