<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From to
------------ -------------
Commission File Number 000-22172
MIDISOFT CORPORATION
(Exact name of small business issuer as specified in its charter)
Washington 91-1345532
(State of incorporation) (I.R.S. Employer Identification No.)
1605 NW Sammamish Rd., Suite 205
Issaquah, Washington 98027
(Address of principal executive offices)
(425) 391-3610
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common stock, no par value; 6,313,797 shares outstanding;
as of August 12, 1998
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<PAGE>
MIDISOFT CORPORATION
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements ....................................... 3
a) Balance Sheets - June 30, 1998 and December 31, 1997
b) Statements of Operations - For the Three and Six
Months Ended June 30, 1998 and 1997
c) Statements of Cash Flows - For the Six Months Ended
June 30, 1998 and 1997
d) Notes to Unaudited Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
or Plan of Operation ....................................... 8
PART II
OTHER INFORMATION
Item 1. Legal Proceedings ........................................... 13
Item 2. Changes in Securities ....................................... 13
Item 3. Defaults Upon Senior Securities ............................. 13
Item 4. Submission of Matters to a Vote of Security Holders ........ 13
Item 5. Other Information............................................ 13
Item 6. Exhibits and Reports on Form 8-K ............................ 13
SIGNATURE ............................................................. 14
</TABLE>
2
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ITEM 1. MIDISOFT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(Unaudited) (Audited)
At June 30, At December 31,
1998 1997
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 176,000 $ 90,000
Accounts receivable - net of allowances of
$323,000 in 1998 and $493,000 in 1997 294,000 574,000
Inventories 258,000 222,000
Prepaid expenses and other receivable 87,000 82,000
------------- ---------------
Total current assets 815,000 968,000
Long-term receivables 195,000 195,000
Property & equipment, net 163,000 239,000
Other assets 96,000 50,000
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Total assets $ 1,269,000 $ 1,452,000
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LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,174,000 $ 969,000
Current portion of long-term debt 250,000 250,000
Accrued wages & payroll taxes 116,000 100,000
Other accrued expenses 314,000 329,000
Deferred revenue 26,000 30,000
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Total current liabilities 1,880,000 1,678,000
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Long-term debt, net of discount 1,689,000 802,000
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Warrant obligations 81,000 81,000
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Shareholders' equity
Common stock, no par value; 10,000,000 shares
authorized, 6,478,000 issued and outstanding
in 1998 and 6,359,000 issued and outstanding
in 1997 20,165,000 $ 20,165,000
Additional paid-in capital 2,245,000 1,245,000
Notes receivable from shareholders (191,000) (191,000)
Retained deficit (24,600,000) (22,328,000)
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Total shareholders' equity (2,381,000) (1,109,000)
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Total liabilities and shareholders' equity $ 1,269,000 $ 1,452,000
------------- ---------------
------------- ---------------
</TABLE>
See accompanying notes to financial statements.
3
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MIDISOFT CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 389,000 $ 819,000 $ 754,000 $ 1,356,000
Cost of revenues 167,000 344,000 307,000 672,000
------------ ------------ ------------- -------------
Gross profit 222,000 475,000 447,000 684,000
Operating expenses:
Sales and marketing 365,000 428,000 674,000 966,000
General and administrative 410,000 420,000 789,000 790,000
Research and development 197,000 255,000 422,000 521,000
------------ ------------ ------------- -------------
Total operating expenses 972,000 1,103,000 1,885,000 2,277,000
------------ ------------ ------------- -------------
Operating loss (750,000) (628,000) (1,438,000) (1,593,000)
Interest and other income/(expense) (60,000) (25,000) (836,000) (32,000)
------------ ------------ ------------- -------------
Net loss $ (810,000) $ (653,000) $ (2,274,000) $ (1,625,000)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Net loss per share (basic) $ (0.13) $ (0.11) $ (0.36) $ (0.28)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Net loss per share (fully diluted)* $ (0.13) $ (0.11) $ (0.36) $ (0.28)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
* Common stock equivalents not included, as it
would be anti-dilutive
Weighted average shares outstanding 6,297,130 5,890,000 6,297,542 5,863,000
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
See accompanying notes to financial statements.
