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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 March 31, 1999
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; shares outstanding;
7,020,621 as of April 30, 1999
<PAGE>
MIDISOFT CORPORATION
INDEX TO FORM 10-QSB
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements ........................................... 3
a) Balance Sheets - March 31, 1999 and December 31, 1998
b) Statements of Operations - For the Three Months Ended
March 31, 1999 and 1998
c) Statements of Cash Flows - For the Three Months Ended
March 31, 1999 and 1998
d) Notes to Financial Statements - For the Three Months Ended
March 31, 1999 and 1998
Item 2. Management's Discussion and Analysis or
Plan of Operation .............................................. 7
PART II
OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 14
Item 2. Changes in Securities and Use of Proceeds ..................... 14
Item 3. Defaults Upon Senior Securities ............................... 14
Item 4. Submission of Matters to a Vote of Security Holders ........... 14
Item 5. Other Information ............................................. 14
Item 6. Exhibits and Reports on Form 8-K .............................. 14
SIGNATURE ..................................................... 15
<PAGE>
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
MIDISOFT CORPORATION
BALANCE SHEETS
<S> <C> <C>
ASSETS
(Unaudited) (Audited)
At March 31, At December 31,
1999 1998
------------- ---------------
Current assets:
Cash and cash equivalents $ 139,000 $ 270,000
Accounts receivable - net of allowances of
$245,000 in 1999 and 1998 94,000 183,000
Inventories 112,000 115,000
Prepaid expenses and other receivable 40,000 42,000
-------------- ---------------
Total current assets 385,000 610,000
Long-term receivable 195,000 195,000
Property & equipment, net of depreciation 99,000 116,000
Debt issuance costs, net of accum. amortization
of $29,000 in 1999 and $23,000 in 1998 50,000 56,000
-------------- ---------------
Total assets $ 729,000 $ 977,000
============== ===============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,452,000 $ 1,181,000
Current portion of long-term debt 250,000 250,000
Accrued wages & payroll taxes 94,000 93,000
Other accrued expenses 84,000 273,000
Deferred revenue 9,000 6,000
-------------- ---------------
Total current liabilities 1,889,000 1,803,000
Long-term debt, net of discount 2,490,000 2,258,000
Warrant obligations 81,000 81,000
Shareholders' (deficit) equity
Common stock, no par value; 25,000,000
shares authorized, 7,251,000 issued and
outstanding in 1999 and 1998 20,488,000 20,488,000
Additional paid-in capital 3,277,000 3,026,000
Notes receivable from shareholders (191,000) (191,000)
Retained deficit (27,305,000) (26,488,000)
-------------- ---------------
Total shareholders' deficit (3,731,000) (3,165,000)
-------------- ---------------
Total liabilities and shareholders' deficit $ 729,000 $ 977,000
============== ===============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
MIDISOFT CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<S> <C> <C>
Quarter Ended
March 31,
---------------------------------
1999 1998
-------------- ---------------
Revenues $ 133,000 $ 365,000
Cost of revenues 41,000 140,000
-------------- ---------------
Gross profit 92,000 225,000
Operating expenses:
Sales and marketing 203,000 310,000
General and administrative 357,000 377,000
Research and development 101,000 225,000
-------------- ---------------
Total operating expenses 661,000 912,000
Operating loss (569,000) (687,000)
Interest expense (240,000) (765,000)
Other expense (7,000) (11,000)
-------------- ---------------
Net loss $ (816,000) $(1,463,000)
============== ===============
Net loss per share (basic) $ (0.11) $ (0.23)
============== ===============
Net loss per share (diluted)* $ (0.11) $ (0.23)
============== ===============
* Common stock equivalents not included, as it would be anti-dilutive
Weighted average shares outstanding 7,251,000 6,298,005
============== ===============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
MIDISOFT CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<S> <C> <C>
Quarter Ended
March 31,
---------------------------------
1999 1998
-------------- ---------------
Cash flows used for operations:
Net loss $ (816,000) $ (1,463,000)
-------------- ---------------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation & amortization 23,000 53,000
Non-cash interest expense to APIC 250,000 722,000
(Increase) decrease in assets:
Accounts receivable, net 89,000 168,000
Inventories 2,000 (17,000)
Prepaid expenses & other assets 3,000 (159,000)
Increase (decrease) in liabilities:
Trade accounts payable 271,000 (6,000)
Accrued wages & payroll taxes 1,000 8,000
Other accrued expenses (179,000) (86,000)
Deferred revenue 1,000
-------------- ---------------
Total adjustments 460,000 684,000
-------------- ---------------
Net cash used for operations (356,000) (779,000)
-------------- ---------------
Cash flows used for investing:
Additions to plant & equipment - (5,000)
-------------- ---------------
Net cash used for investing - (5,000)
-------------- ---------------
Cash flows from financing:
Proceeds from issuance of long-term debt
and warrants, net of debt issue costs 225,000 1,088,000
-------------- ---------------
Net cash provided by financing 225,000 1,088,000
-------------- ---------------
Net change in cash and cash equivalents (131,000) 304,000
Cash and cash equivalents, beginning of year 270,000 90,000
-------------- ---------------
Cash and cash equivalents, end of period $ 139,000 $ 394,000
============== ===============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MIDISOFT CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1999 and 1998
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 1998 audited financial statements included in its Annual Report on
Form 10-KSB/A filed April 30, 1999.
