SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB/A1
[X] Annual Report Under Section 13 or 15(d)of the Securities Exchange Act
of 1934 For the Fiscal Year Ended
December 31, 1998 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-22172
MIDISOFT CORPORATION
(Exact name of small business issuer as specified in its charter)
Washington 91-1345532
(State or other jurisdiction of (I.R.S.employer
incorporation or organization) Identification No.)
1605 NW Sammamish Road, Suite 205,
Issaquah, Washington 98027
(Address of principal executive offices)
(425) 391-3610
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $1,759,954.
Aggregate market value of voting stock held by non-affiliates of the registrant
as of April 14, 1999 was $13,718,920 (based upon the closing sale price of $2.00
per share on such date). Number of shares of Common Stock outstanding as of
April 14, 1999:
7,020,621 shares.
DOCUMENTS INCORPORATED BY REFERENCE
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I
Page
<S> <C>
Item 1. Description of Business.............................................. 3
Item 2. Description of Property.............................................. 8
Item 3. Legal Proceedings.................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders...................9
Part II
Item 5. Market for Common Equity and Related Shareholder Matters............ 11
Item 6. Management's Discussion and Analysis or Plan of Operation........... 11
Item 7. Financial Statements................................................ 20
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................40
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.............................. 40
Item 10.Executive Compensation.............................................. 41
Item 11.Security Ownership of Certain Beneficial Owners and Management...... 42
Item 12.Certain Relationships and Related Transactions...................... 44
Item 13.Exhibits List and Reports on Form 8-K............................... 44
SIGNATURES.................................................................. 47
</TABLE>
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
General
Midisoft Corporation was founded in 1986 as an innovator of music technology.
Over the past 13 years, the Company has established itself as a provider of
award-winning music software and sound utilities for the control of audio and
the management of media files. Midisoft's product lines include music creation
and distribution with integration of sound and media on the PC and over the
Internet. The Company's music products enable users to enjoy, explore, learn,
create and share music. Midisoft pioneered the development of music technology,
including the ability to view (visually interact with) musical notation of
sounds while played with a musical instrument linked to a PC. Midisoft's
Internet products promote the convergence of sound with other technologies that
enhance the experience of combining and controlling music, sound and video with
other Internet capabilities.
The Company markets its products on a worldwide basis in two ways. Music
products are sold on the Internet and at retail stores and the Internet products
are downloadable and sold to hardware manufacturers and content aggregators and
providers. In 1998, the Company deployed a strategy of selling music software to
musical instrument stores that have a focused clientele of musicians. This
channel has proven cost-efficient. Costs of reaching this niche are more
economical than that of general consumer-related audiences. The Company
continues to sell its music software directly to customers through its inside
sales staff and increased visibility of the website.
The second distribution method is selling audio utilities to original equipment
manufacturers and Internet products to content aggregators and providers.
Although this distribution channel is currently in a state of change, there are
revenue opportunities for those companies willing and agile enough to adjust
their strategies. The Company's contracts with companies such as Diamond
Multimedia enable end users to gain exposure to Midisoft's audio utilities on a
mass market scale. The Company also has formed alliances with Internet content
aggregators and providers to download its Internet Media Player, opening
exposure to Internet users.
During the last two years, the Company redesigned and developed its music
products and refocused its strategic products to meet the increasing demand for
access to new technologies. In 1998, the Company released Midisoft Studio 6.0,
the first notation-based sequencer that combines digital editing and recording
capabilities in one application, and Desktop Sheet Music 2.0. These latest
editions of the music software provide increased flexibility and ease-of-use
demanded by customers. The Company also released MediaWorks'98, the media player
for the desktop personal computer, and Internet Media Player, the add-on to
Microsoft's Windows Media Player that allows access and management of content
sourced from the Internet.
Emergence of the Internet as a medium for distributing sound, voice messages and
music globally has amplified expansion of audio technology. As new technologies
evolve, the Company believes it can continue to be a premiere provider of audio
control expertise.
Products
Midisoft Music Product Line consists of Midisoft Studio 6.0, Midisoft Desktop
Sheet Music 2.0, Midisoft Play Piano, Midisoft MidiKit, and Midisoft Family
Music Center. The Company creates and markets these products to bring music
education, composition and professional quality music creation to the PC
desktop.
Midisoft Studio(TM) 6.0 Midisoft Studio 6.0 is a music sequencer utilizing and
extending technology that was first introduced by Midisoft in 1986. The product
creates and edits music digitally, and publishes high-quality music notation
(sheet music). Midisoft Studio 6.0 is differentiated from other music sequencers
because it uses the same notation engine incorporated in Midisoft Desktop Sheet
Music. This capability currently is not found in competing products .
Midisoft Desktop Sheet Music(TM). Desktop Sheet Music 2.0, released at the end
of the third quarter of 1998, includes significant functionality improvements
based on extensive beta use evaluations. Targeted at the estimated $433.5
million per year category of printed music (National Association of Music
Merchants, 1998 Statistical Survey), Desktop Sheet Music creates and publishes
professional sheet music. The product, imports standard MIDI files for
conversion to high-quality music notation (sheet music).
Midisoft MIDIKit(R) Midisoft MIDIKit's universal MIDI connector and MIDI editor
transforms a PC into a music recording studio. Cables connect the PC's sound
card to a MIDI musical instrument. The product's Recording Session Plus software
provides MIDI recording, composing and editing capability, as well as digital
audio recording.
Midisoft Play Piano(TM) 2.0. Midisoft Play Piano 2.0 combines core Midisoft
technologies and new proprietary technologies for creating interactive music
learning experiences based on individual student needs. The product imports MIDI
files and with artificial intelligence creates custom music lessons.
Midisoft Family Music Center(TM). Family Music Center incorporates Midisoft Play
Piano and Midisoft Studio with a keyboard, MIDI connector and a Connect and Play
video, targeting family entertainment.
Midisoft's Internet Product Line consists of Midisoft Internet Media Player,
Midisoft MediaWorks'98, Internet Audio Postcard, Midisoft Internet SoundBar, and
Midisoft AudioPro. Derivatives of these products are planned for development for
new and existing contracts, including audio and content aggregators, as well as
downloads from Internet destination and portal sites.
Internet Media Player(TM) In July 1998, the Company released Internet Media
Player(TM) v3.0, a streaming media player, with full support for Microsoft
Corporation's NetShow v3.0. The player provides Internet users with capabilities
to locate, organize and directly access links to streaming content, such as live
radio and TV broadcasts, concert "webcasts," on-line news and entertainment.
This product also plays MP3 files, the current file format of choice of the
Internet music enthusiast.
Internet Media Player was a featured NetShow(now Windows Media)Partner
third-party product on Microsoft's web site and was included on two Microsoft
Tools CDs, distributed to more than 50,000 commercial and corporate software
developers. Internet Media Player is sold and distributed to end-users 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.
MediaWorks(TM) `98 In late June 1998, the Company released MediaWorks`98 v1.0, a
multimedia playback application for Windows 95/98 and NT. MediaWorks `98
provides an extensible audio/video player supporting most popular file formats.
The product features an intuitive user interface, as well as an integrated
database engine, the MediaFinder, which simplifies locating and managing media
files.
The Company is marketing MediaWorks`98 to its traditional third-party
customers, on its web site (http://www.midisoft.com/html/catalog/
mw98/default.htm) and on download sites, such as BuyDirect.com and ZDNet. New
versions of MediaWorks `98 will feature plug-in architecture for rapid
deployment of enhancements and modules supporting enhanced file formats.
Midisoft AudioPro(TM). AudioPro supports MIDI, wave audio and CD audio for
third-party programs, providing software sound tools and flexibility to manage
and edit interactive multimedia audio data.
Midisoft Internet Audio Postcard(TM). Midisoft Internet Audio Postcard adds
voice to digital snapshots or video files. It includes a player for Internet
distribution.
Midisoft Internet Sound Bar(R) Internet Sound Bar controls sound from the PC
desktop. With this product users send Audio Mail, create Audio Notes, annotate
digital pictures or video with sound, then distribute their creations on the
Internet The software plays CD's and locates and collects all sound and music
files on the PC. This functionality is controlled from a Windows-style task bar,
positioned on the screen edge.
Market Overview
With proliferation of the Internet as an engaging medium for communication,
entertainment and recreation, Midisoft believes the PC will continue to be a
platform for creating and experiencing music, sound and video. In the broadest
sense, the potential market for the Company's audio and media control software
is every PC that ships into a home or business. IDC forecasts unit shipments of
PC's to grow 14.1% in 1999 to more than 96 million, with the number of
households owning a personal computer, expected to reach 43% in the U. S. This
obviously presents substantial segments for music and related applications. The
National Association of Music Merchants estimates 62 million amateur musicians
reside in the U.S. The Company expects that music tutorials, creation,
appreciation and enjoyment with PC's will continue.
The Company also believes that office computer users will become increasingly
aware and experienced in using sound effects, such as background music
integrated with visual effects in their business presentations.
Strategy
Midisoft is deploying a strategy designed to meet the demands of users of music
as well as makers of music. For example, the Company recently customized its
Desktop Sheet Music product for sale into the Christian music market. The
customized version features functionality tailored to the requirements of music
pastors and directors. These users of music require sheet music each week for
use by soloist performers or choirs. In addition, the product contains a
selection of hymns that can be transposed and varied to fit the particular
voices or members of a choir. The Company is identifying other music users for
similar customization and product sales.
Midisoft believes that the Internet will continue to provide a platform for
promoting, marketing and selling music and related products and services 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.
Marketing, Sales and Distribution
The Company markets its products to end users through retail distribution,
third-party manufacturers and Internet destinations and portals. Products
offered directly to end users include the Company's flagship music products.
Music products also have found a home as a product differentiator for sound card
and personal computer manufacturers. The uniqueness of the products allows the
Company to leverage its audio expertise onto the Internet with Internet Media
Player. The Company markets its products principally by attending trade shows,
advertising in periodicals oriented toward retailers and end-users, Web
advertising and direct mailings.
Distribution
Retail distribution is direct through the Company's Retail Channel Sales group.
The Company has a stock balancing program for its retail products that, under
certain circumstances, allows for the exchange of products by resellers. The
Company monitors and manages the volume of its sales to retailers and
distributors and their inventories as substantial overstocking in the
distribution can result in high returns or the requirement of substantial price
protection in subsequent periods. A price protection program allows resellers a
price reduction from the Company for unsold product. The Company believes it
provides adequate reserves for returns and price protection which are based on
estimated future returns of products, taking into account promotional
activities, the timing of new product introductions, distributor and reseller
inventories and other factors and that its current reserves will be sufficient
to meet return and price protection requirements for the foreseeable future.
Internationally, retail products are generally sold through republishers.
