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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From _____ to ______
Commission File Number 000-22172
recordLab CORPORATION
(Exact name of small business issuer as specified in its charter)
Washington 91-1345532
(State of incorporation) (I.R.S. Employer Identification No.)
1605 NW Sammamish Rd., Suite 205
Issaquah, Washington 98027
(Address of principal executive offices)
(425) 391-3610
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common stock, no par value; shares outstanding;
16,642,291 as of May 16, 2000
<PAGE>
recordLab CORPORATION
INDEX TO FORM 10-QSB
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.......................................... 3
a) Balance Sheets - March 31, 2000 and December 31, 1999
b) Statements of Operations - For the Three Months Ended
March 31, 2000 and 1999
c) Statements of Cash Flows - For the Three Months Ended
March 31, 2000 and 1999
d) Notes to Financial Statements
Item 2. Management's Discussion and Analysis or
Plan of Operation ............................................ 7
PART II
OTHER INFORMATION
Item 1. Legal Proceedings............................................. 13
Item 2. Changes in Securities and Use of Proceeds..................... 13
Item 3. Defaults Upon Senior Securities .............................. 13
Item 4. Submission of Matters to a Vote of Security Holders .......... 14
Item 5. Other Information............................................. 14
Item 6. Exhibits and Reports on Form 8-K ............................. 14
SIGNATURE................................................................... 15
<PAGE>
ITEM 1. Financial Statements
recordLab CORPORATION
BALANCE SHEETS
<TABLE>
<S> <C> <C>
ASSETS
At March 31, At December 31,
2000 1999
(Unaudited)
-------------- --------------
Current assets:
Cash and cash equivalents $ 153,000 $ 198,000
Accounts receivable - net of allowances 98,000 63,000
Inventories 34,000 38,000
Prepaid expenses and other assets 37,000 12,000
-------------- --------------
Total current assets 322,000 311,000
Property & equipment, net of accumulated
depreciation of $1,093,000 and $1,010,000,
respectively 574,000 476,000
Debt issuance costs, net of accumulated
amortization of $1,216,000 and $770,000,
respectively - 446,000
-------------- --------------
Total assets $ 896,000 $ 1,233,000
============== ==============
LIABILITIES & SHAREHOLDERS' DEFICIT
Current liabilities:
Trade accounts payable $ 1,295,000 $ 1,199,000
Note payable - line of credit,
net of discount 2,000,000 1,500,000
Current portion of long-term debt - -
Accrued wages & payroll taxes 124,000 118,000
Other accrued expenses 522,000 414,000
Deferred revenue 6,000 6,000
-------------- --------------
Total current liabilities 3,947,000 3,237,000
Comitments and contingencies - -
Shareholders' (deficit) equity
Common stock, no par value; 50,000,000
shares authorized, 16,836,000 issued
and outstanding in 2000 and 7,251,000
issued and outstanding in 1999 25,858,000 25,121,000
Additional paid-in capital 6,175,000 5,885,000
Deferred stock compensation (100,000) (162,000)
Notes receivable from shareholders (109,000) (109,000)
Accumulated deficit (34,875,000) (32,739,000)
-------------- --------------
Total shareholders' deficit (3,051,000) (2,004,000)
-------------- --------------
Total liabilities and shareholders'deficit $ 896,000 $ 1,233,000
============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
recordLab CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C>
Quarter Ended
March 31,
---------------------------------
2000 1999
-------------- --------------
Revenues $ 55,000 $ 133,000
Cost of revenues 12,000 41,000
-------------- --------------
Gross profit 43,000 92,000
Operating expenses:
Sales and marketing 120,000 203,000
General and administrative 808,000 357,000
Research and development 647,000 101,000
-------------- --------------
Total operating expenses 1,575,000 661,000
Operating loss (1,532,000) (569,000)
Interest expense (500,000) (240,000)
Other expense (103,000) (7,000)
-------------- --------------
Net loss $ (2,135,000) $(816,000)
============== ==============
Net loss per share (basic) $ (0.13) $ (0.11)
============== ==============
Net loss per share (diluted)* $ (0.13) $ (0.11)
============== ==============
* Common stock equivalents not included, as it would be anti-dilutive
Weighted average shares outstanding 16,592,000 7,251,000
============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
recordLab CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<S> <C> <C>
Quarter Ended
March 31,
---------------------------------
2000 1999
-------------- --------------
Cash flows used for operations:
Net loss $ (2,135,000) $ (816,000)
-------------- --------------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation & amortization 82,000 23,000
Non-cash interest and other expenses 290,000 250,000