The results of operations for the three months ended March 31, 1999 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>
<S> <C> <C>
March 31, December 31,
1999 1998
OEM $ 19,000 $ 17,000
Resellers and other 320,000 411,000
-------------- ---------------
Subtotal 339,000 428,000
Less: Allowance for doubtful accounts (159,000) (72,000)
Allowance for sales returns (86,000) (173,000)
============== ===============
Total accounts receivable $ 94,000 $ 183,000
============== ===============
</TABLE>
Accounts receivable consists 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 March 31, 1999, OEM accounts
receivable amounts not yet due were $0, equal to 0% of total OEM receivables
compared to $1,000, equal to 6% of total OEM receivables at December 31, 1998.
Reseller payment terms typically are standardized and similar to those given
software distributors. At March 31, 1999, reseller accounts receivable amounts
not yet due were $54,000, equal to 17% of total reseller receivables compared to
$257,000, equal to 63% 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
$325,000 of accounts receivable at March 31, 1999, compared to $415,000 at
December 31, 1998. Foreign customers comprised $14,000 of accounts receivable at
March 31, 1998 compared to $13,000 at December 31, 1998.
Income Taxes
No income taxes are payable at March 31, 1999, the result of the Company's
year-to-date loss and the result of Federal net operating losses through
December 31, 1998 of approximately $26.1 million that may reduce taxes due in
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 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 carry-forward. An investor who owns $3,200,000 in principal
amount of convertible debentures and associated warrants outstanding, has the
right to purchase an additional $800,000 of convertible debentures in 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 would
result.
<PAGE>
Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1999 1998
Raw materials $ 103,000 $ 106,000
Finished goods 29,000 29,000
Less: Allowance for obsolescence (20,000) (20,000)
-------------- ---------------
Total inventory $ 112,000 $ 115,000
============== ===============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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 provides innovative applications and utilities for the control and
enhancement of sound on personal computers. The Company, founded in 1986, has
developed award-winning audio software products since that time. Over the past
thirteen years the available market, represented by hardware for sound creation,
has expanded dramatically, from being available on a small segment of PCs used
mainly by computer hobbyists, into availability on nearly 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. Emergence of the Internet has amplified this expansion by
creating the backbone, on which music and other audio embellished communication
are now distributed globally, and which web-based businesses increasingly desire
to use in creating compelling online experiences.
Midisoft is implementing a strategy designed to meet the needs of two
groups whose needs converge in their desire for a compelling "musical
experience:" (i) those who seek an engaging music listening experience from
their PC desktop, and (ii) those who desire to create this musical experience
for others to enjoy. For example, the Company has recently completed the
engineering to customize its Desktop Sheet Music product for the Christian music
market. This customized version features functionality tailored to the needs of
music pastors and directors who require numerous pages of easily modified sheet
music each week for use by soloist performers or choirs. In addition, this
product contains a large selection of hymns, which can be transposed and
modified with the Company's proprietary software, to fit particular voices of
the choir and individual parts of accompanying instruments.
Additionally, the Company believes that it has identified other groups
whose needs also converge on a desire for compelling online musical experiences,
and who will benefit from the Company's expertise in music creation and
internet-centric audio and music delivery. Development of these products is in
the planning stages.