The Company expanded its presence into Musical Instrument ("MI") stores in 1998.
The Company currently has shelf space in the two largest MI chains, Sam Ash and
Guitar Center, as well as prominent regional MI resellers. The Company believes
that MI retailers generate higher sales per store for these types of products
than computer software retailers do.
Direct Sales. The Company has an inside sales group that sells product directly
to end users through a toll-free number listed in advertising by the Company.
This group is responsible for targeted direct mail marketing and sells product
upgrades and accessories to registered customers.
Web Sales. Web sales are an increasingly important channel for the Company. The
Company has developed its Internet web site to promote the complete product line
and conduct secured online transactions. In addition, the Company has
sublicensed certain of its downloadable software products to other Internet
stores such as Digital River and c|net.
As part of its sales efforts, the Company generates a marketing database of
registered users for direct mail opportunities. Further, the surveying of
current users, collation of user feedback from technical support calls, input by
customers and the Company's sales force is evaluated in determining the features
and function of the next set of product releases in the context of the Company's
own strategic planning.
The Company distributes product direct to third-party manufacturers through its
internal sales force. The Company supplies one master disk, which the
manufacturer duplicates.
Customer Support: The Company provides a high level of support across the
distribution spectrum. Support includes on-site training for third party
manufacturers, as well as on-going telephone support. In turn, these groups
provide support for their customers directly. The Company also offers free
support to end-users of its retail products.
Competition
The software market for audio and music on the PC is highly competitive and
rapidly changing. The Company's competitors, many of which have greater
financial, marketing and technical resources than the Company, offer similar
products and target the same customers. The Company believes its ability to
compete depends upon many factors within and outside its control, including the
ability to offer product enhancements, functionality, performance, price,
reliability, customer support, sales and marketing efforts and distribution.
There can be no assurance that competition will not adversely affect future
operating results or financial condition.
Manufacturing
The Company utilizes a third-party contractor for assembly and outbound
distribution. The Company uses in-house capability for customer order
processing, component inventory procurement, material requirements planning and
production scheduling. The manufacturing process for software involves
duplication of software code onto floppy diskettes or CD's, printing of
packaging and documentation and assembly of final packaged products.
Manufacturing output can generally be increased rapidly to respond to increases
in demand. The Company has experienced occasional delays in manufacturing its
products resulting from not consistently remaining within credit terms with some
of its vendors The Company has not encountered unusual levels of returns
resulting from product defects.
The Company generates and responds to customer demand through Web-based
distribution whereby customers order products and download the Company's
software directly to their PCs, This eliminates most of the traditional order
processing and manufacturing steps. Third-party sales require duplication of the
Company's software code onto a CD, generally referred to as a "golden master."
The manufacturer then transfers the software code from golden masters onto their
hardware.
Proprietary Rights
The Company relies primarily on trade secret, trademark and copyright laws,
treaties and contractual agreements, to protect its proprietary rights. The
Company attempts to keep results of its research and development programs
proprietary to protect its marketed software products against misappropriation
and infringement by third parties. However, there can be no assurance that the
Company will in all instances be able to prevent others from misappropriating or
infringing upon the Company's proprietary information and software products.
The Company intends to maintain the integrity of its trade name, trademarks,
copyrights and other proprietary rights against unauthorized use and to protect
against infringement and unfair competition where circumstances warrant.
Although the Company believes that its products do not infringe on any copyright
or other proprietary rights of third parties, there are currently significant
legal uncertainties relating to the application of copyright and patent law in
the field of software. The Company has no assurance that third parties will not
obtain, or do not have, patents covering features of the Company's products, in
which event the Company or its customers might be required to obtain licenses to
use such features. If a patent holder refuses to grant a license on reasonable
terms or at all, the Company may be required to alter certain products or stop
marketing them.
Employees
The Company, as of March 17, 1999, employed 18 employees. Of these, 8 are
employed in administration, 4 in product development and 6 in sales and
marketing. Employees are covered by confidentiality agreements, and no employee
has an employment contract. None of the Company's employees are represented by a
union or other bargaining group. The Company believes it maintains good employee
relations.
Dividends
The Company has declared no dividends on its Common Stock since its inception.
It is the present policy of the Company to retain earnings and capital for use
in its business. Any payment of dividends on the Common Stock in the future will
be dependent upon the Company's financial restrictions, if any, under debt
obligations, as well as other factors that the Board of Directors may deem
relevant.
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, and such statements are subject to the safe harbors
created thereby. These forward-looking statements include the plans and
objectives of management for future operations, including plans and objectives
relating to (a) the development of new music, strategic and Internet products,
(b) the expansion of domestic and international marketing, sales and
distribution programs, (c) the continued protection of proprietary technologies
and (d) the ability to fund continued operations out of existing working
capital, additional capital infusion and cash flow from future operations. The
forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements 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.
Item 2. DESCRIPTION OF PROPERTY
The Company's principal offices are located in approximately 17,000 square feet
of office space in Issaquah, Washington, which the Company leases pursuant to a
lease expiring in April 2000 with an option to extend through April 2002. The
Company currently pays $25,725 per month under its lease agreement. The Company
considers its leased properties to be in good condition, well maintained, and
generally suitable and adequate for its present and foreseeable future needs.
Item 3. LEGAL PROCEEDINGS
In 1997, an entity which sold substantially all of its assets to the Company in
1995 demanded that the Company arbitrate certain claims arising from the sale.
The claims 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. $20,000 of the $25,000 has been paid.
The debt of $112,000 has been fully reserved and $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 ("Plaintiff") filed suite in
Michigan against Midisoft under a certain manufacturer's representative
agreement ("Agreement") entered into between the parties in November 1994.
Plaintiff claims that the Company breached the 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 in April 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.
As of December 31, 1998, the Company had $345,000 of accounts payable that were
current, $37,000 extended to between 31 and 60 days and $799,000 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. 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. Twelve of these vendors have
initiated litigation for claims totaling $131,000 and 8 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on October 30, 1998 near the
Company's headquarters in Issaquah, Washington. Matters submitted to the
shareholders for a vote were as follows:
Election of Directors - Mr. Larry Foster and Ms. Marsha Murry were
reelected as directors of the Company. Their three year terms expire at the 2001
annual meeting of shareholders. Mr. Foster's nomination received 5,345,267 votes
FOR, 295,824 votes were withheld and there were 186,751 broker non-votes. Ms.
Murry's nomination received 5,337,598 votes FOR, 303,493 votes were withheld and
there were 186,751 broker non-votes. Directors continuing in office were Mr.
Robert Orbach and Mr. J. Larry Smart, who's terms expire at the next annual
meeting of shareholders and Mr. John Bauer, whose term expires in 2000.
Selection of Independent Accountants - The selection of PricewaterhouseCoopers
LLP as the Company's independent accountants was ratified. The results of the
vote were 5,593,913 FOR and 33,898 AGAINST with 13,280 abstentions and 186,751
broker non-votes.
Proposal to Amend the Articles of Incorporation to Increase the Authorized
Common Shares to 25 Million - This increase of 15 million shares in the
authorized common shares was approved by the shareholders. The results of the
vote were 5,196,653 FOR and 410,788 AGAINST with 33,650 abstentions and 186,751
broker non-votes.
Proposal to Reserve an Additional 500,000 Shares under the 1989 Stock Option
Plan - This proposal was defeated. The shareholder votes were 1,470,063 FOR and
529,468 AGAINST with 83,509 abstentions and 3,744,802 broker non-votes. Although
the measure received a majority of the votes cast, a majority of the total
outstanding shares was required for passage.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information. The Company's Common Stock is traded under the symbol
"MIDI". The Company's Common Stock was quoted on the Nasdaq National Market
through September 9, 1997. Since that time, the Common Stock has traded on the
OTC Bulletin Board. The following table sets forth the range of high and low
closing bid prices, as reported, from January 1, 1997 through December 31, 1998.
The prices set forth reflect inter-dealer quotations, without retail markups,
markdowns or commissions, and do not necessarily represent actual transactions.
As of March 17, 1999, the number of holders of record of the Company's Common
Stock was approximately 1,567. Since certain of the shares of Common Stock are
held in street name, there may be additional beneficial holders of the Company's
Common Stock.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1997
First quarter $ 2.5000 $ 1.1250
Second quarter 2.0000 1.0625
Third quarter 4.6250 3.0313
Fourth quarter 1.6250 0.4375
1998
First quarter $ 1.2500 $ 0.6250
Second quarter 0.8125 0.3125
Third quarter 1.0000 0.3750
Fourth quarter 0.7500 0.2300
</TABLE>
Dividends The Company has declared no dividends on its Common Stock since its
inception. It is the present policy of the Company to retain earnings and
capital for use in its business. Any payment of dividends on the Common Stock in
the future will be dependent upon the Company's financial condition, results of
operations, current and anticipated cash requirements, plans for expansion,
restrictions, if any, under debt obligations, as well as other factors that the
Board of Directors may deem relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the Financial
Statements and notes thereto.
General
The Company's revenues include sales of software and software licenses net of
sales returns. Cost of revenues includes the costs of manuals, software
duplication, packaging materials, assembly, paper goods, shipping, amortization
of software development costs and royalty fees paid to licensors of third-party
software bundled with the Company's products.
Research and development expenses consist primarily of personnel and equipment
costs required to conduct the Company's development effort. Software development
costs are expensed as incurred.
Revenue from products licensed to OEMs consisting of one-time license fees and
contracts for minimum advances against future unit licenses are recognized when
the criteria for fixed fee revenue recognition under American Institute of
Certified Public Accountants' Statement of Position No. 97-2, Software Revenue
Recognition (SOP 97-2) is satisfied. These criteria include, but are not limited
to, delivery of the software master, the Company's lack of other significant
obligations to the customer and a determination that the collectability of the
amount due is probable. Contracts that do not meet the fixed fee revenue
recognition criteria in SOP 97-2 included in deferred revenue are recognized as
revenue on the installment basis as payments from customers are received, or
until the Company has no significant obligations. Additional royalty use or unit
copy royalty fees are recognized when they are earned pursuant to the license
agreements and upon notification of shipment from the OEMs. Revenue from sales
to distributors, other resellers and end-users net of a provision for
anticipated returns, is recognized when the products are shipped. The allowance
for returns is evaluated each quarter taking into consideration, among other
things, known return requests from distributors, anticipated return requests
based on the distributor's rate of product sale, returns due to product upgrades
and historical distributor return patterns.
During 1997 and 1998, the Company's research and development, marketing and
sales efforts were focused upon the Company's core technologies in sound and
music. The Company has continued to reduce its reliance on technology licensed
from others through internal development of superior technologies or through
direct acquisition of desirable technologies.