Amortization of debt issuance costs 446,000 -
Deferred stock compensation 62,000 -
(Increase) decrease in assets:
Accounts receivable, net (35,000) 89,000
Inventories 4,000 2,000
Prepaid expenses & other assets (25,000) 3,000
Increase (decrease) in liabilities:
Trade accounts payable 96,000 271,000
Accrued wages & payroll taxes 6,000 1,000
Other accrued expenses 108,000 (179,000)
Deferred revenue - -
-------------- --------------
Total adjustments 1,034,000 460,000
-------------- --------------
Net cash used by operationing activities (1,101,000) (356,000)
-------------- --------------
Cash flows used for investing:
Additions to property & equipment (181,000) -
-------------- --------------
Net cash used for investing (181,000) -
-------------- --------------
Cash flows from financing:
Issuance of common stock 737,000 -
Proceeds from borrowings on note
payable to bank 500,000 -
Proceeds from issuance of long-term debt
and warrants, net of debt issue costs - 225,000
-------------- --------------
Net cash provided by financing 1,237,000 225,000
-------------- --------------
Net change in cash and cash equivalents (45,000) (131,000)
Cash and cash equivalents, beginning of year 198,000 270,000
-------------- --------------
Cash and cash equivalents, end of period $ 153,000 $ 139,000
============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
recordLab CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Interim Financial Information
The condensed financial statements included herein have been prepared
by recordLab Corporation (the "Company") without audit, according to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. However, in the opinion of management,
the accompanying unaudited financial statements contain all adjustments
considered necessary to present fairly the results for the interim periods
presented. The accompanying condensed financial statements and related notes
should be read in conjunction with the Company's 1999 audited financial
statements included in its Annual Report on Form 10-KSB/A filed April 28, 2000.
The results of operations for the three months ended March 31, 2000 are
not necessarily indicative of the results to be expected for the full calendar
year.
Going Concern
The Company has incurred substantial operating losses during the past several
years and has a net capital deficiency that raise substantial doubt about its
ability to continue as a going concern. 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. For further discussion see Management's Discussion and
Analysis or Plan of Operation.
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.
Accounts Receivable and Major Customer Information
Accounts receivable from Original Equipment Manufacturers (OEM) and
other resellers are summarized as follows:
<TABLE>
<S> <C> <C>
March 31, December 31,
2000 1999
OEM $ 8,000 $ 7,000
Resellers and other 582,000 548,000
-------------- --------------
Subtotal 568,000 555,000
Less: Allowance for doubtful accounts (22,000) (22,000)
Allowance for sales returns (470,000) (470,000)
============== ==============
Total accounts receivable $ 98,000 $ 63,000
============== ==============
</TABLE>
Accounts receivable consists principally of amounts due from OEMs and
reseller customers for licensing fees, royalties and direct sales of products.
OEM customer payment terms typically are one year in duration and require
payments to be made in quarterly installments. At March 31, 2000 and December
31, 1999, OEM accounts receivable amounts not yet due were $0, equal to 0% of
total OEM receivables. Reseller payment terms typically are standardized and
similar to those given software distributors. At March 31, 2000, reseller
accounts receivable amounts not yet due were $0, equal to 0% of total reseller
receivables compared to $1,000, equal to 1% at December 31, 1999.
The Company's primary credit concentrations involve domestic and
foreign OEM and reseller customers. Domestic customers comprised $560,000 of
accounts receivable at March 31, 2000, compared to $526,000 at December 31,
1999. Foreign customers comprised $8,000 of accounts receivable at March 31,
2000 compared to $0 at December 31, 1999.
Income Taxes
No income taxes are payable at March 31, 2000, the result of the
Company's year-to-date loss and the result of Federal net operating losses
through December 31, 1999 of approximately $30.5 million that may reduce taxes
due in future periods and expire beginning in 2008. In certain circumstances, as
specified in the Internal Revenue Code, a 50% or more ownership change by
certain combinations of the Company's stockholders during any three-year period
would result in limitations on the Company's ability to utilize its net
operating loss carry-forward. As a result of investment and conversion of
convertible debt to equity totaling $3.2 million, a 50% or more ownership change
has occurred.