Midisoft's strategy is based on its belief that the Internet provides a
platform for promoting, marketing and selling music and related products and
services. For example, MP3, the file format for compression of audio files, is
the second most frequently searched for term on the leading Internet search
engines, according to Searchterms.com. Jupiter Communications estimates music
downloads and other music sales will reach $1.4 billion by 2002. The Company is
positioning its Internet Products to exploit these trends. Internet Media Player
is a candidate for private labeling on destination and portal websites. The
Company has initiated arrangements with content aggregators and providers for
the download of the Internet Media Player.
However, success of the Company's strategy in this area depends in large
part on the global development of an infrastructure for providing Internet
access and services. Because global e-commerce and online exchange of
information and compelling music content on the Internet and other similar open
wide area networks are new and evolving, it is not possible to anticipate with
assurance whether the Internet will prove to be a viable commercial marketplace
for the Company's technology. Even though the Internet has experienced, and is
expected to continue to experience, significant, geometric growth in the number
of users and amount of traffic, there can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed on it by
this continued growth. In addition, the Internet could lose its viability due to
delays in the development or adoption of new standards and protocols (for
example, the next-generation Internet Protocol) to handle increased levels of
Internet activity, or due to increased governmental regulation. If the necessary
infrastructure or complementary services or facilities are not developed, or if
the Internet does not become a viable commercial marketplace, the Company's
ability to execute its strategy could be seriously limited and this would
materially and adversely affect its results of operation and financial position.
With these strategies the Company is seeking to ehance its core
technologies, in which it has continued to invest over the past 24 months, and
augment its retail distribution model with more direct distribution models,
including web-based sound and music delivery. The Company is hopeful that
successful execution of these strategies will result in growth and improved
gross margins. However, Midisoft's development efforts may not result in the
timely introduction of new products, and these new products may not be
commercially successful. Failure to successfully develop new products, delays in
the introduction of these new products, or lower-than-anticipated demand for
these products could have a material and adverse effect on the Company's
business and results of operations.
The Company markets its products on a worldwide basis (i) to original
equipment manufacturers (OEMs), which "bundle" one or more of Midisoft's
products with their own products, (ii) to distributors and resellers, which
directly supply the retail distribution channel, and (iii) to end users, catalog
companies, and businesses and (iv) through on-line Internet sales. Sales to
software distributors and resellers, together with direct sales, represented 30%
of revenues in the three months ended March 31, 1999, and OEM sales represented
70% during the same period. International sales accounted for 11% of the
Company's revenues during the three months ended March 31, 1999. 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
March 31, 1999, two customers individually accounted for more than 10% of the
Company's total revenues and together represented 91% of net revenues for the
period.
The principal competitive factors affecting the music creation software and
internet music distribution markets include product functionality, ease of use,
performance and reliability; customer service and support; product availability;
vendor credibility; brand awareness; ability to keep pace with technological
change; and price. Although the Company believes that its products currently
compete favorably with respect to these factors, there can be no assurance that
the Company can achieve an improved competitive position in the face of
increasing competition from new products and enhancements introduced by existing
competitors and new companies entering this market. The markets for the
Company's products are characterized by significant price competition, and the
Company expects it will continue to face increasing pricing pressures. There can
be no assurance that the Company will be able to compete successfully against
current and future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, financial position
and results of operations.
Additionally, certain of the Company's competitors have substantially
greater financial, marketing or technical resources than the Company. There can
be no assurance that other companies have not developed or marketed or will not
develop or market products that are superior to those of the Company, that are
offered at substantially lower prices than those of the Company or that have or
will achieve greater market acceptance than those of the Company.
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
and amortization of purchased software technology and 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.
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 any significant obligations to customers subsequent to
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. Additional royalty use or
unit copy royalty fees are recognized when they are received pursuant to license
agreements upon notification of shipment from OEMs.
Seasonality
Sales to distributors tend to be greater in the 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 Three months ended March 31, 1999 and 1998
This table provides comparative results of the quarters ending March 31,
1999 and 1998. A general discussion of these results follow.