4
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MIDISOFT CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operations:
Net loss $(2,274,000) $(1,625,000)
------------ ------------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation & amortization 83,000 408,000
Non-cash interest expense to APIC 722,000 36,000
(INCREASE) DECREASE IN ASSETS:
Accounts receivable, net 280,000 677,000
Inventories (36,000) 165,000
Prepaid expenses (5,000) (69,000)
Other Assets (46,000) -
INCREASE (DECREASE) IN LIABILITIES:
Trade accounts payable 205,000 73,000
Accrued wages & payroll taxes 16,000 (46,000)
Other accrued expenses (15,000) -
Deferred revenue (4,000) (619,000)
------------ ------------
Total adjustments 1,200,000 625,000
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Net cash used for operations (1,074,000) (1,000,000)
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Cash from/(used for) investments:
Additions to plant & equipment (5,000) (3,000)
------------ ------------
Net cash used for investments (5,000) (3,000)
------------ ------------
Cash flows from financing:
Proceeds from issuance of long-term debt and warrants,
net of debt issue costs 1,165,000 -
------------ ------------
Net cash provided by financing 1,165,000 -
------------ ------------
Net change in cash and cash equivalents 86,000 (1,003,000)
Cash and cash equivalents, beginning of year 90,000 709,000
------------ ------------
Cash and cash equivalents, end of period $ 176,000 $ (294,000)
------------ ------------
------------ ------------
Supplemental cash flow information:
Common stock issued in payment of interest $ - $ 36,000
</TABLE>
See accompanying notes to financial statements.
5
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MIDISOFT CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
INTERIM FINANCIAL INFORMATION
The condensed financial statements included herein have been prepared by
Midisoft Corporation (the "Company") without audit, according to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations.
However, in the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) considered necessary to present fairly the results for the interim
periods presented. The accompanying condensed financial statements and
related notes should be read in conjunction with the Company's 1997 audited
financial statements included in its Annual Report on Form 10-KSB filed April
15, 1998.
The results of operations for the three and six months ended June 30,
1998 are not necessarily indicative of the results to be expected for the
full calendar year.
ACCOUNTS RECEIVABLE AND MAJOR CUSTOMER INFORMATION
Accounts receivable from Original Equipment Manufacturers (OEM) and
other resellers are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ------------
<S> <C> <C>
OEM $ 120,000 $ 137,000
Resellers and other 497,000 930,000
---------- ------------
Subtotal 617,000 1,067,000
Less: Allowance for doubtful accounts (196,000) (260,000)
Allowance for sales returns (127,000) (233,000)
---------- ------------
Total accounts receivable $ 294,000 $ 574,000
---------- ------------
---------- ------------
</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 monthly or quarterly installments. At June
30, 1998, OEM accounts receivable amounts not yet due were $0, compared to
$16,000, equal to 12% of accounts receivable at December 31, 1997. Reseller
payment terms typically are standardized and similar to those given software
distributors. At June 30, 1998, reseller accounts receivable amounts not yet
due were $284,000, equal to 57% of total reseller receivables compared to
$425,000, equal to 46% at December 31, 1997.
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 $501,000 of accounts receivable at June 30, 1998, compared to
$1,054,000 at December 31, 1997. Foreign customers comprised $116,000 of
accounts receivable at June 30, 1998 compared to $13,000 at December 31,
1997.
INCOME TAXES
No income taxes are payable at June 30, 1998, as a result of the
Company's year-to-date loss and the result of Federal net operating losses at
December 31, 1997 of approximately $22.7 million that will reduce taxes due
in
6
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future periods and 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. 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 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.
INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
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<S> <C> <C>
Raw Materials $ 93,000 $ 212,000
Finished Goods 200,000 75,000
Less: Allowance for obsolescence (35,000) (65,000)
---------- ------------
Total Inventories $ 258,000 $ 222,000
---------- ------------
---------- ------------
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE IN THIS FORM
10-QSB.