Inventories
Inventories are summarized as follows:
<TABLE>
<S> <C> <C>
March 31, December 31,
2000 1999
Raw materials $ 29,000 $ 17,000
Finished goods 10,000 27,000
Less: Allowance for obsolescence (5,000) (6,000)
-------------- --------------
Total inventories $ 34,000 $ 38,000
============== ==============
</TABLE>
In June 1998, Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities (FAS 133), was issued. This
pronouncement standardizes the accounting for derivative instruments by
requiring that an entity recognize those items as assets or liabilities in the
financial statements and measure them at fair value. FAS 133 is required to be
adopted by the Company for the year ending December 31, 2001. The Company is
currently reviewing the requirements of FAS 133 and assessing its impact on the
Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101) which
must be adopted by the Company by June 30, 2000. SAB 101 provides additional
guidance on revenue recognition as well as criteria for when revenue is
generally realized and earned. The Company is currently reviewing the
requirements of SAB 101 and assessing its impact on the Company's financial
statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion should be read in conjunction with the
financial statements and the notes thereto appearing elsewhere in this Form
10-QSB.
IN ADDITION TO HISTORICAL INFORMATION, THIS FORM 10-QSB CONTAINS FORWARD-LOOKING
STATEMENTS SUCH AS STATEMENTS OF THE COMPANY'S EXPECTATIONS, PLANS, OBJECTIVES
AND BELIEFS. THESE STATEMENTS USE SUCH WORDS AS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "BELIEVE," "PLAN," AND OTHER SIMILAR TERMINOLOGY. ACTUAL RESULTS
COULD DIFFER MATERIALLY DUE TO CHANGES IN THE MARKET ACCEPTANCE OF RECORDLAB
PRODUCTS, MARKET INTRODUCTION OR PRODUCT DEVELOPMENT DELAYS, GLOBAL AND LOCAL
BUSINESS CONDITIONS, LEGISLATION AND GOVERNMENTAL REGULATIONS, COMPETITION, THE
COMPANY'S ABILITY TO EFFECTIVELY MAINTAIN AND UPDATE ITS PRODUCT PORTFOLIO,
SHIFTS IN TECHNOLOGY, POLITICAL OR ECONOMIC INSTABILITY IN LOCAL MARKETS, AND
CURRENCY AND EXCHANGE RATES. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF
THE DATE HEREOF. THIS DISCUSSION SHOULD BE READ TOGETHER WITH THE FINANCIAL
STATEMENTS AND OTHER FINANCIAL INFORMATION INCLUDED IN THIS FORM 10-QSB.
General
recordLab Corporation (formerly Midisoft Corporation) (the "Company")
has since its incorporation in 1986 developed software for the creation and
distribution of music and the control of sound on personal computers. The
products have enabled users to learn to play instruments, create and share
music, produce print quality sheet music and view the musical notation of sounds
as they are being played on the computer or just enjoy the experience of sound
on the PC. The Company has refined and expanded these products to include
playing and viewing other forms of media, such as video.
In the past the Company has marketed its products in several ways.
Media utilities were sold to original equipment manufacturers ("OEM's"), who
incorporated these utilities into their products for sale to computer
manufacturers or end users. The Company has also formed alliances with Internet
content aggregators and providers to download its Internet Media Player and
other Internet products. Although these sources of revenue are unpredictable,
the costs of revenues are minimal and the Company continues to pursue
opportunities in this area.
The Company's consumer products have been sold primarily through retail
stores specializing in the sale of personal computers and software. As the
ownership of PC's has become more common, the Company added direct sales
channels in an effort to reach more potential users of its boxed products. Two
years ago the Company began selling through music and instrument stores to reach
amateur musicians and in 1999 the introduction of Worship Studio made
distribution through Christian bookstores an essential new channel.
The Company believes that amateur musicians and aspiring artists do not
have a place to go on the Internet to learn how to make music or to make their
music better. They are limited to their local stores, teachers and network of
friends. The Company intends to change that by providing easy and direct access
to top music industry talent, expertise, technology and learning opportunities.
With this category-creation opportunity, the Company is focused on reaching the
broadest number of musicians possible and intends to capture and sustain the
leadership position in the music creation space on the Internet.