At December 31, 1998, the Company had Federal net operating loss carryovers of
approximately $26.1 million, which expire beginning 2008. In certain
circumstances, as specified in Section 382 of the Internal Revenue Code, a 50%
or more ownership change by certain combinations of the Company's stockholders
during any three-year period would result in limitations on the Company's
ability to utilize its net operating loss carryforwards. An investor owns
$3,000,000 in principal amount of convertible debentures and associated warrants
and has the right to purchase an additional $1,000,000 in convertible debentures
by June 1999. If the debenture holder were to exercise all its warrants and
convert all the debt it holds, a change in control of the Company would result.
Seasonality
Sales to distributors tend to be greater in the third and fourth quarter as
consumers buy software to supplement their holiday computer hardware purchases.
OEM sales are concentrated in a small number of large customer contracts and
tend to occur sporadically. Direct sales generally increase when software
upgrades become available.
Comparison of Years Ended December 31, 1998 and 1997
Sales for 1998 were $1.8 million compared to $3.0 million in 1997. Sales to
software distributors and resellers, together with direct sales, represented 79%
and 70% of sales for the years ended December 31, 1998 and 1997, respectively.
OEM sales represented 21% and 30% during the same periods. Sales to distributors
and resellers were lower in part from higher returns and lower units sales in
1998 compared to 1997. 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. These pricing pressures persisted
during 1998. In this light, actions by the Company's OEM customers to reduce
their costs and number of suppliers has adversely affected the Company's OEM
sales in 1998 compared to 1997. The Company has responded by repositioning its
OEM products to take advantage of enhanced internet-based functionality and by
pursuing partnerships with internet content aggregators. International sales
accounted for 8% of the Company's revenues in 1998 compared to 13% of revenues
in 1997 resulting from the Company's continued emphasis on US sales in 1998.
Gross profit for 1998 was $1.1 million, a decrease of $0.2 million, compared to
$1.3 million for the prior year. As a percentage of net revenues, gross profit
increased to 62% in 1998 from 45% in 1997. Gross profits, in general, are
affected by the mix of OEM licensing sales versus music product sales as well as
the mix within music products. The retail channel and inside sales channel for
music products consist of boxed product. OEM costs of sales generally consist of
one master CD from which OEMs duplicate the Company's software. Accordingly,
gross profit is higher on OEM sales compared to sales into other channels. Costs
were lower in 1998 compared with the same period in the prior year due primarily
to the absence of software amortization expense in 1998. Software amortization
costs for the year ended December 31, 1997 were $455,000. These assets were
fully amortized in 1997. Without amortization expense, cost of sales for the
year ended December 31, 1997 would have been 40% as compared to 38% in 1998.
Contributing to gross margin increase was the elimination of software
amortization expenses partially offset by a higher level of returns and a change
in sales mix, reflecting lower OEM sales, in 1998 compared to 1997. Also,
increased cost of goods sold in 1998 resulted in part from higher unit
production and component costs resulting from lower volumes and smaller order
quantities. The Company has kept royalty costs low as it has concentrated on
internal development of sound and music software.
Research and development expenses for 1998 were $626,000, a decrease of $362,000
compared to $988,000 for 1997. As a percentage of net revenues, research and
development expenses increased to 36% in 1998 from 33% in 1997. This reflects
the Company's commitment to sustain internal development of its industry leading
software for the production and management of sound and music. The Company's
continued investment in product development reflects commitments to continually
introduce new or improved products.
Sales and marketing expenses for 1998 were $1.2 million, a decrease of $0.6
million, compared to $1.8 million for 1997. As a percent of net revenues, sales
and marketing expenses increased to 68% in 1998 from 61% in 1997. Principal cost
reductions were in sales and marketing employees, advertising, and trade shows.
The increase in sales and marketing expense as a percentage of sales resulted
from lower sales. The reduction in expense levels reflects the Company's
continuing emphasis on cost controls and targeting marketing and sales efforts
into direct sales channels.
General and administrative expenses for 1998 were $1.9 million, a decrease of
$200,000, compared to $2.2 million for 1997. As a percentage of net revenues,
these expenses for 1998 increased to 106% from 72% in 1997. The increase in
general and administrative expense as a percentage of sales is due to lower
sales in 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, legal and other professional services fees.
Interest expense for 1998 was $1.6 million, an increase of $0.6 million compared
to $1 million in 1997. The increase in interest expense results from non-cash
charges relating to the intrinsic value of in-the-money conversion options
related to the convertible debentures and detachable warrants issued by the
Company in 1998.
Liquidity and Capital Resources
As of December 31, 1998, the Company's principal sources of liquidity included
cash and cash equivalents of $270,000 and net accounts receivable of $183,000.
As of December 31, 1998, working capital was negative $1.2 million.
The Company's operating activities used cash of $1.5 million for the year
ended December 31, 1998 due primarily to operating losses of $2.6 million.
Current assets decreased $358,000 to $610,000 at December 31, 1998 from $968,000
at the end of 1997. The decrease was due to reductions of accounts receivable,
inventories and prepaid expenses totaling $538,000, offset by an increase in
cash of $180,000. Long term assets decreased $117,000 to $367,000 at December
31, 1998 from $484,000 at the end of 1997. This decrease resulted largely from
depreciation of fixed assets. There were no significant additions to fixed
assets in 1998. The total of current liabilities and deferred revenue were $1.8
million at December 31, 1998, an increase of $0.1 million from the balance at
December 31, 1997 of $1.7 million. An increase in accounts payable of $200,000
in 1998 was partially offset by a decrease of $100,000 in other accrued
expenses. Shareholders' equity decreased $2.1 million to negative $3.2 million
at December 31, 1998 from a negative $1.1 million at the end of 1997. The change
in equity resulted from a net loss recorded in 1998 of $4.2 million, partially
offset by additions to equity for the issuance of stock in settlement of claims
and outstanding accounts payable of $300,000 and $1.7 million, reflecting the
fair value of warrants and the intrinsic value of convertible debentures, both
associated with the securities purchase agreement executed October 28, 1997, as
described below.
On October 28, 1997, the Company entered into a Securities Purchase Agreement,
which was amended on January 7, 1998, (the "Agreement") with an unrelated third
party (the "Lender"). The Agreement provides for the sale of $2 million of
convertible debentures with the option for an additional $2 million through June
1999. The Company sold $500,000 of debentures on each of October 28, 1997,
November 28, 1997, January 9, 1998 and January 28, 1998. The first $1 million in
debentures sold are convertible into a total of 1,666,667 shares of Common Stock
and were issued with warrants to purchase an additional 833,333 shares of Common
Stock at a price of $1.50 per share. The second $1 million in debentures sold
are convertible into a total of 1,923,077 shares of Common Stock and were issued
with warrants to purchase an additional 961,538 shares of Common Stock at a
price of $1.25 per share. The debentures bear interest at the rate of 1% per
annum payable in cash or, at the Company's option, in shares of Common Stock.
The Company is obligated to pay a finder's fee of 3% of the money raised as that
money is received by the Company. The Company has the right to redeem these
debentures at any time prior to conversion for an amount equal to the sum of the
outstanding principal amount plus accrued interest plus a redemption premium
which increases from 7% of the principal amount if redeemed within 45 days from
issuance to 25% of the outstanding principal amount if the redemption date is
more than 90 days from the issuance date. For so long as the debentures are
outstanding or the Lender owns at least 25% of the Company's outstanding Common
Stock, the Lender shall have the right to (i) approve certain merger or
acquisition transactions, (ii) appoint two of the Company's five directors with
the Company's concurrence and (iii) purchase any equity securities the Company
may propose to sell. The first of the Lender's board positions was filled by Mr.
J. Larry Smart, President and Chief Executive Officer of Visioneer, Inc., a
public company. The second position has been filled by Mr. Robert Orbach,
President and founder of B. Orbach, Inc.
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 in 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 Common Stock. The note holder also received five year
warrants to purchase 500,000 shares of 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 had the option to purchase an additional
$500,000 of notes with terms and conditions similar to those referenced above,
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. This option was exercised in two installments. The Company
sold $250,000 of these notes in December 1998 and a like amount in March 1999.
Each of these notes are convertible into 1,000,000 shares of Common Stock. The
note holder also received five year warrants to purchase 500,000 shares of
Common Stock at an exercise price of $0.75 per share with each note.
The debt holder has the right to purchase an additional $1,000,000 of
convertible notes in 1999. If the debt 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.
Simultaneous with the execution of the original Agreement, the Company entered
into a Registration Rights Agreement with the Lender, whereby the Company agreed
to use its reasonable best efforts to file a registration statement to register
the Common Stock which is issuable upon the conversion and exercise of the
debentures and warrants. The Company has agreed that it will bear all costs
associated with such registration, excluding underwriting commissions or
discounts.
In September 1997, the Company received $250,000 for which it was to issue a 5%
convertible note due September 1998 (the Note). The Note and accrued interest
were to be convertible into common stock at a conversion price of $0.65 per
share, at the option of the holder, at any time after October 30, 1997 through
maturity. A debt discount of $135,000 was recorded related to the intrinsic
value of the in-the-money conversion option at the close of the debt
transaction. The discount was expensed on October 30, 1997. The note agreement
has not been executed and the lender has requested changes to certain terms of
the agreement. The Company expects that the final agreement will provide for a
convertible note bearing interest from 5% to 8% with a conversion price of $0.65
per share, maturing in two to three years.
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 to 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 December 31, 1998, the Company had $345,000 of accounts payable that were
current, $37,000 extended to between 31 and 60 days and $799,000 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. 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. Twelve of these vendors have
initiated litigation for claims totaling $131,000 and 8 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.
Nasdaq
Effective with the close of business September 9, 1997 the Nasdaq delisted the
Company's Common Stock from the Nasdaq National Market. The Company was unable
to evidence a minimum of $2,000,000 in net tangible assets and compliance with
all the requirements for continued listing on the Nasdaq National Market.
Although the Common Stock trades on the OTC Bulletin Board, the Company believes
that the delisting of its stock has adversely affected its ability to raise
capital.
YEAR 2000
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.
State Of Readiness
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.
Year 2000 Project Methodology and Approach
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 in 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:
Critical ("1"): Will potentially impair the company's ability
to do business should the component fail.
Important ("2"): Will adversely affect some productivity should the
component fail.
Inconvenient ("3"): Will cause minor inconvenience should the component
fail.
Non-Essential ("4"): Will have no impact should the component fail.
Based on assigned priorities from Phase I and II, the following phases will
be carried out to the critical (priority 1) components first, followed by
important (priority 2) components, then inconvenient (priority 3) components and
finally non-essential (priority 4) 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.
Year 2000 Testing Criteria and Tools Utilized
Information systems are being tested with a licensed software program; a
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 uses different test criteria and test dates for different
computing platforms.