GENERAL
Midisoft is a leading provider of innovative applications and
utilities for the control and use of sound on personal computers. The
Company was founded in 1986 and has developed award-winning audio software
products since that time. Over the past 12 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 all hardware platforms
and product lines. The emergence of the Internet has amplified this expansion
and created the backbone with which sounds, voice messages and music can now
be sent globally to enhance communication world-wide. As new technologies
evolve, the Company believes it can continue to be a premiere provider of
audio control expertise. 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, (iii) end
users, catalog companies, and businesses and (iv) on-line Internet sales.
Sales to software distributors and resellers, together with direct
sales, represented 76% and 77% of revenues in the three and six months ended
June 30, 1998, and OEM sales represented 24% and 23% during the same periods.
International sales accounted for 5% and 4% of the Company's revenues during
the three and six months ended June 30, 1998. Midisoft's customer base tends
to vary from period to period as it establishes new relationships in each of
its customer segments. During the three months ended June 30, 1998, two
different software distributors individually accounted for at least 10% of
the Company's revenues, collectively accounting for 39%. During the six
months ended June 30, 1998, three software distributors individually
accounted for at least 10% of the Company's revenues and together represented
39% of net revenues for the period.
The Company's revenues include sales of software, software licenses and
services, less returns. Cost of revenues includes the costs of manuals,
diskettes and duplication, packaging materials, assembly, paper goods,
shipping costs, amortization of purchased software technology and
amortization of capitalized software development costs. Cost of revenues as
a percentage of sales is lower for OEM sales than for distributor and direct
sales because few direct costs are involved. Sales and marketing expenses
consist primarily of salaries of sales and marketing personnel, customer
service and technical support costs and advertising and promotion expenses.
General and administrative expenses consist of salaries of administrative
personnel, legal and accounting costs and general operating expenses
including rent and insurance. Research and development expenses consist
primarily of personnel and equipment costs required to conduct the Company's
development efforts. Software development costs are expensed as incurred,
until technological feasibility is established, after which any additional
costs may be capitalized until the software is ready for release.
Amortization of capitalized software development costs begins when the
related product is available for release to customers. The Company has
determined that the dynamic nature of software technology precludes it from
capitalizing software development in the future.
Revenues from sales to distributors and resellers and direct sales are
recognized when products are shipped. The Company's software sales
agreements generally do not involve significant obligations to customers
subsequent to product delivery. Revenues from products licensed to OEMs,
consisting of one-time license fees, are recognized at the time the software
master is delivered and when the criteria for fixed fee revenue recognition
under Statement of Position No. 97-2 "Software Revenue Recognition" are
satisfied. The Company recognizes additional royalty use or unit copy royalty
fees, pursuant to license agreements, when the Company receives payments from
OEM customers.
8
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ACQUISITIONS
On January 28, 1998, the Company announced 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 the acquisition of Passport Designs,
Inc.
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. Sales generally increase when
software upgrades become available.
NEW PRODUCTS
MEDIAWORKS 98 In late June 1998, the Company released MediaWorks-TM- 98
v1.0, a next-generation multimedia playback application for Windows 95/98 and
NT. MediaWorks 98 provides end-users with an easy to use and extensible
audio/video player that supports most popular file types found on today's PC.
The product features an intuitive user interface with a single set of
transport controls, as well as an integrated database engine called the
MediaFinder-TM- which significantly simplifies the task of locating and
managing the large volume of media files on the typical users local system.
The Company is marketing MediaWorks 98 to its traditional OEM customers
and prospects as a logical replacement for the Audio Pro stereo rack utility.
In addition, the Company is aggressively marketing MediaWorks 98 on its web
site (http://www.midisoft.com/html/catalog/mw98/default.htm) and on popular
on-line software download sites such as BuyDirect.com, ZDNet, download.com,
and others. New versions of MediaWorks 98 are planned which take advantage of
the modular, "plug-in" architecture. The plug-in architecture allows new
feature enhancements and player modules that support additional file formats
to be developed and "registered" with the main application.