<TABLE>
<CAPTION>
<S> <C> <C>
Quarters ending March 31,
1999 1998
% of Revenue % of Revenue
Revenues 100% 100%
Gross Profit 69% 62%
Research & Development 76% 62%
Sales & Marketing Expense 153% 85%
General & Administrative Expense 268% 103%
Total Operating Expenses 497% 250%
Net Operating Loss -428% -188%
Other Expense 186% 213%
Net Loss -614% -401%
</TABLE>
Revenues for the three months ended March 31, 1999 were $133,000, a
decrease of $232,000, compared to $365,000 for the same period in 1998. Sales to
software distributors and resellers, together with direct sales were $40,000,
representing 30% of revenues in the three months ended March 31, 1999, compared
to $287,000 which represented 79% of revenues for the same period in 1998. OEM
sales were $93,000 and $78,000 representing 70% and 21% for the same periods
respectively. International sales accounted for 11% of the Company's revenues
for the three months ended March 31, 1999 and 15% in 1998.
The Company has begun positioning its Midisoft StudioTM 6.0 into the
Christian music market with enhanced features tailored to meet requirements of
music pastors. With this emphasis on special feature sets enhancing its core
technologies, the Company hopes to lessen its reliance on relatively low margin
retail distribution. The Company expects to ship the enhanced version of
Midisoft StudioTM 6.0 during the second quarter of 1999. This effort has
required marketing and sales resources, which the Company would otherwise have
applied to its traditional retail channel sales efforts. The Company believes
that this transitioning process, and the resources it has required, is the
principal reason for significantly lower revenues in the quarter ended March 31,
1999 compared to the same period in 1998. These efforts are a key element of the
Company strategy to enhance its core technologies and augment its retail
distribution with more direct distribution models. The Company is hopeful that
successful execution of this strategy will result in higher gross margins for
its packaged software business. However, these development efforts may not
result in timely introduction of new products, and these new products may not be
commercially successful. Failure to successfully develop new products, delays in
the introduction of these new products, or lower-than-anticipated demand for
these products could have a material and adverse effect on the Company's
business and results of operations.
Gross profit for the three months ended March 31, 1999 was $92,000, a
decrease of $133,000, compared to $225,000 for the same period the prior year.
As a percentage of revenues, gross margin increased to 69% in the three months
ended March 31, 1999 from 62% in 1998. This is mainly the result of a higher
percentage of OEM sales, compared to other software sales, in the quarter ended
March 31, 1999 versus the same quarter in 1998. Gross margins of OEM sales,
which generate licensing royalties with no distribution or packaging costs, are
generally higher than gross margins for the Company's other products.
Sales and marketing expenses for the three months ended March 31, 1999 were
$203,000, a reduction of $107,000, compared to $310,000 for the same period in
the prior year. This decrease has resulted from targeted reductions in
advertising and fewer personnel during the three months ending March 31, 1999
compared to this period in 1998. As a percentage of revenues, sales and
marketing expenses increased to 153% in the three months ended March 31, 1999
from 85% for the same period in 1998. This increase was a direct result of
comparably lower revenues in the quarter ended March 31, 1999.
General and administrative expenses for the three months ended March 31,
1999 were $357,000, a decrease of $20,000, compared to $377,000 for the same
period of the prior year. As a percentage of revenues, these expenses for the
three months ended March 31, 1999 increased to 268% from 103% for the same
period in 1998, as a result of lower revenues in the three month period ending
March 31, 1999.
Research and development expenses for the three months ended March 31, 1999
were $101,000, a decrease of $124,000, compared to $225,000 for the same period
in the prior year. As a percentage of revenues, research and development
expenses increased to 76% in the three months ended March 31, 1999 from 62% for
the same period in 1998.
Interest and other income for the three months ended March 31, 1999 was
$5,000, compared to $7,000 for the same period the prior year. Interest expense
for the three months ended March 31, 1999 was $240,000 compared to $765,000 for
the same period in 1998, a decrease of $525,000. Interest expense includes
one-time non-cash charges of $174,000 in the first quarter of 1999, relating to
the valuation of the $250,000 of convertible debentures and $50,000 for
amortization of the discount on the detachable warrants issued through March
1999 and $722,000 in the first quarter of 1998, relating to the valuation of the
$1,000,000 of convertible debentures and $30,000 for amortization of the
discount on detachable warrants issued through January, 1998. The balance of the
expense totaling $15,000 in the first quarter of 1999 and $29,000 in the same
period last year, represent accrued interest on the Company's debt.