Hardware: On PC and LAN server hardware platforms, Midisoft has adopted the
NSTL's Ymark2000 test program during the assessment phase to identify non
compliant hardware. NSTL, a division of McGraw-Hill Companies, is a leading
independent testing facility for the computer industry.
Software: During the remediation and testing phases, Midisoft has adopted
GMT's Check2000 PC Deluxe for testing and corrective actions.
Microsoft products are also being tested using the Microsoft Product Analyzer
available from their web site at www.microsoft.com/y2k. This program checks all
Microsoft products installed against their online database that contains the
latest results from their internal testing.
Data: Check2000 PC Deluxe will be used to identify and examine individual data
in a variety of storage formats. Data files with potential date issues will be
identified and presented to the user for ranking to determine the importance of
each file detected. Based on this ranking, all critical and important files will
be analyzed for non-compliant dates and corrected accordingly.
Year 2000 Supplier and Partner Status
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.
Suppliers and Partners have been identified and ranked based on the same
criteria as phase II.
Critical ("1"): Will potentially impair the company's ability
to do business should the supplier / partner fail.
Important ("2"): Will adversely affect some productivity should
the supplier / partner fail.
Inconvenient ("3"): Will cause minor inconvenience should the
supplier / partner fail.
Non-Essential ("4"): Will have no impact should the supplier/partner fail.
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 Companies approach to Financial Risk Transfer 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. The cost of
internal resources dedicated to the Year 2000 has not been estimated at this
time.
Subsequent Events
As discussed above, in March 1999 the Company issued 1% convertible notes in
exchange for $250,000. The notes are convertible into a total of 1,000,000
shares of Common Stock and carry detachable warrants to purchase an additional
500,000 shares of Common Stock at $0.75 per share. The notes mature in March
2004.
In the last week of April 1999 the Company expects to issue 1% convertible notes
for $200,000. The notes will be convertible into a total of 250,000 shares of
Common Stock and carry detachable warrants to purchase an additional 250,000
shares of Common Stock at $1.75 per share. The notes mature in April 2004.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Report of Independent Accountants
To the Board of Directors
and Shareholders of
Midisoft Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in shareholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Midisoft
Corporation at December 31, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Seattle, Washington
April 14, 1999
<PAGE>
Midisoft Corporation
Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 270,000 $ 90,000
Accounts receivable, net 183,000 574,000
Inventories 115,000 222,000
Prepaids and other 42,000 82,000
--------- ---------
Total current assets 610,000 968,000
Long-term receivable 195,000 195,000
Property and equipment, net 116,000 239,000
Debt issuance costs, net of accumulated amortization
of $23,000 in 1998 and $0 in 1997 56,000 50,000
--------- ----------
$ 977,000 $1,452,000
--------- ----------
Liabilities and Shareholders' Deficit
Current liabilities
Trade accounts payable $1,181,000 $ 969,000
Current portion of long-term debt 250,000 250,000
Accrued wages and payroll taxes 93,000 100,000
Other accrued expenses 273,000 391,000
Deferred revenue 6,000 30,000
---------- ---------
Total current liabilities 1,803,000 1,740,000
Long-term debt, net of discount 2,258,000 740,000
Warrant obligations 81,000 81,000
Commitments and contingencies (Notes 11, 12 and 13)
Shareholders' deficit
Preferred stock, Series A convertible, no par value; 2,500,000
shares authorized, zero issued and outstanding in 1998 and 1997
Common stock, no par value; 25,000,000 shares authorized,
7,251,000 issued and outstanding in 1998 and 6,359,000 issued
and outstanding in 1997 20,488,000 20,165,000
Additional paid-in capital 3,026,000 1,245,000
Notes receivable from shareholders (191,000) (191,000)
Accumulated deficit (26,488,000) (22,328,000)
------------ ------------
Total shareholders' deficit (3,165,000) (1,109,000)
------------ ------------
$ 977,000 $1,452,000
------------ ------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Midisoft Corporation
Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Revenues $1,760,000 $3,004,000
Cost of revenues 672,000 1,659,000
---------- ----------
Gross profit 1,088,000 1,345,000
Operating expenses
Sales and marketing 1,190,000 1,842,000
General and administrative 1,864,000 2,151,000
Research and development 626,000 988,000
---------- ----------
Total operating expenses 3,680,000 4,981,000
---------- ----------
Operating loss (2,592,000) (3,636,000)
Interest expense (1,565,000) (1,035,000)
Interest income 17,000 6,000
Other expense (20,000) (64,000)
----------- -----------
Net loss $(4,160,000) $(4,729,000)
----------- -----------
Basic and diluted net loss per share $ (0.64) $ (0.79)
----------- -----------
Weighted-average shares outstanding 6,457,000 6,014,000
----------- -----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Midisoft Corporation
Statement of Changes in Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
Additional Notes
Preferred stock Common stock paid-in receivable from
Shares Amount Shares Amount capital shareholders
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 1,100 $ 1,100,000 5,345,000 $18,733,000 $ - $ -
Stock options exercised in
exchange for a note receivable 175,000 191,000 (191,000)
Preferred stock converted (1,100) (1,100,000) 776,000 1,141,000
Common stock issued 63,000 100,000
Warrants issued with
convertible debt 273,000
In the money conversion option
on convertible debt 862,000
Warrants issued for debt
and services 110,000
Net loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 - - 6,359,000 20,165,000 1,245,000 (191,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued 91,000
Common stock issued in
settlement of claims 650,000 283,000
Common stock issued in
settlement of accounts payable 128,000 38,000
Exercise of stock options 23,000 2,000
Warrants issued with
convertible debt 416,000
In the money conversion option
on convertible debt 1,334,000
In the money options granted 31,000
Net loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 - $ - 7,251,000 $20,488,000 $ 3,026,000 $ (191,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Total
shareholders'
Retained equity
deficit (deficit)
<S> <C> <C>
Balance at December 31, 1996 $(17,558,000) $ 2,275,000
Stock options exercised in
exchange for a note receivable --
Preferred stock converted (41,000) --
Common stock issued 100,000
Warrants issued with
convertible debt 273,000
In the money conversion option
on convertible debt 862,000
Warrants issued for debt
and services 110,000
Net loss (4,729,000) (4,729,000)
- --------------------------------------------------------------------------------
Balance at December 31, 1997 (22,328,000) (1,109,000)
- --------------------------------------------------------------------------------
Common stock issued --
Common stock issued in
settlement of claims 283,000
Common stock issued in
settlement of accounts payable 38,000
Exercise of stock options 2,000
Warrants issued with
convertible debt 416,000
In the money conversion option
on convertible debt 1,334,000
In the money options granted 31,000
Net loss (4,160,000) (4,160,000)
- --------------------------------------------------------------------------------
Balance at December 31, 1998 $(26,488,000) $ (3,165,000)
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Midisoft Corporation
Statement of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities
Net loss $ (4,160,000) $ (4,729,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 127,000 657,000
Amortization of debt discount & debt issuance costs 1,541,000 875,000
Warrants issued for debt and services 110,000
Common stock issued in settlement of claims 283,000
In the money options granted 31,000
Changes in operating assets and liabilities:
Decrease in accounts receivable, net 391,000 708,000
Decrease in inventories 107,000 720,000
Decrease in prepaids and other 40,000 200,000
Increase in long-term receivable (195,000)
Increase in trade accounts payable 250,000 278,000
Decrease in accrued wages and payroll taxes (7,000) (86,000)
(Decrease) increase in other accrued expenses (118,000) 273,000
Decrease in deferred revenue (24,000) (791,000)
Increase in warrant obligations 81,000
---------- ----------
Net cash used in operating activities (1,539,000) (1,899,000)
---------- ----------
Cash flows from investing activities
Additions to property and equipment (4,000) (20,000)
---------- ----------
Net cash used in investing activities (4,000) (20,000)
---------- ----------
Cash flows from financing activities
Stock options exercised 2,000
Issuance of common stock 100,000
Proceeds from issuance of long-term debt and warrants,
net of debt issue costs 1,721,000 1,200,000
---------- ----------
Net cash provided by financing activities 1,723,000 1,300,000
---------- ----------
Net increase (decrease) in cash and cash equivalents 180,000 (619,000)
Cash and cash equivalents, beginning of year 90,000 709,000
---------- ----------
Cash and cash equivalents, end of year $ 270,000 $ 90,000
---------- ----------
Supplemental cash flow information
Cash paid during year for interest $ - $ 58,000
---------- ----------
<FN>
See Note 15 for supplemental information of noncash financing activities.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Midisoft Corporation
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
1. Organization and business
Midisoft Corporation (the Company) is a provider of innovative
applications for the use of sound on the personal computer (PC). The
Company was incorporated in Washington in 1986 and introduced its first
product, Midisoft Studio, in that year. The Company has focused its
product lines to include music learning and creativity and the
integration of sound and media in today's PC environment. The Company
divides these product lines into two development categories, music
products and strategic products. The Company's music products enable
users to enjoy, explore, learn, create and share music. The Company
pioneered the development of MIDI technology, including the ability of
users to instantly view musical notation of sounds played through a
piano keyboard, or other MIDI-equipped instrument, linked to a PC.
Midisoft's strategic products promote the convergence of sound with
other technologies into the personal computer desktop, allow users to
enhance their computing experience, and communicate more effectively
with and through computers. The Company markets its products on a
worldwide basis to (i) original equipment manufacturers (OEMs), which
"bundle" one or more of Midisoft's products with their own products,
(ii) distributors and resellers, which directly supply the retail
distribution channel, and (iii) end users, catalog companies, and
businesses.
Going concern and liquidity
The Company has incurred substantial operating losses during the past
several years. The financial statements have been prepared assuming the
Company will continue as a going concern and do not include any
adjustments to reflect the possible future effects on the
recoverability and classification of assets and liabilities that may
result from this uncertainty.
The Company has required substantial working capital to fund its
operations. To date, the Company has financed its operations
principally through the net proceeds from its initial public offering
and other debt and equity transactions. The Company's ability to
continue as a going concern is dependent upon numerous factors,
including its ability to obtain additional financing, the level of
future revenues and its ability to reduce operating expenses. The
Company is actively pursuing possible sources of additional working
capital. There can be no assurance that the Company will be able to
obtain additional financing.
If the Company is unable to obtain sufficient funds to satisfy its cash
requirements, it may be forced to curtail operations, dispose of assets
or seek extended payment terms from its vendors. Such events would
materially and adversely affect the value of the Company's equity
securities. There can be no assurance that the Company will be able to
reduce expenses or successfully complete other steps necessary to
continue as a going concern.