INTERNET MEDIA PLAYER In July 1998, the Company formally released
Internet Media Player-TM- v3.0, a streaming media player with full support
for Microsoft Corporation's recently released NetShow v3.0. The player
provides an easy and fast way for Internet users to find, save, organize and
directly access links to their favorite streaming content such as live radio
and TV broadcasts, concert "webcasts", on-line news and entertainment
Internet Media Player was a featured NetShow Partner third-party product
on Microsoft's web site and was included on two Microsoft NetShow Tools CDs
distributed to more than 50,000 commercial and corporate software developers.
Internet Media Player is being sold and distributed to end-users on-line via
the Company's Web site and targeted ad banner advertising on
streaming-specific web sites. Of particular interest to third-party
customers is the ability to "brand" Internet Media Player with corporate
logos, advertising and streaming content links, as well as the ability to
automatically refresh advertising and content via the Internet.
MIDISOFT DESKTOP SHEET MUSIC Although initially planned for release in
Q2, the 2.0 version of Desktop Sheet Music is currently scheduled for release
at the end of Q3 to enable the inclusion of significant additional
functionality as suggested by early beta users of the product. Desktop Sheet
Music provides a powerful tool by which users can create and publish
professional sheet music using a personal computer. Standard MIDI files can
be imported into DSM and converted into high-quality music notation.
MIDISOFT STUDIO RECORDING SESSION Midisoft SRS 2.0 is a computerized
music sequencer and the latest version of the product and category that was
pioneered by Midisoft in 1986. It gives the user a means by which to create
music, edit the music in many ways and subsequently print it out. Midisoft
SRS differentiates itself from other music sequencers on the market by
including the sheet music engine that powers Midisoft Desktop Sheet Music.
Competing products from other developers in this category cannot produce the
quality of printed output that is available from Midisoft SRS. It also has
been rescheduled for release at the end of Q3 in an effort to include
functionality requested by early users of the beta release.
9
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COMPARISON OF THREE AND SIX MONTHS ENDED JUNE 30, 1998 TO 1997
This table provides comparative results of the quarters ending June 30,
1998 and 1997. A general discussion of these results follow.
<TABLE>
<CAPTION>
Three months ending June 30, Six months ending June 30,
1998 1997 1998 1997
% of Revenue % of Revenue % of Revenue % of Revenue
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales Revenue 100% 100% 100% 100%
Gross Profit 57% 58% 59% 50%
Research & Development 51% 31% 56% 38%
Sales & Marketing Expense 94% 52% 89% 71%
General & Administrative Expense 105% 51% 105% 58%
Total Operating Expenses 250% 135% 250% 168%
Net Operating Income (Loss) (193%) (77%) (191%) (117%)
Other (Income) Expense (15%) (3%) (111%) (2%)
Net Income (Loss) (208%) (80%) (302%) (120%)
</TABLE>
Revenues for the three months ended June 30, 1998 were $389,000, a
decrease of $430,000, or 53%, compared to $819,000 for the same period in
1997. Revenues for the first six months of 1998 were $754,000, a decrease of
$602,000, or 44%, compared to $1,356,000 for the same period in 1997. Sales
to software distributors and resellers, together with direct sales were
$296,000 and $583,000, representing 76% and 77% of revenues in the three and
six months ended June 30, 1998, compared to $558,000 and $827,000 which
represented 68% and 61% of revenues for the same period in 1997. OEM and
strategic product sales of $93,000 and $171,000 represented 24% and 23% in
the three and six months ended June 30, 1998, respectively. OEM and
strategic product sales of $261,000 and $529,000 represented 32% and 39% in
the three and six months ended June 30, 1997, respectively. International
sales accounted for 5% and 4% of the Company's revenues for the three and six
months ended June 30, 1998 and accounted for 9% and 22% for the same periods
in 1997. Sales to distributors and resellers were lower in part from higher
returns in the second quarter and lower units sales in the first six months
of 1998. The Company believes that the decline in OEM sales is substantially
related to significant industry-wide reductions in PC prices which began in
the fourth quarter of 1997. It appears that these pricing pressures increased
during the first quarter of 1998 as a result of excess industry-wide PC
inventories. Subsequent actions by the Company's OEM customers to reduce
their costs and number of suppliers appears to have adversely affected the
Company's OEM sales during the first and second quarters of 1998.