In the fourth quarter of 1999, the Company announced sweeping changes
in its business and revealed a new corporate identity and strategies that deploy
its proprietary music creation technology, and complimentary services and
products, over the Internet. The Company's core customer focus continues to be
the amateur and non-professional musician and aspiring artist. In order to
implement this change in strategy, recordLab diverted marketing resources from
traditional sales channels to invest in website infrastructure development and
product technology engineering. These changes have had the effect of removing
the Company's products from the computer/software retail channel, which has been
the source of most of the Company's revenue since its founding in 1986. The
withdrawal from this channel has resulted in a significant reduction in
revenues.
The Company believes this reduction in sales will continue until the
development of the recordLab.com website infrastructure, product engineering and
complimentary content and service creation is substantially completed, which the
Company anticipates will take place during the year 2000. However, the Company
will not be able to fund this development from operations and will require
additional investment to continue operations and complete implementation of its
plans. The Company has invested and intends to continue investing the majority
of its financial and management resources on website and product development,
marketing and promotion, strategic relationships and technology and operating
infrastructure.
In November 1999 the Company opened its flagship website,
recordLab.com. When completed later this year, the website will present a series
of online learning laboratories providing information, education, downloadable
music creation software, musical equipment, business and entertainment services
that offer visitors access to the knowledge and technology that simplifies the
process of composing, writing, recording, editing and publishing music.
The Company's core strategy is to create THE platform for amateur
creation of original musical content on the Internet. recordLab.com will provide
music authoring software, craft enhancement seminars and career development
services that allow amateur musicians to produce and improve their music.
Presented as a community-based online "laboratory," recordLab.com will provide
members with: 1] access to expert knowledge of those practicing specific crafts
within the music industry; and 2] the Company's technology that aims to simplify
the process of recording, editing, printing and distributing their music. The
Company believes that these are the keys to enabling amateur musicians to
contribute original artistic content and to creating communities of interest.
This in turn, creates a platform for the Company to deliver a number of
additional complimentary services to amateur musicians. The Company believes
that this strategy establishes significant differentiation between the Company
and its competition.
The software market for audio and music on the PC is highly competitive
and changing rapidly. 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.
The Company will continue to sell its boxed product directly to
consumers, through existing retail channels and through its websites. The
Company will also generate revenues by selling downloadable music software
(recording and sheet music applications and sound and effects add-ons for
Internet TapeDeck and iDrum), selling classes, coursework and seminars
(streaming videos of professional producers, arrangers, vocal coaches and
publishers) and selling ads on the website and on its Internet Media Player.
Revenue from music fans will be generated from advertising accompanying
compelling content and consumer electronic merchandise.
The Company's revenues include sales of software, software licenses and
services, less returns. Cost of revenues includes the costs of manuals,
diskettes and duplication, packaging materials, assembly, paper goods, shipping
and amortization of purchased software technology and capitalized software and
website development costs. Cost of revenues as a percentage of sales is lower
for OEM sales than for distributor and direct sales because few direct costs are
involved. Sales and marketing expenses consist primarily of salaries of sales
and marketing personnel, customer service and technical support costs and
advertising and promotion expenses. General and administrative expenses consist
of salaries of administrative personnel, legal and accounting costs and general
operating expenses including rent and insurance. Research and development
expenses consist primarily of personnel and equipment costs required to conduct
the Company's development efforts.
Revenues from sales to distributors and resellers and direct sales are
recognized when products are shipped. The Company's software sales agreements
generally do not involve any significant obligations to customers subsequent to
delivery. Revenues from products licensed to OEMs, consisting of one-time
license fees, are recognized at the time the software master is delivered and
when the criteria for fixed fee revenue recognition under Statement of Position
No. 97-2 "Software Revenue Recognition" are satisfied. Additional royalty use or
unit copy royalty fees are recognized when they are received pursuant to license
agreements upon notification of shipment from OEMs.