2. Significant accounting policies
Revenue recognition
Revenue from products licensed to OEMs consisting of one-time license
fees and contracts for minimum advances against future unit licenses
are recognized when the criteria for fixed fee revenue recognition
under Statement of Position No. 97-2, Software Revenue Recognition,
(SOP 97-2) are satisfied. These criteria include, but are not limited
to, delivery of the software master, the Company's lack of other
significant obligations to the customer and a determination that
collectibility of the amount due is probable. Revenues on contracts
which do not meet the fixed fee revenue recognition criteria in SOP
97-2 are included in deferred revenue in the accompanying balance sheet
and are recognized as revenue on the instalment basis as payments are
received or until the Company has no significant obligations.
Additional royalty use or unit copy royalty fees are recognized when
they are earned pursuant to the license agreements and upon
notification of shipment and payment from the OEMs. Revenue from sales
to distributors, other resellers and end users, net of a provision for
anticipated returns, is recognized when the products are shipped. The
allowance for returns is evaluated each quarter taking into
consideration, among other things, known return requests from
distributors, anticipated return requests based on the distributor's
rate of product sale, returns due to product upgrades and historical
distributor return patterns.
Warranties and returns
The Company warrants products against defects and has policies
permitting the return of products under certain circumstances. The
Company's distributor agreements provide for sales returns, stock
rotation, cooperative advertising and price protection. Customers are
granted price protection for a period of up to 60 days after the
Company reduces the price of a product. The Company provides for
warranties and returns at the time of product sale.
Advertising costs
The Company generally provides for cooperative advertising at
agreed-upon rates. Advertising costs, included in sales and marketing
expenses, are expensed as incurred and were $330,000 and $449,000 for
the years ended December 31, 1998 and 1997, respectively.
Research and development
Research and development expenses consist principally of payroll and
related expenses for design and development of the Company's products.
Research and development costs related to these activities are expensed
as incurred.
Income taxes
The Company follows the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to difference between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. If it is more likely than not that some
portion of a deferred tax asset will not be realized, a valuation
allowance is recorded.
Net loss per share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (FAS 128), Earnings
per Share. FAS 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. The adoption of FAS 128 did not
have a material impact on the Company's earnings per share. Net loss
per share assuming dilution for the years ended December 31, 1998 and
1997 is equal to basic net loss per share due to the fact that the
effect of common stock equivalents outstanding during the periods is
anti-dilutive.
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997
<S> <C> <C>
Numerator:
Net loss $(4,160,000) $(4,729,000)
Less: Preferred stock dividends (41,000)
----------- -----------
$(4,160,000) $(4,770,000)
----------- -----------
Denominator:
Weighted-average shares 6,457,000 6,014,000
----------- -----------
Basic and diluted net loss per share $ (0.64) $ (0.79)
----------- -----------
</TABLE>
Common stock equivalents, consisting of warrants, stock options and
convertible securities, are anti-dilutive, and are detailed in Note 10.
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Short-term investments classified as cash equivalents are stated at the
lower of cost or market, which approximates fair value.
Inventories
Inventories are valued at the lower of cost or market using the
first-in, first-out method. The Company continuously reviews its
inventories for obsolete, slow-moving and nonsalable items and
establishes a reserve for such items.
Property and equipment
Property and equipment are recorded at cost less accumulated
depreciation and amortization, and are depreciated using the
straight-line method over the estimated useful lives of the related
assets, which range from three to seven years. Leasehold improvements
are amortized over shorter of the economic useful lives or the term of
the lease.
<PAGE>
Concentration of credit risk/financial instruments
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable,
for which collateral is generally not required. The Company's trade
receivables include amounts due from U.S. and foreign customers in the
computer software and hardware industry and are derived from sales of
products, OEM licensing fees and unit royalties (Note 3). The Company
performs ongoing credit evaluations of its customers' financial
condition and limits its exposure to losses by limiting the amount of
credit extended whenever deemed necessary.
The carrying values of cash and cash equivalents and other assets and
liabilities (such as accounts receivable and payable) approximate fair
value at December 31, 1998 and 1997.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Stock compensation
The Company accounts for stock-based employee compensation under the
provisions of FAS 123, Accounting for Stock-Based Compensation (FAS
123). FAS 123 establishes financial accounting and reporting standards
for stock-based employee compensation plans and for the issuance of
equity instruments to acquire goods and services from nonemployees.
The Company has elected to apply the disclosure-only provisions of FAS
123. Accordingly, the Company accounts for stock-based compensation to
employees using the intrinsic-value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Compensation cost for stock
options is measured as the excess, if any, of the fair market value of
the Company's common stock at the date of grant over the exercise
price. The Company records the fair value of equity securities issued
to nonemployees in accordance with the provisions of FAS 123.
3. Accounts receivable and major customer information
The Company operates a single business segment. During 1998 and 1997,
the Company had revenue from foreign customers of $147,000 and
$391,000, respectively. Foreign sales as a percentage of the Company's
total revenue in 1998 and 1997 were 8% and 13%, respectively. In 1998
and 1997, separate domestic reseller customers accounted for revenues
of $1,079,000 and $1,835,000, respectively, equal to 61% of the
Company's total revenue in the periods. During 1998, one customer
accounted for 46% of total revenue.
<PAGE>
Accounts receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
OEM's $ 17,000 $ 137,000
Resellers and other 411,000 930,000
--------- ---------
428,000 1,067,000
Less:Allowance for doubtful accounts (72,000) (260,000)
Less:Allowance for warranty and returns (173,000) (233,000)
--------- ---------
$ 183,000 $ 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 quarterly instalments. At December
31, 1998 and 1997, OEM accounts receivable amounts not yet due were
$1,000 and $16,000, equal to 6% and 12%, respectively, of total OEM
receivables. At December 31, 1998 and 1997, reseller accounts
receivable amounts not yet due were $257,000 and $425,000 equal to 60%
and 46%, respectively, of total reseller receivables.
The Company's primary credit concentrations involve domestic and
foreign OEM and reseller customers. Foreign customers are primarily
located in Western Europe, Taiwan, Singapore, Korea and Japan. Domestic
customers comprised $415,000 and $1,054,000 of accounts receivable at
December 31, 1998 and 1997, respectively. Foreign customers comprised
$13,000 of accounts receivable at December 31, 1998 and 1997. At
December 31, 1998 and 1997, four customers accounted for an aggregate
balance of $359,000 and $807,000 of accounts receivable, respectively.
4. Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Raw materials and work-in-process $ 106,000 $ 212,000
Finished goods 29,000 75,000
Less: Allowance for obsolescence (20,000) (65,000)
------- -------
$ 115,000 $ 222,000
</TABLE>
5. Property and equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Equipment $ 925,000 $ 925,000
Furniture 91,000 93,000
Leasehold improvements 30,000 30,000
--------- ---------
Property and equipment, at cost 1,046,000 1,048,000
Less: Accumulated depreciation (930,000) (809,000)
--------- ---------
$ 116,000 $ 239,000
--------- ---------
</TABLE>
6. Bank credit line facility
The Company's bank line-of-credit matured May 18, 1998 and was not
renewed.
7. Other accrued expenses
The following table summarizes the components of the other current
liabilities:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Accrued tax liabilities $ 133,000 $ 135,000
Other accrued expenses 140,000 256,000
--------- ---------
$ 273,000 $ 391,000
--------- ---------
</TABLE>
8. Convertible debt
In September 1997, the Company received $250,000 for which it was to
issue a 5% convertible note due September 1998 (the Note). The Note and
accrued interest were to be convertible into common stock at a
conversion price of $0.65 per share, at the option of the holder, at
any time after October 30, 1997 through maturity. A debt discount of
$135,000 was recorded related to the intrinsic value of the
in-the-money conversion option at the close of the debt transaction.
The discount was expensed on October 30, 1997. The note agreement has
not been executed and the lender has requested changes to certain terms
of the agreement. The Company expects that the final agreement will
provide for a convertible note bearing interest from 5% to 8% with a
conversion price of $0.65 per share, maturing in two to three years.
In October and November 1997, the Company issued $500,000 of 1%
convertible debentures (the Debentures) due October and November 2000,
respectively, for a total of $1,000,000. The Debentures are
collateralized by a perfected security interest in all assets of the
Company and are convertible into common stock at a conversion price of
$0.60 per share at any time through maturity, unless previously
redeemed or repurchased. At any time, the entire amount of the
outstanding notes is redeemable at the Company's option at prices
ranging from 107% to 125% of the principal amount thereof, depending on
the date of redemption, together with accrued interest through the date
the redemption price is paid to the holder. The Debentures were issued
with detachable warrants that entitle the holders to purchase 833,333
shares of the Company's common stock at a price of $1.50 per share, and
expire in October and November 2002. A debt discount of $273,000 has
been recorded related to the fair value of the warrants. The discount
is amortized using the effective interest method over the term of the
debt. In addition, a debt discount of $727,000 was recorded related to
the intrinsic value of the in-the-money conversion option. This
discount was expensed immediately as the Debentures may be converted at
any time. Debt issue costs of $50,000 related to the Debenture sale
have been capitalized and will be amortized over the life of the debt.
In January 1998, an additional 1% debenture was issued in exchange for
proceeds totaling $1,000,000. The Debenture is convertible into
1,923,077 shares of common stock and carries detachable warrants to
purchase an additional 961,538 shares of common stock at a price of
$1.25 per share. The debenture matures in January 2001. A debt discount
of $278,000 has been recorded related to the fair value of the warrant,
which will be amortized to interest expense over the term of the debt.
An additional discount of $722,000 was recorded related to the
intrinsic value of the in-the-money conversion option. The discount
related to the conversion option was expensed on the issue date.
In June and December 1998, the Company issued another $500,000 and
$250,000, respectively, of 1% convertible debentures due June 2003 and
December 2003. The Debentures are convertible into common stock at a
conversion price of $0.20 per share and $0.25 per share, respectively,
at any time through maturity, unless previously redeemed or
repurchased. The Debentures were issued with detachable warrants that
entitle the holders to purchase 1,000,000 shares of the Company's
common stock at a price of $0.75 per share, and expire between June and
December 2003. A debt discount of $138,000 has been recorded related to
the fair value of the warrants. The discount is amortized using the
effective interest method over the term of the debt. In addition, a
debt discount of $612,000 was recorded related to the intrinsic value
of the in-the-money conversion option. This discount was expensed
immediately as the Debentures may be converted at any time. At any
time, the entire amount of the outstanding notes is redeemable at the
Company's option at prices ranging from 107% to 125% of the principal
amount thereof, depending on the date of redemption, together with
accrued interest through the date the redemption is paid to the holder.
Among other restrictions, the Debentures restrict the Company's other
third party borrowings to $400,000. The Company is in compliance with
all operating and financial covenants of the debentures at December 31,
1998.