Gross profit for the three months ended June 30, 1998 was $222,000, a
decrease of $253,000, or 53%, compared to $475,000 for the same period the
prior year. Gross profit for the six months ended June 30, 1998 was $447,000,
a decrease of $237,000, or 35%, compared to $684,000 for the same period the
prior year. As a percentage of revenues, gross profit decreased to 57% in
the three months ended June 30, 1998 from 58% in 1997. As a percentage of
revenues, gross profit increased to 59% in the six months ended June 30, 1998
from 50% in 1997. Gross profits, in general, are affected by the mix of OEM
licensing revenue versus application products revenue as well as the mix
within application products. Costs were lower in the second quarter of 1998
compared with the same quarter last year due primarily to the absence of
software amortization costs. Software amortization costs for the three and
six months ended June 30, 1997 were $150,000 and $308,000, respectively.
These assets were fully amortized in 1997. Without amortization expense,
cost of revenues for the three and six months ended June 30, 1997 would have
been 27% and 27%, as compared with 43% and 41% for the same periods in 1998,
increases of 16% and 14%, respectively. Contributing to gross margin
reduction was a higher level of returns and a change in sales mix, reflecting
lower OEM sales, through the first half of 1998 compared to the first half of
1997. Also, increased cost of goods sold resulted in part from recording
reserves for potentially excess or obsolete items.
Sales and marketing expenses for the three months ended June 30, 1998
were $365,000, a reduction of $63,000, compared to $428,000 for the same
period in the prior year. Sales and marketing expenses for the six months
ended June 30, 1998 were $674,000, a reduction of $292,000, compared to
$966,000 for the same period in the prior year. As a percentage of revenues,
sales and marketing expenses increased to 94% in the three months ended June
30, 1998 from 52% for the same period in 1997. As a percentage of revenues,
sales and marketing expenses increased to 89% in the six months ended June
30, 1998 from 71% for the same period in 1997. The
10
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reduction in expenses reflects the Company's increasing emphasis on cost
controls and targeting marketing and sales efforts into direct sales
channels. The increase in these costs as a percentage of sales results from
lower revenues.
General and administrative expenses for the three months ended June 30,
1998 were $410,000, a decrease of $10,000, compared to $420,000 for the same
period of the prior year. General and administrative expenses for the six
months ended June 30, 1998 were $789,000, a decrease of $1,000, compared to
$790,000 for the same period of the prior year. Although these expenses
remained flat for the comparison periods, as a percentage of revenues, these
expenses for the three months ended June 30, 1998 increased to 105% from 51%
for the same period in 1997 and for the six months ended June 30, 1998
increased to 105% from 58% for the same period in 1997.Again, these increases
as a percent of sales were due to lower revenues in the first half of 1998.
G&A expense is comprised mainly of fixed obligations and the Company is
endeavoring to reduce these costs by restructuring certain lease agreements,
reducing insurance and other costs.
Research and development expenses for the three months ended June 30,
1998 were $197,000, a decrease of $58,000, compared to $255,000 for the same
period the prior year. As a percentage of revenues, research and development
expenses increased to 51% in the three months ended June 30, 1998 from 31%
for the same period in 1997. Research and development expenses for the six
months ended June 30, 1998 were $422,000, a decrease of $99,000, compared to
$521,000 for the same period the prior year. As a percentage of revenues,
research and development expenses increased to 56% in the six months ended
June 30, 1998 from 38% for the same period in 1997. The Company's continued
investment in product development reflects commitments to continually
introduce new or improved products.
Interest and other income for the three months ended June 30, 1998 was
$3,350 compared to $500 for the same period the prior year. Interest and
other income for the six months ended June 30, 1998 was $10,000 compared to
$7,000 for the same period the prior year. Interest expense for the three
months ended June 30, 1998 was $63,000 compared to $25,000 for the same
period in 1997. Interest expense for the six month period ending June 30,
1998 was $816,000 compared to $39,000 for the same period the prior year, an
increase of $777,000. $722,000 of this increase was a one time non-cash
charge relating to the amortization of the $1,000,000 of convertible
debentures issued in January 1998. The remaining increase in interest expense
results from increased borrowing in the current year.