Comparison of Three months ended March 31, 2000 and 1999
Revenues for the three months ended March 31, 2000 were $55,000, a
decrease of $78,000, compared to $133,000 for the same period in 1999. Sales to
software distributors and resellers, together with direct sales were $55,000,
representing 100% of revenues in the three months ended March 31, 2000, compared
to $40,000 which represented 30% of revenues for the same period in 1999. OEM
sales were $1,000 and $93,000 representing 2% and 70% for the same periods
respectively. International sales accounted for 0% of the Company's revenues for
the three months ended March 31, 2000 and 11% in 1999. The reduction in revenues
is the result of the Company's decision to redirect resources from the
computer/software retail channel to the development of the web based business.
Gross profit for the three months ended March 31, 2000 was $43,000, a
decrease of $49,000, compared to $92,000 for the same period in the prior year.
As a percentage of revenues, gross margin increased to 78% in the three months
ended March 31, 2000 from 69% in 1999. The Company's musical instrument retail
channel, direct sales and internet downloads have resulted in significantly
lower product returns and the associated inventory writedowns.
Sales and marketing expenses for the three months ended March 31, 2000
were $120,000, a decrease of $83,000, compared to $203,000 for the same period
in the prior year. This decrease is due primarily to the reduction of costs
associated with the computer/software retail channel during the three months
ending March 31, 2000. As a percentage of revenues, sales and marketing expenses
increased to 218% in the three months ended March 31, 2000 from 153% for the
same period in 1999. This increase was a direct result of lower revenues in the
quarter ended March 31, 2000.
General and administrative expenses for the three months ended March
31, 2000 were $808,000, an increase of $451,000, compared to $357,000 for the
same period of the prior year. This increase is the result of non-cash charges
of $263,000 related to stock option expense, an additional $59,000 for
depreciation and amortization expense, an increase of $81,000 for legal expense
and settlement of claims, $41,000 for strategic planning for the new business
model and $25,000 for investor relations.
Research and development expenses for the three months ended March 31,
2000 were $647,000, an increase of $546,000, compared to $101,000 for the same
period in the prior year. As a percentage of revenues, research and development
expenses increased to 1176% in the three months ended March 31, 2000 from 76%
for the same period in 1999, as a result of lower revenues and expenditures of
$545,000 for website content and development in the period ending March 31,
2000.
Interest expense for the three months ended March 31, 2000 was $500,000 compared
to $240,000 for the same period in 1999, an increase of $260,000. Interest
expense includes one-time non-cash charges of $446,000 relating to the
amortization of debt discount in the first quarter of 2000 and one-time non-cash
charges of $174,000 in the first quarter of 1999, relating to the valuation of
the $250,000 of convertible debentures and $50,000 for amortization of the
discount on the detachable warrants issued through March 1999. Other expense of
$103,000 in the three months ended March 31, 2000 is primarily for one time
non-cash charges associated with warrants granted to new investors.
No income taxes are payable at March 31, 2000, the result of the
Company's year-to-date loss and the result of federal net operating losses at
December 31, 1999 of approximately $30,552,000. The net operating losses may
potentially reduce federal income tax liability, due in future periods and which
begin to expire in 2008, In certain circumstances, as specified in Section 382
of the Internal Revenue Code, a fifty percent or more ownership change by
certain combinations of the Company's stockholders during any three-year period
would result in limitations on the Company's ability to utilize its net
operating loss carryforwards. As a result of investment and conversion of
convertible debt to equity totaling $3.2 million, a 50% or more ownership change
has occurred.
Liquidity and Capital Resources
As of March 31, 2000, the Company's principal sources of liquidity
included cash and cash equivalents of $153,000 and net accounts receivable of
$76,000. This compares to cash, cash equivalents and short-term investments of
$198,000 and net accounts receivable of $63,000 at December 31, 1999. The change
in liquidity and capital resources is the result of negative cash flow from
operations during the first quarter of 2000.
The Company's current liabilities at March 31, 2000 were $3,947,000
compared to $3,237,000 at December 31, 1999. As of March 31, 2000, working
capital totaled a negative $3,625,000. The Company's operating activities used
cash of $1,101,000 for the three month period ending March 31, 2000, due
primarily to operating losses of $1,576,000. This use of cash is an increase of
$745,000 from the first quarter of 1999. The increase in cash used in the first
quarter of 2000 compared to the same quarter in 1999 is principally due to
higher operating costs associated with the development of the recordLab.com
website.
In February and March 2000 the Company sold 267,818 shares of the
Company's common stock to several investors. The agreements provided for
investment at $2.75 per share, yielding a total investment of $736,500. The
agreements further provided for three year warrants to purchase 10% of the
shares purchased under the agreements, or a total of 26,782 shares for $4.00 per
share.