The scheduled maturities of long-term debt outstanding at December 31,
1998, are summarized as follows: $0 in 1999, $500,000 in 2000,
$1,000,000 in 2001, $0 in 2002 and $750,000 in 2003, and $0 thereafter.
9. Income taxes
There is no provision for income taxes for the years ended December 31,
1998 and 1997 due to the net losses incurred. A valuation allowance has
been recorded for deferred tax assets because realization is primarily
dependent on generating sufficient taxable income prior to the
expiration of net operating loss carry-forwards.
The components of deferred income taxes are summarized as follows:
<TABLE>
<CAPTION>
December 31,
<S> 1998 1997
Deferred income tax assets <C> <C>
Net operating losses $8,887,000 $7,710,000
Accrued liabilities and allowances 76,000 197,000
Capitalized software 121,000
Equity instruments 72,000 65,000
Other 227,000 236,000
---------- ----------
9,262,000 8,329,000
Deferred income tax liabilities
Other (9,000) (12,000)
Valuation allowance (9,253,000) (8,317,000)
---------- ----------
$ - $ -
---------- ----------
</TABLE>
At December 31, 1998, the Company had federal net operating losses of
approximately $26,137,000 that expire beginning in 2008. In certain
circumstances, as specified in the Internal Revenue Code, a 50% or more
ownership change by certain combination of the Company's stockholders
during any three-year period would result in limitations on the
Company's ability to utilize its net operating loss carry-forward. The
value of the Company's stock at the time of the ownership change is the
primary factor in determining the limit on the Company's ability to
utilize its net operating loss carry-forward.
Certain net operating losses arise from the deductibility for tax
purposes of compensation under nonqualified stock options equal to the
difference between the fair value of the stock on the date of exercise
and the exercise price of the options. For financial reporting
purposes, the tax effect of this deduction when recognized will be
accounted for as a credit to shareholders' deficit.
10. Shareholders' deficit
Preferred Stock
In 1996, the Company's Board of Directors designated 1,100 shares of
preferred stock as Series A convertible preferred stock (the Series A
Preferred Stock). All 1,100 shares were issued at a price of $1,000 per
share in an off-shore private placement completed in October 1996. The
Series A Preferred Stock was convertible at the holder's option into
shares of common stock at a price equal to the lesser of 85% of the
closing bid as of the date of conversion or 100% of the closing bid
price of the common stock as of the date of issuance of the Series A
Preferred Stock. Holders of the Series A Preferred Stock were entitled
to an 8% cumulative dividend payable in cash or common stock, at the
holder's option, at the time of conversion. All 1,100 shares, plus
accrued dividends, were converted to common stock over the six-month
period from January 16 through July 17, 1997. The principal value of
$1,100,000 and the accrued dividends of $41,000 were converted to
747,797 and 28,408 shares of common stock, respectively, at an average
price of $1.56 per share.
Common Stock
During the year ended December 31, 1998, the Company finalized the
terms of the sale of common stock which was recorded in fiscal 1997.
Under the new terms, the Company issued 91,000 additional shares of
common stock to the investors.
As further described in Note 13, the Company issued 650,000 shares of
common stock in settlement of claims. The Company recorded expense
totaling $283,000 based on the fair market value of the common stock on
the settlement date.
Additionally, during the year ended December 31, 1998, the Company
issued 128,000 shares of common stock in settlement of outstanding
accounts payable totaling $38,000.
At December 31, 1998, the Company has reserved the following shares of
common stock:
Warrants 3,073,042
Stock options 1,068,881
Convertible debentures 7,474,359
Warrants
In connection with the July 26, 1994 and the July 19, 1993 public stock
offerings, the Company has agreed to issue the Underwriter
Representatives, for nominal consideration, warrants to purchase an
aggregate of 38,000 and 100,000 shares of common stock at a price of
$12.90 and $4.20, respectively. The warrants to purchase 100,000 shares
of common stock expired in 1998 without exercise.
In connection with the conversion of the Series A Preferred Stock, the
Company issued warrants to purchase an aggregate of 747,797 shares of
common stock at a price equal to $8.50 per share. The warrants expired
in 1998 without exercise. Additionally, the Company agreed to issue the
Placement Agent warrants to purchase 25,000 shares of common stock at a
price of $6.00 per share.
Additionally, a warrant to purchase 40,171 shares of the Company's
common stock at an exercise price of $1.17 was issued to a bank in
connection with the short-term bank borrowings described in Note 6. The
warrant expires in September 2002 and carries a right to require the
Company to purchase the warrant for $63,000 or the fair value of the
warrant, at the holder's option, at any time after December 31, 1997.
The warrant is subject to certain anti-dilution provisions. The fair
value of the warrant of $81,000 was expensed during 1997.
In connection with an attempt to arrange a private placement of equity
financing, the Company agreed to sell to the agent for nominal
consideration, a warrant to purchase 10,000 shares of common stock at a
price of $1.25 per share. The warrant expired in 1998 without exercise.
The fair value of the warrant of $10,000 was expensed during 1997.
In connection with the sale of common stock, the Company issued
warrants in August 1997 to purchase 100,000 shares of common stock at a
price of $1.25 per share. These are two-year warrants expiring in 1999.
In connection with an unsecured loan of $40,000 from an officer, the
Company issued a warrant to purchase 75,000 shares of common stock at a
price of $.75 per share. The warrant will expire in 2002. Interest
expense of $100,000 was recognized based on the fair value of the
warrant. The loan was repaid during 1997.
As described in Note 8, during 1998 and 1997 the Company issued
warrants to purchase 1,961,538 and 833,333 shares, respectively of
common stock to the holder of convertible debentures.
Stock option plan
The Company has adopted the 1989 Stock Option Plan (the 1989 Plan), as
amended September 28, 1994, to provide for the granting of both
Incentive Stock Options (ISO's) and Nonqualified Stock Options for
employees, directors and consultants of the Company to acquire
ownership in the Company and provide them with incentives for their
service.
Under the terms of the 1989 Plan, 1,350,000 shares of common stock may
be issued. The 1989 Plan is currently administered by the Compensation
and Option Committee of the Board of Directors which determines the
terms and conditions of the options granted under the 1989 Plan,
including exercise price, number of option shares granted and the
vesting period of such options. Upon termination of a participant's
employment or consulting relationship with the Company, unvested
options terminate and vested options remain exercisable for a period
not to exceed three months. The exercise price of all ISO's granted
under the 1989 Plan must be at least equal to the fair market value of
the common stock of the Company on the date of grant. The exercise
price of all ISO's granted under the 1989 Plan are determined by the
Compensation and Option Committee and the term may not exceed ten
years.
On February 10, 1998 the Company adopted the 1998 Stock Option Plan
(the 1998 Plan) to provide for the granting of options to independent
directors and outside consultants. Under the terms of the 1998 Plan,
500,000 shares of common stock may be issued. The 1998 Plan is
currently administered by the Board of Directors which determines the
terms and conditions of the options granted and the vesting of such
options.
On April 9, 1998, the Company's board of directors authorized the
repricing of all options outstanding at September 17, 1997 to $0.75 per
share.
At December 31, 1998 and 1997, options for 361,436 and 215,000 shares,
respectively, of common stock were exercisable and options for 507,375
and 160,000 shares, respectively, of common stock were available for
future grants under the two plans.
Activity with respect to both plans is as follows:
<TABLE>
<CAPTION>
Weighted-
average
exercise
Shares price
<S> <C> <C>
Options outstanding, December 31, 1996 701,936 $ 2.64
Granted 468,000 1.33
Exercised (175,000) 1.09
Canceled (433,014) 2.65
-------- ------
Options outstanding, December 31, 1997 561,922 2.02
Granted 941,922 0.81
Exercised (22,875) 0.10
Canceled (789,297) 1.72
-------- ------
Options outstanding, December 31, 1998 691,672 $ 0.78
-------- ------
</TABLE>
<PAGE>
The following table summarizes information about fixed-price options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options excercisable
--------------------------------------------- ----------------------
Weighted-
average Weighted- Weighted-
Range of remaining average average
exercise Options contractual exercise Options exercise
prices outstanding life price exercisable price
<S> <C> <C> <C> <C> <C>
0.10-0.94 649,672 8.14 $ 0.76 351,436 $ 0.76
1.13-1.19 42,000 8.89 $ 1.19 10,000 $ 1.19
</TABLE>
The Company follows the intrinsic-value method in accounting for its
stock options. Under this method, the Company recognized no
compensation expense on stock options issued to employees if the
exercise price of the option equals or exceeds the fair market value of
the Company's common stock on the date of grant. For options granted
with an exercise price less than fair market value the Company
recognized $31,000 and $0 of compensation expense for the years ended
December 31, 1998 and 1997, respectively. Had compensation cost been
recognized based on the fair value at the grant date for options
awarded under the Plan, the pro forma amounts of the Company's net loss
and net loss per share for the years ended December 31, 1998 and 1997
would have been as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997
<S> <C> <C>
Net loss as reported $(4,160,000) $(4,729,000)
----------- -----------
Net loss pro forma $(4,465,000) $(5,030,000)
----------- -----------
Loss per share as reported $ (0.64) $ (0.79)
----------- -----------
Loss per share pro forma $ (0.69) $ (0.84)
----------- -----------
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions for the years ended December 31, 1998 and 1997,
respectively: risk-free interest rates of 5.512% to 5.673% and 4.934%
to 6.748%; expected option life of five to ten years; expected
volatilities of 124% and 84% to 125%; and no expected dividends. The
weighted-average fair value of options granted during 1998 and 1997 was
$0.79 and $0.83, respectively, for options with an exercise price equal
to market. The weighted-average fair value of options granted during
1998 and 1997 at a price above market was $0.59 and $0.87,
respectively. The weighted-average fair value of options granted in
1998 at a price below market was $0.88.
11. License agreements
The Company has license agreements with various developers and
producers of computer software which require the Company to pay
royalties. During the years ended December 31, 1998 and 1997, total
royalty expense was $13,000 and $5,000, respectively.
12. Lease commitments
The Company leases office facilities for its operations. The lease
contains renewal and expansion provisions, exercisable at the
discretion of the Company. The Company's lease includes scheduled
increases over the term of the lease. The total payment amount is being
recognized as expense on a straight-line basis over the term of the
lease. Future minimum lease commitments for all noncancelable operating
leases are summarized as follows:
Year ending December 31,
1999 $ 273,000
2000 68,000
---------
$ 341,000
---------
Rent expense for 1998 and 1997 was $256,000 and $281,000, respectively.
The Company received $86,000 and $98,000 from sublease income for the
years ended December 31, 1998 and 1997, respectively.
13. Contingencies
In 1997, an entity which sold substantially all of its assets to the
Company in 1995 demanded that the Company arbitrate certain claims
arising from the sale. The claims aggregate in excess of $1 million.