No income taxes are payable at June 30, 1998, the result of the
Company's year-to-date loss and the result of Federal net operating losses at
December 31, 1997 of approximately $22,676,000. The net operating losses
will reduce taxes due in future periods and begin to expire in 2008, subject
to the change in control criteria and NOL use limitations as specified in
Internal Revenue Code Section 382 and related code sections.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company's principal sources of liquidity
included cash and cash equivalents of $176,000 and net accounts receivable of
$294,000. This compares to cash, cash equivalents and short term investments
of $90,000 and net accounts receivable of $574,000 at December 31, 1997. The
decline in liquidity and capital resources is the result of negative cash
flow from operations.
The Company's current liabilities at June 30, 1998 were $1,880,000
compared to $1,678,000 at December 31, 1997. As of June 30, 1998, working
capital totaled a negative $1,065,000.
The Company's operating activities used cash of $1,074,000 for the six
month period ended June 30, 1998, reflecting an increase of $74,000 compared
with the same period in 1997. During the second quarter of 1997, the
Company's net operating activities used cash of $295,000, a decrease of
$59,000, compared with the same period the prior year.
The Company sold $500,000 of debentures on each of January 9, 1998 and
January 28, 1998, in accordance with the Securities Purchase Agreement
discussed in the Company's 10-KSB/A2 filed with the SEC on April 30, 1998.
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. Additionally, the
debenture holder has the right to purchase an additional $1,000,000 of
convertible debentures in June, 1998 and again in June, 1999. On May 14,
1998 the debenture
11
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holder and the Company agreed to continue discussion regarding the Company's
capital resource needs. In this respect, the Company granted to the debenture
holder a waiver of the Company's right to 30 day notice for funding or not
funding the June 1998 traunch. In July 1998 the Company and the debenture
holder amended the Securities Purchase Agreement, with respect to the
proposed June 15, 1998 sale of $1,000,000 of convertible debentures, to
provide for the sale of up to $1,000,000 of Senior Convertible Secured Notes
through December 31, 1998. The first $500,000 of these notes are for five
years and bear interest at the rate of one percent (1%) per annum, payable in
cash annually on the anniversary date of the notes. These notes are
convertible into 2,500,000 shares of the Company's common stock. The note
holder will also receive five year warrants to purchase 500,000 of the
Company's common stock at an exercise price of $0.75 per share. The notes
will be secured by first, prior and perfected interests in all intellectual
property rights, fixed assets and contracts for product delivery. The note
holder has the option to purchase an additional $500,000 of notes with terms
and conditions similar to those referenced above, prior to December 31, 1998,
with a conversion price equal to forty-seven percent (47%) of the value of
each share of common stock for the ten trading days prior to exercise of the
conversion option.
The Company sold common stock to three accredited investors for a total
of $100,000 under stock subscription agreements in 1997. These agreements
originally provided for the stock purchase price to be $1.60 per share. This
purchase price was subsequently changed to $0.65 per share in 1998. This
repricing increased the number of shares to be purchased for the $100,000
from 62,500 to 153,846 shares of common stock. These shares have not yet
been issued.
To date, the Company has financed its operations principally through net
proceeds from two public offerings and private placements of debt and equity.
Cash on hand, along with cash generated from the sale of products and
collections of accounts receivable, is not expected be sufficient to meet the
Company's requirements for the next 3 months. The Company's ability to fund
continued operations depends on raising additional capital. Should the
Company be unable to raise additional capital, the Company will be required
to significantly reduce operations, reduce expenses, and may find it
necessary to file for protection under the bankruptcy code. Such steps would
likely have a material adverse effect on the Company's ability to establish
profitable operations in the future. The Company will continue to pursue
other financing arrangements to increase its cash reserves. 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 June 30, 1998, the Company had $352,000 of accounts payable that
were current, $98,000 extended to between 31 and 60 days and $724,000
extended over 60 days. The level of extended accounts payable results from
the Company's negative operating cash. The Company has entered into plans to
extend payments beyond due dates in the original purchase orders. While the
Company believes that payment plans will continue to be accepted, there is
no certainty that the Company will be able to continue to meet extended
payment terms. The Company has received demand letters from certain vendors
requesting immediate payment of amounts owing them totaling approximately
$491,000. Eight of these vendors have initiated litigation for claims
totaling $93,000 and three of these have received judgments totaling
approximately $36,000. The Company has reached settlement agreements with
five of these eight vendors and is negotiating with the remaining three.