No income taxes are payable at March 31, 1999, the result of the Company's
year-to-date loss and the result of federal net operating losses at December 31,
1998 of approximately $26,137,000. The net operating losses may potentially
reduce federal income tax liability, due in future periods and which begin to
expire in 2008, In certain circumstances, as specified in Section 382 of the
Internal Revenue Code, a fifty percent 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 owns $3,200,000 in principal amount of convertible
debentures and associated warrants and has the right to purchase an additional
$800,000 in convertible debentures in 1999. If the debenture holder were to
exercise all of its warrants and convert all the debt it holds, a change in
control of the Company would result.
Liquidity and Capital Resources
As of March 31, 1999, the Company's principal sources of liquidity included
cash and cash equivalents of $139,000 and net accounts receivable of $94,000.
This compares to cash, cash equivalents and short term investments of $270,000
and net accounts receivable of $183,000 at December 31, 1998. The change in
liquidity and capital resources is the result of negative cash flow from
operations during the first quarter of 1999.
The Company's current liabilities at March 31, 1999 were $1,889,000
compared to $1,803,000 at December 31, 1998. As of March 31, 1999, working
capital totaled a negative $1,504,000. The Company's operating activities used
cash of $356,000 for the three month period ending March 31, 1999, due primarily
to operating losses of $569,000, net of non-cash charges. This use of cash of
$356,000 for the three month period ended March 31, 1999, is a decrease of
$423,000 from the first quarter of 1998 and a $316,000 increase from the fourth
quarter of 1998. The decrease in cash used in the first quarter of 1999 compared
to the same quarter in 1998 is principally due to lower operating losses and
increases in accounts payable. The increase from the fourth quarter of 1998
results from lower revenues in the current period.
The Company sold $250,000 of convertible notes on March 30, 1999, in
accordance with the Securities Purchase Agreement discussed in the Company's
10-KSB/A filed with the SEC on April 30, 1999. The notes bear interest at the
rate of 1% per annum payable annually in cash and are convertible into 1,000,000
shares of the Company's common stock. The note holder also received five-year
detachable warrants to purchase 500,000 shares of common stock for $0.75 per
share. On April 30, 1999 the Company sold another $200,000 of convertible notes
bearing interest at 1% per annum, payable annually in cash and convertible into
250,000 shares of common stock. The note holder received five-year detachable
warrants to purchase 250,000 shares of the Company's common stock for $1.75 per
share. Additionally, the note holder has the right to purchase an additional
$800,000 of convertible debentures in 1999. If the note 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 would result.
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, will not 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 March 31, 1999, the Company had $40,000 of accounts payable that were
current, $97,000 extended to between 31 and 60 days and $1,153,000 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 $401,000. Eight of these vendors have
initiated litigation and received judgments totaling approximately $95,000. Some
vendors have refused to make sales to the Company and others have required cash
on delivery terms. The Company has negotiated changes in delivery date
commitments, but has not failed to make product shipments due to supply problems
from its vendors.
YEAR 2000 Issues
The Year 2000 or Y2K problem is somewhat predictable in its timing, but
unpredictable in its effects. In order to conserve limited computer memory, many
computer systems, software programs, and other microprocessor dependent devices
were created using only two digit dates, such that 1998 was represented as 98.
These systems may not recognize certain 1999 dates, and the year 2000 and
beyond, with the result that processors and programs may fail to complete the
processing of information or revert back to the year 1900. As we approach the
year 2000, we expect computer systems and software used by many companies in a
wide variety of applications to experience operating difficulties unless they
are modified or upgraded to process information involving, related to, or
dependent upon the century change. Failures could incapacitate systems essential
to the functioning of commerce, building systems, consumer products, utilities,
and government services locally as well as worldwide. Significant uncertainty
exists concerning the scope and magnitude of problems associated with Y2K.
The Company has established a Y2K Task Force to address these risks. The
Y2K Task Force, comprised of the CEO, CFO and Director of Information
Technology, is leading the Year 2000 risk management efforts. The Y2K Task Force
is coordinating the identification and testing of computer hardware and software
applications, with a goal to ensure availability and integrity of the
information systems and the reliability of the operational systems utilized by
the Company.