To date, the Company has financed its operations principally through
net proceeds from two public offerings and private placements of debt and
equity. Cash on hand, along with cash generated from the sale of products and
collections of accounts receivable, will not be sufficient to meet the Company's
requirements for the current week. The Company's ability to fund continued
operations depends on raising additional capital immediately. Should the Company
be unable to raise additional capital this week, 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 have a material
adverse effect on the Company's ability to establish profitable operations in
the future. The Company will continue to pursue other financing arrangements to
increase its cash reserves. There can be no assurance the Company will be
capable of raising additional capital or that the terms upon which such capital
will be available to the Company will be acceptable.
Trade Debt and Other Matters
As of March 31, 2000, the Company had $433,000 of accounts payable that
were current, $150,000 extended to between 31 and 60 days and $712,000 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 $610,000. Six of these vendors have
initiated litigation for claims or received judgments totaling approximately
$81,000. 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.
The Company is in default of its office lease resulting from partial payment of
its lease obligation due on May 1, 2000. The lessor has agreed in principle to a
cure period and to forebear from enforcing its rights under the lease agreement
until June 6, 2000. If the lessor were to exercise its rights under the lease,
it would have a material adverse effect on the Company's operations. Under the
terms of the forbearance agreement, the lessor grants to the Company a cure
period ending on June 6, 2000 by which date the Company must have paid to the
lessor a total of $68,000, applicable to lease payments due on May 1, and June1,
2000.
YEAR 2000
The information provided below complies with the disclosure
requirements under the Year 2000 Information and Readiness Disclosure Act.
The Company established a Y2K task force in early 1999 to identify and
correct any computer problems that may arise with hardware or software resulting
from the change of year from 1999 to 2000. The task force worked with vendors
and suppliers to assure that no disruptions would occur that would interfere
with the Company's operations. The Company's existing accounting system was not
Y2K compliant and the Company used this opportunity to change to a more capable
accounting system rather than upgrade the old system. The new system is
completely installed and data entry is proceeding. The Company does not
anticipate any significant problems arising from this new installation. To date
the Company has encountered no disruptions and is not aware of any problems with
any of its internal systems or the operation of any of its vendors or suppliers.
The total cost of this program has not been determined, but the Company believes
the cost of this program has not and will not have a material impact on the
Company's operating results.
While the Company is not aware of any disruptions or losses of data
resulting from Year 2000 problems, there is no assurance that problems may not
arise after the anticipated event date. If such problems were to occur, there
could be significant loss of data that may affect the Company's future
operations. As part of the Y2K program the Company developed contingency plans
in the event of any system failures. These plans call for frequent backups of
critical data and arrangements for substitute systems in the event of hardware
or software failures.
Subsequest Events
In April 2000 the Company's largest shareholder loaned the Company
$120,000 on a promissory note bearing interest at 8% per annum payable in full
on or before August 29, 2000. All unpaid principal and interest shall bear
interest of 13% per annum after that date until all outstanding principal and
interest are paid in full.
In April 2000 the Company's Board of Directors elected Dalton Kaye as
Chairman of the Board and Larry Foster as Vice-Chairman.
In April 2000 an investor purchased 100,000 shares of the Company's
common stock for $118,750. The investor also received three year warrants to
purchase an additional 25,000 shares for $2.00 per share. The agreement requires
the Company to register the shares within 45 days.
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. The forward-looking statements
also assume that the Company will be able to raise the capital necessary to
continue as a going concern, but there can be no assurance that sources of
capital to sustain operations will be available. 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, and
that there will be no material adverse change in the Company's operations or
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, there can be
no assurance that the forward-looking information will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS -
In 1997, an entity ("Claimant") 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 total
consideration of $420,000, $25,000 in cash and the remainder
comprised of forgiveness of $112,000 in debt and issuance of
approximately 633,000 recordLab 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. Payments totaling
$20,000 have been made. The debt of $112,000 has been fully
reserved and expense of $283,000 for the additional common shares
has been booked as of December 31, 1998. recordLab agreed to remove
restrictive legends on 166,667 of previously issued shares. The
Company believes that the Claimant's subsequent actions nullified
this agreement. In July 1999 the Company demanded the return of all
consideration. In December 1999 the Company cancelled the 633,000
shares previously issued and reserved the $269,000 related to the
value of those shares. recordLab has petitioned the court to
dismiss the case. In April 2000, the Company and Claimant entered
into settlement discussions, which are on-going. The ultimate
outcome is unknown, but the Company is vigorously defending against
the claim.