Some vendors have stopped making sales to the Company and others have
required cash on delivery terms. The Company has not yet failed to meet
delivery commitments due to supply problems from its vendors.
YEAR 2000
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.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. 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 jurisdiction of arbitration is now uncertain.
The parties are pursuing a negotiated settlement. The ultimate
outcome of this matter cannot be determined at this time; however,
the Company believes it has defenses and intends to defend the
matter vigorously, if a settlement cannot be achieved.
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.
The Company has received demand letters from certain vendors
requesting immediate payment of amounts owing them totaling
approximately $491,000. Eight of these vendors have initiated
litigation for claims totaling $93,000 and three of these have
received judgments totaling approximately $36,000. The Company has
entered into payment plans with some of these vendors and is
pursuing payment plans with others. However, if the Company is
unable to arrange payment plans satisfactory to the vendors, or
meet it obligations under the plans arranged, further litigation
may ensue.
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in technical default of certain provisions of
$2,000,000 of 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION. - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
No. 4.8 - Form of amendment to the Securities Purchase Agreement
dated June 15, 1998
No. 27 - Financial Data Schedule
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MIDISOFT CORPORATION
(Registrant)
Date: August 14, 1997
BY: /S/ Gary M. Cully
---------------------------------------
Gary M.Cully, Vice President of Finance
and Chief Financial Officer
14
<PAGE>
SECOND AMENDMENT TO
SECURITIES PURCHASE AGREEMENT
THIS SECOND AMENDMENT TO SECURITIES PURCHASE AGREEMENT ("Second Amendment") is
made with effect as of June 15, 1998, by and between BP SOFTWARE', LTD., a Texas
limited partnership ("Buyer"), and MIDISOFT CORPORATION, a Washington
corporation ("Company").
WITNESSETH:
WHEREAS, Buyer and Company entered into that certain Securities Purchase
Agreement, dated October 28, 1997, relating to the proposed sale and purchase in
various tranches of an aggregate of $4,000,000 principal amount of the
Debentures of the Company and Warrants related thereto, as more particularly
described in such Agreement; and
WHEREAS, Buyer and Company entered into that certain First Amendment to
Securities Purchase Agreement, dated January 7, 1998, amending in certain
respects the terms of such Agreement (the Agreement, as amended, hereinafter
referred to as the "Contract"); and
WHEREAS, as used herein, all capitalized terms shall have the same meanings
and definition! as set forth in the Contract except as specifically modified
herein; and
WHEREAS, Buyer and Company desire to further amend the Contract as herein
provided.
NOW, THEREFORE, for good and valuable consideration, the receipt, adequacy
and sufficiency of which are hereby acknowledged, and in further consideration
of the mutual covenants and agreements herein set forth, the parties hereto
agree as follows:
SECTION 1. THE $1,000,000 JUNE 15, 1998 PURCHASE. With respect only to the
proposed $1,000,000 June 15, 1 998 purchase by Buyer of $1,000,000 principal
amount of the Debentures of the Company and Warrants related thereto, the
Contract and all Exhibits thereto are hereby amended in all
<PAGE>
appropriate places to provide that Buyer agrees to purchase from the Company
in the June 15, 1998 tranche, for a $500,000 aggregate purchase price, (a)
$500,000 principal amount of Senior Convertible Secured Notes of the Company
maturing on June 15, 2003, and bearing interest at the rate of one (1%) per
annum to be paid in annual installments in arrears on the anniversary date
hereof, the principal amount of which Notes shall be, at the option of the
Holder thereof, convertible at any time, in whole or in part, upon ninety
(90) days' written notice, into 2,500,000 shares of Common Stock of the
Company at a conversion price for each share of Common Stock equal to twenty
cents ($0.20) per share and (b) a five (5) year Warrant entitling the Holder
thereof to subscribe for, purchase and receive 500,000 fully paid and
non-assessable shares of Common Stock of the Company at the Exercise Price of
seventy-five cents ($0.75) per share. The Notes shall be secured by first,
prior and perfected interests in all intellectual property rights, fixed
assets and contracts for product delivery of the Company. Subordinated and
perfected interests in such collateral shall secure the Debentures of the
Company previously purchased by Buyer. Such Holder shall have the option to
purchase from the Company prior to December 31, 1998, for additional $500,000
purchase price, an additional $500,000 principal amount of Senior Convertible
Secured Notes with terms and conditions similar to those referenced above,
the principal amount of which Notes shall be, at the option of the holder
thereof, convertible at any time, in whole or in part, into shares of Common
Stock of the Company at a conversion price for each share of Common Stock
equal to forty-seven percent (47%) of the value of each share for the ten
(10) trading days prior to the exercise of such option.