The 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 of which
is cash and the remainder comprised of forgiveness of $112,000 in debt
and issuance of approximately 630,000 shares of the Company's common
stock. At December 31, 1998, Midisoft has paid $20,000 of the $25,000,
the debt has been fully reserved and $283,000 of expense has been
recognized related to the issuance of common stock.
The Company is subject to various claims and lawsuits in the ordinary
course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
14.
<PAGE>
Notes receivable from stockholders
The Company has made advances and loans to employees in connection with
the purchase of common stock under the Employee Stock Option Plan.
Promissory notes totaling $191,000 are held by the Company from the
Company's Chief Executive Officer and former Chief Financial Officer.
Interest on these loans is set at 8% per annum. The officers have
pledged the 175,000 shares of common stock as collateral for these
loans. The full unpaid principal and accrued interest amounts are due
and payable on August 1, 2000, but can be prepaid at any time. The
terms of these notes receivable cause the underlying shares to be
considered variable stock options. For variable stock options,
compensation cost is measured as the amount by which the quoted market
value of the shares exceeds the option price. At December 31, 1998, the
quoted market price of the Company's common stock was less than the
option price. Accordingly, no compensation expense was recorded.
15. Supplemental cash flow information
The following items are supplemental information of noncash financing
activities:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997
<S> <C> <C>
Common stock issued in settlement of claims $ 283,000 $ -
--------- ----------
Common stock issued in settlement of accounts payable $ 38,000 $ -
--------- ----------
Warrants issued with convertible debt $ 416,000 $ 273,000
--------- ----------
Preferred stock converted $ - $1,100,000
--------- ----------
Stock options exercised in exchange for note receivable $ - $ 191,000
--------- ----------
In the money options granted $ 31,000 $ -
--------- ----------
In the money conversion option on convertible debt $ 1,334,000 $ 862,000
--------- ----------
</TABLE>
16. Employee benefit plans
In June 1996, the Company adopted a qualified profit-sharing plan under
the provisions of Internal Revenue Code 401(k). The plan is available
to all employees meeting the eligibility requirements. Contributions by
the Company are based on a matching formula as defined in the plan. The
Company made no contributions to the plan in 1998 or 1997.
17.
<PAGE>
Subsequent events
In connection with the Debentures as described in Note 8, during the
first quarter of 1999 the Company issued additional 1% convertible
debentures in exchange for proceeds totaling $250,000. The debentures
are convertible into a total of 1,000,000 shares of common stock and
carries detachable warrants to purchase an additional 500,000 shares of
common stock at a price of $0.75 per share. The debentures mature in
March 2004. A debt discount of $76,000 has been recorded related to the
fair value of the warrant, which will be amortized to interest expense
over the term of the debt. An additional discount of $174,000 was
recorded related to the intrinsic value of the conversion option. The
discount related to the conversion option was expensed on the issue
date.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS
Terms expire 1999:
ROBERT ORBACH (age 46) has served as a director since July 1998.
He is the President and founder of B.Orbach Inc. founded in May 1990.
The company's primary business is to establish and create strategic
alliances for technology companies. Working with start-up and
established companies, Mr. Orbach has developed business relationships
and technology licensing as well as funding and marketing activities.
The company has been profitable since its inception. Mr. Orbach is
currently on the board of eSynch Corporation (ESYN). From 1992 to
1995, Mr. Orbach was a founding board member of Digital Pictures, Inc.
based in San Mateo, CA. Six months after Mr. Orbach resigned from its
board, Digital Pictures filed for protection under Chapter 11 of the
bankruptcy code.
J. LARRY SMART (age 50) has been a director since December 1997.
Since April 1997, Mr. Smart has served as President and Chief
Executive Officer of Visioneer, Inc., a digital imaging systems
company. Mr. Smart is currently Chairman of Southwall Technologies,
Inc. and serves as a director of Scansoft, Inc.(SFST) and Savoir
Technology Group, Inc.(SVGT) Mr. Smart served as Chairman, President
and Chief Executive Officer of Micropolis/StreamLogic Corporation from
April 1995 to February 1997 and as President and Chief Executive
Officer of Maxtor Corporation from April 1994 through March 1995.
Term expires 2000:
JOHN H. BAUER (age 58) has been a director of the Company since
March 1997. Since May 1994, Mr. Bauer has been Executive Vice
President of Nintendo of America Inc., a manufacturer and distributor
of video games and products. From 1979 to 1994, he served as Managing
Partner of the Northwest Group and the Seattle office of Coopers &
Lybrand. Mr. Bauer serves on the board of Multiple Zones
International, Inc. (MZON).
Terms expire 2001:
LARRY D. FOSTER (age 54) has been a director of the Company since
May 1995. He has served as the Company's President and Chief Operating
Officer since September 1995 and as the Company's Chief Executive
Officer and Chairman of the Board since March 1996. From November 1992
until July 1995, Mr. Foster served as President and Chief Executive
Officer of Remote Input Solutions, Inc.
MARSHA MURRY (age 51) has been a director of the Company since
July 1993. Ms. Murry is the principal of Accelerated Edge, a privately
held consulting firm, which she founded in January 1981. From May 1992
to August 1994, she was Strategic Product Manager for Autodesk, Inc.
Ms. Murry served as Vice President of Marketing and Business
Development of the Company from February 1988 to August 1990. Ms.
Murry served as Secretary of the Company from February 1989 to July
1991 and from December 1997 to the present.
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company, and their ages and
positions as of April 1999 are as follows:
Name Age Position
Larry Foster 54 President, Chief Executive Officer and Chairman of
the Board of Directors
Gary Cully 48 Vice President, Finance and Chief Financial Officer
For information regarding Mr. Foster see "--DIRECTORS --."
GARY M. CULLY (age 48) Vice President, Finance and Chief
Financial Officer joined the Company in January 1998. For two years
prior to joining Midisoft, Mr. Cully consulted with Mentor Graphics, a
developer of design automation software, in M&A integration and
information technology. Mr. Cully was Chief Financial Officer of Prism
Group, Inc. from 1994 to 1996. After Mr. Cully's departure, some
subsidiaries of Prism filed for protection under Chapter 7 of the
bankruptcy code and Prism Group, Inc. ceased all operations. Mr. Cully
was also Chief Financial Officer of Omega Environmental, where his
primary focus areas were financial controls, M&A evaluation and
setting up operations in Latin America.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information with respect
to compensation paid by the Company for the fiscal year ended December
31, 1998 and for the prior two fiscal years to (i) the Company's Chief
Executive Officer and (ii) its other executive officer whose cash
compensation exceeded $100,000 for services performed during that
fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
Securities
Name & Principal Other Annual Underlying All Other
Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation($)
<S> <C> <C> <C> <C> <C> <C>
Larry D. Foster, 1998 $133,750 $33,678 -- 0 --
President, Chief 1997 $120,000 -- -- 150,000 --
Executive Officer 1996 $117,692 -- -- 75,000 --
& Chairman
Gary M. Cully, 1998 $103,372 -- -- 50,000 --
Vice President,
Finance & Chief
Financial Officer
</TABLE>
Grants of Stock Options
The following table sets forth certain information regarding stock
options granted during the fiscal year ended December 31, 1998 to executive
officers of the Company whose compensation in 1998 exceeded $100,000.
<PAGE>
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
Number of Securities Percent of Total Options
Underlying Options Granted to Employees in
Name Granted (#) Fiscal Year Exercise Price($/Sh) Expiration Date
<S> <C> <C> <C> <C>
Larry D. Foster -- -- --
Gary M. Cully (1) 50,000 14.7 % $0.8125 01/07/2008
<FN>
(1) The option vests 25% per year on the option anniversary date.
</FN>
</TABLE>
Exercises of Stock Options and Year-End Values
The following table sets forth certain information regarding stock
options exercised during the fiscal year ended December 31, 1998 and options
held as of December 31, 1998 by executive officers of the Company whose
compensation in 1998 exceeded $100,000.
Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
nderlying Unexercised Options Value of Unexercised
at In-the-Money Options at
Shares December 31, 1998 December 31, 1998
Acquired on Value
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Larry D. Foster -- -- 143,750 106,250 -- --
Gary M. Cully -- -- -- 50,000 -- --
</TABLE>
Outside directors of the Company receive options for 30,000 shares of Common
Stock upon election to the board and options for 30,000 shares for each year of
service. Outside directors also receive a retainer of $1,500 per quarter and
$500 for attendance in person at each meeting of the board or $250 for
attendance by telephone and $250 for participation in each meeting of the
committees. Employee directors receive no additional compensation for service on
the board.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership with the Securities and Exchange Commission ("SEC"). All such persons
who are subject to Section 16(a) reporting are required by SEC regulation to
furnish the Company with copies of all such reports that they file.
Based solely on the Company's review of the copies of such reports received by
the Company, in addition to written representations by the Company's officers
and directors regarding their compliance with the applicable reporting
requirements under Section 16(a), the Company believes that its officers and
directors, and all of the persons known to own more than ten percent of the
Common Stock, complied with all filing requirements applicable to them under
Section 16(a) during 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning
beneficial ownership of the Common Stock by (i) persons known by the Company to
beneficially own 5% or more of the outstanding Common Stock as of April 23,
1999, (ii) each director, (iii) each executive officer, and (iv) all executive
officers and directors of the Company as a group. The Company believes that the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole voting and investment power with respect to
such shares.
<PAGE>
<TABLE>
<CAPTION>
Shares
Beneficially Percent of
Name and Address Owned Class
<S> <C> <C>
Larry D. Foster (1) 275,000 3.8%
Gary M. Cully (2) 12,500 *
John H. Bauer (3) 70,000 *
Marsha Murry(4) 102,661 1.5%
Robert Orbach (5) 67,500 *
J. Larry Smart (6) 60,000 *
B. P. Software, Ltd. (7)
15851 Dallas Parkway, St. 1120
Dallas, Texas 75248 11,884,615 62.9%
All directors and executive officers
as a group (six persons)(8) 587,661 7.9%
* Less than 1%.
<FN>
(1) Includes 175,000 shares issuable upon exercise of options that are
exercisable within 60 days.
(2) Includes 12,500 shares issuable upon exercise of options that are
exercisable within 60 days.
(3) Includes 70,000 shares issuable upon exercise of options that are
exercisable within 60 days.
(4) Includes 41,500 shares issuable upon exercise of options that are
exercisable within 60 days.
(5) Includes 67,500 shares issuable upon exercise of options that are
exercisable within 60 days.
(6) Includes 60,000 shares issuable upon exercise of options that are
exercisable within 60 days
(7) Includes 8,339,744 shares issuable upon conversion of debentures and
notes that are convertible within 60 days and includes 3,544,871 shares
issuable upon exercise of warrants that are exercisable within 60 days.