In March 1997, a former sales representative ("Plaintiff") filed
suit in Michigan against the Company 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. recordLab 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 exceed the damages claimed by the Plaintiff. The lawsuit is
at the trial stage and the ultimate outcome cannot be determined at
this time. The Company believes that it has meritorious defenses
and is vigorously defending against the claim.
On April 3, 1997 the Company began arbitration proceedings against
a former customer. On September 24, 1997, the Company was awarded a
judgement in the amount of $194,983.37 against the former customer.
The amount of the award represents the sum of 1) $160,000.00, the
unpaid portion of the base annual license royalty under the
Company's OEM License Agreement and 2) $34,983.37, representing
interest on the unpaid installments from their respective due dates
through the date of the award computed at 12% per annum. In
November 1998, the former customer had exhausted its appeals when
the Washington State Court of Appeals denied the former customer's
appeal motion, thereby terminating the appellate process. In March
1999, the Company amended the judgement to add attorneys' fees and
interest accrued since the original judgement was entered. The
total amount of the amended judgement is $247,925.34. The Company
has engaged a California law firm to enforce judgement in the state
of California, the headquarters location of the former customer.
The Company has reserved the entire sum of the debt on the
financial statements as of December 31, 1999.
The Company has received demand letters from certain vendors
requesting immediate payment of amounts owing them totaling
approximately $610,000. Six of these vendors have initiated
litigation for claims or received judgments totaling approximately
$81,000. The Company has reached settlement agreements with some
vendors and is negotiating with the remainder. Some vendors have
stopped making sales to the Company and others have required cash
on delivery terms.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
The annual meeting of shareholders was held on January 31, 2000
near the Company's headquarters in Issaquah, Washington. Matters
submitted to the shareholders for a vote were as follows:
Election of Directors - All Directors were elected at the meeting.
Mr. Bauer and Mr. Chasan, whose terms expire at the 2000 annual
meeting, each received 15,036,720 votes for their election and
21,173 votes were withheld. Mr Foster and Ms. Murry, whose terms
expire at the 2001 annual meeting, each received 15,036,503 votes
for their election and 21,390 votes were withheld. Mr. Lloyd, who's
term also expires at the 2001 annual meeting, received 15,036,720
votes for his election and 21,173 votes were withheld. Mr. Kaye and
Mr Orbach, whose terms expire at the 2002 annual meeting, received
15,036,720 and 15,036,503 votes respectively for their election and
21,173 and 21,390 votes respectively were withheld.
Selection of Independent Accountants - The selection of
PricewaterhouseCoopers LLP as the Company's independent accountants
was ratified. The results of the vote were 15,013,163 FOR and
30,568 AGAINST with 14,162 abstentions.
Proposal to Amend the Articles of Incorporation to Increase the
Authorized Common Shares to 50 Million - This increase of 25
million shares in the authorized common shares was approved by the
shareholders. The results of the vote were 14,862,573 FOR and
173,371 AGAINST with 21,949 abstentions.
Ratification of the 1999 Stock Option Plan - The plan was ratified.
The shareholder votes were 11,260,213 FOR and 198,641 AGAINST with
50,546 abstentions and 3,548,493 broker non-votes.
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -
a) EXHIBITS - No. 27 Financial Data Schedule
b) FORM 8-K - was filed on April 18, 2000 reporting the change of the
Company name from Midisoft Corporation to recordLab Corporation.
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
recordLab CORPORATION
(Registrant)
Date: May 19, 2000
BY: /S/ Gary M. Cully
Gary M. Cully, Vice President of Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET DATED MARCH 31, 2000 AND THE STATEMENT OF OPERATIONS FOR THE THREE MONTH
PERIOD ENDING MARCH 31, 2000 FOUND ON PAGES 3 AND 4 OF THE COMPANY'S 10-QSB AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000882692
<NAME> recordLab Corporation
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<PERIOD-TYPE> 3-MOS
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