<PAGE>
SECTION 2. DEBT RESTRICTIONS. The Company covenants and agrees that
prior to the payment In full or conversion in full of such Notes1 the Company
shall not incur any bank or commercial finance debt, except in the ordinary
course of business, without the express written consent of the Holder of the
Notes.
SECTION 3. APPOINTMENT OF DIRECTORS. The word "two" in lines 5 and 6 of
Section 11 of the Contract is deleted and the word "three" is substituted in
lieu thereof. Buyer hereby appoints Larry Smart, David Weimert and Robert
Orbach to the Board of Directors of the Company.
SECTION 4. USE OF PROCEEDS. Company shall use the proceeds from the
Notes for such purposes and in such amounts as have been previously approved
in writing by the Holder.
SECTION 5. CONTRACT IN FORCE. Buyer and Company hereby acknowledge and
agree that, except as expressly modified in this Second Amendment, the terms
and provisions of the Contract as previously written shall remain in full
force and effect. The provisions of this Second Amendment shall control if
there is a conflict with the provisions of the Contract.
SECTION 6. EXECUTION OF AMENDMENT. Any facsimile signature appearing
hereon shall be deemed an original, and this Second Amendment may be executed
simultaneously in two or more counterparts. each of which shall be deemed an
original and all of which together shall constitute one and the same
instrument.
<PAGE>
IN WITNES'S WHEREOF, the parties hereto have executed this Second Amendment
as of this day and year first above written.
BUYER:
BP SOFTWARB, LTD.
a Texas Limited Partnership
By: BP Software GI', L.L.C. General
Partner
By:______________________________
Shaul C. Baruch, Manager
COMPANY:
MIDISOFT CORPORATION
a Washington Corporation
By:______________________
Larry Foster
CEO/President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET DATED JUNE 30, 1998 AND THE STATEMENT OF OPERATIONS FOR THE THREE AND SIX
MONTHS ENDING JUNE 30, 1998, FOUND ON PAGES 3 AND 4 OF THE COMPANY'S 10-QSB FOR
THE SECOND QUARTER OF 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 APR-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 176 0
<SECURITIES> 0 0
<RECEIVABLES> 617 0
<ALLOWANCES> 196 0
<INVENTORY> 258 0
<CURRENT-ASSETS> 815 0
<PP&E> 1,053 0
<DEPRECIATION> 889 0
<TOTAL-ASSETS> 1,269 0
<CURRENT-LIABILITIES> 1,880 0
<BONDS> 1,770 0
0 0
0 0
<COMMON> 20,165 0
<OTHER-SE> (22,546) 0
<TOTAL-LIABILITY-AND-EQUITY> 1,269 0
<SALES> 754 389
<TOTAL-REVENUES> 754 389
<CGS> 307 167
<TOTAL-COSTS> 1,885 972
<OTHER-EXPENSES> (3) (1)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 63 837
<INCOME-PRETAX> (2,274) (810)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,274) (810)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,274) (810)
<EPS-PRIMARY> (0.36) (0.13)
<EPS-DILUTED> (0.36)<F1> (0.13)<F1>
<FN>
<F1>COMMON STOCK EQUIVALENTS HAVE NOT BEEN INCLUDED, AS THEY WOULD BE
ANTI-DILUTIVE.
</FN>
</TABLE>