(8) Includes 426,500 shares issuable upon exercise of options that are
exercisable within 60 days.
</FN>
</TABLE>
BP Software, Ltd. has the right to purchase an additional $800,000 of
convertible debentures in 1999. If BP Software, Ltd. were to exercise all its
warrants and convert all the debt it holds and has a right to acquire, a change
in control of the Company would result.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Accelerated Edge, a firm in which director, Ms. Murry is a principal, was paid
$46,083.35 in 1998 for services provided to the Company in 1997 and 1998. Davis
Wright Tremaine, a firm in which former director, Mr. A. Peter Parsons is a
partner, provided services to the Company totaling $5,987.80 in 1998.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements: The following are filed as a part of this report
under ITEM 7.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of PricewaterhouseCoopers LLP..................................................20
Balance Sheet - At December 31, 1998 and 1997.........................................21
Statement of Operations - For the Years Ended December 31, 1998 and 1997..............22
Statement of Shareholders' Equity (Deficit) - For the Years Ended December 31, 1998
and 1997..............................................................................23
Statement of Cash Flows - For the Years Ended December 31, 1998 and 1997..............24
Notes to Financial Statements - For the Years Ended December 31, 1998 and1997.........25
</TABLE>
(b) Reports on 8-K.
None
(c) Exhibits. The following exhibits are filed as part of this report:
Exhibit No. Description
3.1.1a Articles of Incorporation of the Company as filed on
September 23, 1986 with the Secretary of State of the
State of Washington.
3.1.2b Articles of Amendment to Articles of Incorporation of the
Company as filed on February 22, 1989 with the Secretary
of State of the State of Washington.
3.1.3b Articles of Amendment to Articles of Incorporation of the
Company as filed on July 13, 1994 with the Secretary of
State of the State of Washington.
3.1.4 Articles of Amendment to Articles of Incorporation of the
Company as filed on November 13, 1998 with the Secretary
of State of the State of Washington.
3.2.1b By-laws of the Company.
3.2.2a Amended and Restated By-laws of the Company.
4.1 b Form of specimen certificate for Common Stock of the
Company.
4.2 f Designation of Rights and Preferences of Series A
Convertible Preferred Stock.
4.3 h Form of Securities Purchase Agreement dated October 28, 1997
4.4 h Form of Registration Rights Agreement dated October 28, 1997
4.5 k Form of Debenture dated October 28, 1997
4.6 l Form of amendment to the Securities Purchase Agreement dated
June 15, 1998
<PAGE>
Exhibit No. Description
10.1 b Combined Incentive and Nonstatutory Stock Option Plan,
adopted February 22, 1989, and as amended April 30, 1994
and September 28, 1994, authorizing 1,200,000 shares of
Common Stock for issuance pursuant to the combined Plan.
10.2.1d Industrial Lease, dated March 9, 1995, by and between I-90
Lake Place II Limited Partnership, as landlord, and the
Company, as tenant.
10.3.1b Software License Agreement, dated June 4, 1994, by and
between Music Technology Associates and the Company.
10.3.2b Software Rights Purchase Agreement, dated May 5, 1994, by
and between Music Technology Associates and the Company.
10.3.3c Software License Agreement, dated August 6, 1994 by and
between Dennis McMahon d/b/a Asystem, and the Company.
10.3.4a Software Purchase Agreement, dated April 15, 1994 by and
between Dennis McMahon d/b/a Asystem, and the Company.
10.3.5d Software Purchase Agreement, dated November 10, 1994 by
and between Dennis McMahon d/b/a Asystem, and the Company.
10.3.6d Software Purchase Agreement, dated December 22, 1994 by
and between Dennis McMahon d/b/a Asystem, and the Company.
10.4.1b Reseller Agreement, dated January 3, 1992, by and between
WestPoint Creative Ltd. and the Company.
10.4.2b Reseller Agreement, dated December 31, 1991, by and
between CPS Computer Distribution GmbH and the Company.
10.4.3b Reseller Agreement, dated February 13, 1992, by and
between Walop Electronics B.V. and the Company.
10.5.1b Distribution Agreement, dated August 26, 1992, by and between
Merisel, Inc. and the Company.
10.5.2b Distribution Agreement, dated July 14, 1992, by and
between Ingram Micro Inc. and the Company.
10.6.1b OEM License Agreement, dated August 26, 1992, by and
between MPC (Distribution) Ltd. and the Company.
10.6.2b OEM License Agreement, dated January 8, 1994, by and
between Ad Lib Multimedia Inc. and the Company.
10.6.3b OEM License Agreement, dated October 26, 1994 by and
between Media Vision Corporation 10.6.4b Form of OEM License
Agreement between various OEM licensees and the Company.
10.6.5a OEM License Agreement, dated May 10, 1994, by and between
International Business Machines and the Company.
10.6.6a OEM License Agreement, dated May 17, 1994, by and between
Gateway 2000 and the Company.
<PAGE>
Exhibit No. Description
10.6.7a OEM License Agreement, dated May 20, 1994, by and between
ASCII Corporation and the Company.
10.6.8a OEM License Agreement, dated May 20, 1994, by and between
I-O Data Devices and the Company.
10.6.9e OEM License Agreement, dated March 6, 1995, by and between
Genoa Systems Corporation and the Company.
10.6.10eOEM License Agreement, dated June 2, 1995, by and between
Acer America Corporation and the Company.
10.6.11eOEM License Agreement, dated June 5, 1995, by and between NEC
Technologies, Inc. and the Company.
10.7.1e Asset Purchase and Sale Agreement by and among Midisoft
Corporation, Ask Me Multimedia, Inc. and Michael O'Donnell
dated April 14, 1995.
------------------
a Incorporated by reference from the Company's Registration
Statement on Form SB-2 (S.E.C. File No. 33-80064).
b Incorporated by reference from the Company's Registration
Statement on Form SB-2 (S.E.C. File No. 33-62468-5).
c Incorporated by reference from the Company's Form 10-KSB filed
March 30, 1994 (S.E.C. File No. 000-22172).
d Incorporated by reference from the Company's Form 10-KSB filed
April 13, 1995 (S.E.C. File No. 000-22172).
e Incorporated by reference from the Company's Form 10-KSB/A filed
August 4, 1995 (S.E.C. File No. 000-22172).
f Incorporated by reference from the Company's Form 10-KSB filed
April 15, 1997 (S.E.C. File No. 000-22172).
g Incorporated by reference from the Company's Form 10-KSB/A filed
June 20, 1997 (S.E.C. File No. 000-22172).
h Incorporated by reference from the Company's Form 10-QSB filed
November 12, 1997 (S.E.C. File No. 000-22172).
i Incorporated by reference from the Company's Form 8-K filed
January 9, 1997 (S.E.C. File No. 000-22172).
j Incorporated by reference from the Company's Form 8-K filed
November 3, 1997 (S.E.C. File No. 000-22172).
k Incorporated by reference from the Company's Form 10-KSB filed
April 15, 1998 (S.E.C. File No. 000-22172).
l Incorporated by reference from the Company's Form 10-QSB filed
August 14, 1998 (S.E.C. File No. 000-22172).
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MIDISOFT CORPORATION
(Registrant)
Date: April 30, 1999 By: /S/ LARRY D. FOSTER
Larry Foster, Chairman of the Board,
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
- --------------
/S/ LARRY D. FOSTER Chairman of the Board, April 30, 1999
Larry D. Foster President and Chief
Executive Officer
/S/ GARY M. CULLY Vice President, Finance, April 30, 1999
Gary M. Cully Chief Financial Officer and
Principal Accounting Officer
/S/ JOHN H. BAUER Director April 30, 1999
John H. Bauer
/S/ MARSHA MURRY Director April 30, 1999
Marsha Murry
/S/ ROBERT M. ORBACH Director April 30, 1999
Robert M. Orbach
/S/ J. LARRY SMART Director April 30, 1999
J. Larry Smart
Exhibit 3.1.4
ARTICLES OF AMENDMENT
OF
MIDISOFT CORPORATION
Pursuant to the provisions of RCW 23B.10.060 of the Washington Business
Corporation Act, the following Articles of Amendment to the Articles of
Incorporation are herewith submitted to the Secretary of State for filing.
ARTICLE 1. The name of record of the corporation is:
MIDISOFT CORPORATION
ARTICLE 2. The amendment to the Articles of Incorporation as adopted is
as follows:
RESOLVED; Article IV of the Articles of Incorporation is amended to
increase the number of authorized shares of Common Stock of the Company
to 25,000,000.
ARTICLE 3. The date of the adoption of the amendment was October 30,
1998.
ARTICLE 4. The amendment was adopted by the shareholders.
ARTICLE 5. The number of shares of the corporation outstanding at the
time of such adoption was 6,387,954 and the number of shares entitled to vote
thereon was 6,387,954.
ARTICLE 6. The designation and number of outstanding shares of each
class entitled to vote as a class is as follows:
CLASS NUMBER OF SHARES
Common 6,387,954
ARTICLE 7. The number of shares that voted in favor of the amendment
was 5,196,091 ; and the number of shares that voted against the amendment was
410,788.
ARTICLE 8. The amendment was approved by the shareholders in accordance
with the provisions of RCW 23B.10.030 and 23B.10.040.
I certify that I am an officer of the above-named corporation and am authorized
to execute these Articles on behalf of the corporation.
Dated: November 2, 1998 /S/ MARSHA MURRY
--------------------------------
Marsha Murry
Secretary of the Corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET DATED DEC.31, 1998 AND THE STATEMENT OF OPERATIONS FOR THE TWELVE MONTH
PERIOD ENDING DEC. 31, 1998 FOUND ON PAGES 20 AND 21 OF THE COMPANY'S 10-KSB/A1
FOR 1998 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 270
<SECURITIES> 0
<RECEIVABLES> 428
<ALLOWANCES> (245)
<INVENTORY> 115
<CURRENT-ASSETS> 610
<PP&E> 1,047
<DEPRECIATION> (930)
<TOTAL-ASSETS> 977
<CURRENT-LIABILITIES> 1,803
<BONDS> 0
0
0
<COMMON> 20,167
<OTHER-SE> (23,332)
<TOTAL-LIABILITY-AND-EQUITY> 977
<SALES> 1,760
<TOTAL-REVENUES> 1,760
<CGS> 672
<TOTAL-COSTS> 3,680
<OTHER-EXPENSES> 20
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,565
<INCOME-PRETAX> (4,160)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,160)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,160)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64) <F1>
<FN>
COMMON STOCK EQUIVALENTS NOT INCLUDED, AS IT WOULD BE ANTI-DILUTIVE.
</FN>
</TABLE>