The Year 2000 Project at Midisoft Corporation uses the following five-phase
methodology and approach:
The first two phases are "work in progress" and are being updated on an
ongoing basis.
Phase I - Inventory. Collect a comprehensive list of components that may be
affected by the Year 2000 issues. Components are categorized into facilities,
hardware, software, and services.
Phase II - Assessment. Evaluate the inventory to determine which components will
function properly with the turn of the century and rank components based on
their potential impact to the company. Each component is assigned priority as
follows:
Based on assigned priorities from Phase I and II, the following phases will
be carried out to the critical components first, followed by important
components, then inconvenient components and finally non-essential components if
resources and time are available. The Company is committed to complete testing
of all critical and important components before August 31, 1999.
Phase III - Remediation. Analyze all components affected by Year 2000,
identifying problem areas and repairing / replacing non-compliant components.
Phase IV - Testing. Thorough testing of all affected systems, including present
and future date testing to simulate Year 2000 dates.
Phase V - Implementation. Place all components that have been successfully
tested into production.
Information systems are being tested with a licensed software program,
diagnostic tools designed for personal computers and servers that will identify
Y2K issues related to computer hardware, software and data. To date, this
testing appears to have been successful and has yielded no significant problems.
With the constant introduction of new computer equipment and software,
information systems testing will continue throughout the year.
The company does not currently utilize Electronic Data Interchange (EDI)
with any of its partners or vendors but will thoroughly test any EDI situation
that may arise between now and March 1, 2000. If critical suppliers do not
satisfy the companies Year 2000 compliance requirements, alternative suppliers
will be identified. As a contingency plan, inventory levels may be raised prior
to December 1999 to assure continued delivery of products to customers through
March 2000.
Risks
In the event such third parties cannot provide the Company with products,
services, or systems that meet the Year 2000 requirements on a timely basis, or
in the event Year 2000 issues prevent such third parties from timely delivery of
products or services required by the Company, the Company's results of
operations could be materially adversely affected. To the extent Year 2000
issues cause significant delays in, or cancellation of, decisions to purchase,
the Company's products or services, the Company's business, results of
operations, and financial position would be materially adversely affected. The
Company is assessing these risks and in some cases has initiated formal
communications with significant suppliers and customers to determine the extent
to which the Company is vulnerable to these third parties' failure to remediate
their own Year 2000 issues. There can be no assurance the Company will identify
and remediate all significant Year 2000 risks, or that such risks will not have
a material adverse effect on the Company's business, results of operations, or
financial position. Accordingly, the Company will continue to develop
contingency plans in anticipation of unexpected Year 2000 events. Based on its
assessment of year 2000 risks to date, the Company does not believe any material
exposure to significant business interruption exists as a result of Year 2000
compliance issues.
Contingency Plans
Since the Year 2000 problem is pervasive, few, if any, companies can make
absolute assurances that they will identify and remediate all Y2K risks.
Accordingly, the Company expects the risk assessment and contingency planning to
remain an ongoing process leading up to and beyond the year 2000. In addition,
the potential Year 2000 problem is being addressed as part of the Company's
overall emergency preparedness program that includes contingency planning for
other potential major catastrophes like earthquakes, fires and floods.
The Company's approach to Financial Risk has two main areas of focus.
Secure the broadest insurance coverage available at a reasonable cost and avoid
exclusions or restrictions of coverage, if possible. Explore other Financial
Risk Transfer products and/or Y2K specific insurance coverage to the extent that
it becomes available at economically feasible levels.
Estimated Costs
The Company is continuing to assess the potential impact of the century
change on its business, results of operations, and financial position. The total
cost of these Year 2000 compliance activities is not anticipated to be material
to the Company's financial position or its results of operations. However, if
there should be significant problem(s) achieving Year 2000 compliance, there is
no assurance that the Company will have the financial or other resources to
properly address the problem(s). The cost of internal resources dedicated to the
Year 2000 has not been estimated at this time.
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 (a) the ability to fund continued operations out of existing working
capital, additional capital infusion and cash flow from future operations and
(b) the success of the Company's approach to dealing with year 2000 issues. The
forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions that the Company will continue to develop
and introduce new music, strategic and Internet products on a timely basis, that
rapid changes in technology will not make the Company's products obsolete or
otherwise reduce their ability to compete in the marketplace, that competitive
conditions within the industry will not change materially or adversely, that the
use of multimedia PC's in homes and small offices will continue to grow, that
management's decision to focus the Company's resources on music and sound
products will reduce certain expenses from the levels which were experienced in
1997 and 1998, and that there will 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.
<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 aggregated in excess of $1
million. The parties reached an agreement in July 1998 outside of
arbitration. In exchange for the mutual release of all claims and
counterclaims, the Company agreed to provide consideration of
$420,000, $25,000 in cash and the remainder comprised of
forgiveness of $112,000 in debt and issuance of approximately
630,000 Midisoft common shares. The Company agreed to file a
registration statement for these shares within 30 days after final
authorization by the shareholders in 1998, but has not filed the
registration statement as of this date. Midisoft intends to file a
registration statement at the earliest possible date. Payments
totaling $20,000 have been made. The debt of $112,000 has been
fully reserved and expense of $283,000 for the additional common
shares has been booked as of December 31, 1998. Midisoft agreed to
remove restrictive legends on 166,667 of previously issued shares.
It is anticipated that the releases and consideration will be
exchanged in 1999.
In March 1997, a former sales representative filed suit in Michigan
against Midisoft under a certain manufacturer's representative
agreement entered into between the parties in November 1994.
Plaintiff claims that the Company breached this agreement by
failing to pay commissions and is seeking damages in excess of
$75,000. Midisoft denies that it failed to pay commissions under
the agreement and is asserting counterclaims for over payments and
return credits. Damages asserted by the Company equal the damages
claimed by the plaintiff. The parties are awaiting a trial date,
which is reportedly to occur sometime during the second quarter of
1999. The ultimate outcome cannot be determined at this time, but
the Company believes that it has meritorious defenses and is
vigorously defending against the claim.
On April 3, 1997 the Company began arbitration proceedings against
a former customer. On September 24, 1997, the Company was awarded a
judgement in the amount of $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. In
November 1998, the former customer had exhausted its appeals when
the Washington State Court of Appeals denied the former customer's
appeal motion, thereby terminating the appellate process. In March
1999, the Company amended the judgement to add attorneys' fees and
interest accrued since the original judgement was entered. The
total amount of the amended judgement is $247,925.34. The Company
has engaged a California law firm to enforce judgement in the state
of California, the headquarters location of the former customer.
The Company has received demand letters from certain vendors
requesting immediate payment of amounts owing them totaling
approximately $401,000. Twelve of these vendors have initiated
litigation for claims totaling $131,000 and eight of these have
received judgments totaling approximately $95,000. The Company has
reached settlement agreements with some vendors and is negotiating
with the remainder. Some vendors have stopped making sales to the
Company and others have required cash on delivery terms.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
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.
a) EXHIBITS - No. 27 Financial Data Schedule
<PAGE>
SIGNATURE
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: May 19, 1999
BY: /S/ Gary M. Cully
-----------------------------------------
Gary M. Cully, Vice President of Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET DATED MARCH 31, 1999 AND THE STATEMENT OF OPERATIONS FOR THE THREE MONTH
PERIOD ENDED MARCH 31, 1999 FOUND ON PAGES 3 AND 4 OF THE COMPANY'S 10-QSB FOR
THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRITY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000882692
<NAME> MIDISOFT CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 139
<SECURITIES> 0
<RECEIVABLES> 339
<ALLOWANCES> (245)
<INVENTORY> 112
<CURRENT-ASSETS> 385
<PP&E> 1,046
<DEPRECIATION> (947)
<TOTAL-ASSETS> 729
<CURRENT-LIABILITIES> 1,889
<BONDS> 0
0
0
<COMMON> 20,488
<OTHER-SE> (24,219)
<TOTAL-LIABILITY-AND-EQUITY> 729
<SALES> 133
<TOTAL-REVENUES> 133
<CGS> 41
<TOTAL-COSTS> 661
<OTHER-EXPENSES> 7
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 240
<INCOME-PRETAX> (816)
<INCOME-TAX> 0
<INCOME-CONTINUING> (816)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (816)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11) <F1>
<FN>
COMMON STOCK EQUIVALENTS NOT INCLUDED, AS IT WOULD BE ANTI-DILUTIVE.
</FN>
</TABLE>
