SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 1996
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
Commission file number 0-26192
Coda Music Technology, Inc.
(Exact Name of Small Business Issuer as Specified in its Charter)
Minnesota 41-1716250
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6210 Bury Drive
Eden Prairie, Minnesota 55346-1718
(Address of Principal Executive Offices)
(612) 937-9611
(Issuer's Telephone Number, Including Area Code)
------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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_____
As of August 7, 1996, there were 4,327,035 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
Coda Music Technology, Inc.
Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $2,065,995 $3,960,274
Accounts receivable 513,919 405,528
Inventories 769,660 563,741
Prepaid royalties 107,223 91,117
Other current assets 59,663 124,676
--------- ---------
Total current assets 3,516,460 5,145,336
EQUIPMENT, FURNITURE AND FIXTURES 534,773 466,592
REPERTOIRE DEVELOPMENT COSTS 269,715 --
OTHER ASSETS, principally patents and trademarks 169,773 93,526
--------- ---------
$4,490,721 $5,705,454
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ -- $ 3,838
Accounts payable 205,605 339,554
Accrued expenses 386,295 582,398
Deferred revenue 156,700 122,692
--------- ---------
Total current liabilities 748,600 1,048,482
SHAREHOLDERS' EQUITY 3,742,121 4,656,972
--------- ---------
$4,490,721 $5,705,454
========= =========
</TABLE>
See accompanying notes to condensed financial statements
2
<PAGE>
Coda Music Technology, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET REVENUES $ 1,292,514 $ 838,368 $ 2,547,093 $ 2,204,649
COST OF SALES 551,534 194,862 852,617 504,249
---------- ---------- ---------- ----------
GROSS PROFIT 740,980 643,506 1,694,476 1,700,400
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Sales and marketing 614,266 532,823 1,478,623 1,097,787
Product development 268,809 321,803 591,284 652,125
General and administrative 358,088 334,025 730,088 726,814
---------- ---------- ---------- ----------
Total operating expenses 1,241,163 1,188,651 2,799,995 2,476,726
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (500,183) (545,145) (1,105,519) (776,326)
Interest Income (Expense), net 34,941 (38,557) 80,304 (59,147)
---------- ---------- ---------- ----------
NET LOSS $ (465,242) $ (583,702) $(1,025,215) $ (835,473)
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 4,280,657 3,300,515 4,273,871 3,295,972
========== ========== ========== ==========
NET LOSS PER COMMON AND
COMMON EQUIVALENT SHARE $ (.11) $ (.18) $ (.24) $ (.25)
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements
3
<PAGE>
Coda Music Technology, Inc.
Condensed Statements of Cash Flows
For the Six Months Ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,025,215) $ (835,473)
Adjustments to reconcile net loss
to net cash used in operating activities--
Depreciation and amortization 166,927 142,929
Change in current assets and liabilities:
Accounts receivable (108,391) 101,906
Inventories (205,919) (14,371)
Prepaid royalties (16,106) (14,264)
Other current assets 65,013 5,563
Accounts payable (133,949) (411,690)
Accrued expenses (196,103) 83,737
Deferred revenue 34,008 111,194
---------- ----------
Net cash used in operating activities (1,419,735) (830,469)
---------- ----------
INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures (228,774) (43,358)
Capitalized repertoire development cost (276,049) --
Other assets, principally patents and trademarks (76,247) --
---------- ----------
Net cash used in investing activities (581,070) (43,358)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 110,364 --
Payment of initial public stock offering costs -- (140,993)
Proceeds from subordinated debt -- 700,000
Repayment of short-term borrowings -- (300,000)
Repayment of long-term debt (3,838) (15,889)
---------- ----------
Net cash provided by financing activities 106,526 243,118
---------- ----------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS (1,894,279) (630,709)
CASH AND SHORT-TERM INVESTMENTS, beginning of period 3,960,274 684,727
---------- ----------
CASH AND SHORT-TERM INVESTMENTS, end of period $ 2,065,995 $ 54,018
========== ==========
</TABLE>
See accompanying notes to condensed financial statements
4
<PAGE>
Coda Music Technology, Inc.
Notes to Financial Statements
(Unaudited)
Note 1 Accounting Policies. The information furnished in this report is
unaudited but reflects all adjustments which are necessary, in the
opinion of management, for a fair statement of the results for the
interim period. The operating results for the six months ended June
30, 1996 are not necessarily indicative of the operating results to
be expected for the full fiscal year. These statements should be read
in conjunction with the Company's most recent Annual Report on Form
10-KSB.
Note 2 Repertoire Development Costs. During the first six months of 1996,
the Company capitalized $276,049 of costs incurred in the development
of repertoire. Such costs had previously been charged to expense as
incurred due to uncertainties surrounding their ultimate
realizability. These costs are amortized using the straight line
method over the economic lives of the assets, not to exceed 5 years,
beginning when the repertoire products are released. Accumulated
amortization totaled $6,334 as of June 30, 1996.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company develops and markets proprietary music technology products that
enhance music learning and composition, increase productivity and make
practicing and performing music fun.
Through 1994, the primary business of the Company consisted of enhancing,
marketing and selling Finale(R) products while developing Vivace(R) products. In
June 1994, the first test markets of the Vivace product were launched. After
receiving an encouraging response from music educators and music students, the
Company began the process of building a dealer network commencing in January
1995. The Company anticipates that revenues from the Vivace product will
increase as the dealer network expands and gains experience, as well as with the
introduction of stronger and more focused marketing efforts by the Company. In
December 1995, the Company announced new configurations of the Vivace product at
lower suggested retail prices together with upgraded features which now include
an application for vocalists. The Company began shipment of these configurations
in the second quarter of 1996. With a long-term objective of penetrating the
amateur musician market, the Company intends to continue to adapt its product to
technologies with lower cost and to expand the amount of repertoire available
for use with the Vivace product.
The Company has incurred losses from operations since inception and has an
accumulated deficit of $7,710,146 as of June 30, 1996.
Results of operations
For the periods ended June 30, 1996 compared to the periods ended June 30, 1995
Net Revenues. Revenues of $1,292,514 for the quarter ended June 30, 1996
increased 54% or $454,146 over the quarter ended June 30, 1995. This increase is
attributable to an increase in Vivace product revenues, due largely to the
release of the new soundcard system and vocal repertoire, as well as the impact
of increasing the number of dealers selling Vivace products. The increase in
Vivace product revenue is partially offset by a $112,020 decrease in Finale
product revenues, principally related to a decline in academic sales. Revenues
from Vivace products totaled approximately $733,000 in the quarter ended June
30, 1996 and included revenue from the shipment of approximately 975 modular
systems and soundcard application units and 5,565 repertoire cartridges. In the
second quarter of 1995, the Company sold approximately 100 modular systems and
1,100 repertoire cartridges resulting in total Vivace related revenue in the
quarter ended June 30, 1995 of approximately $167,000.
Revenues for the six months ended June 30, 1996 were $2,547,093 compared to
$2,204,649 for the first six months of 1995, an increase of 16%. Vivace product
revenues increased $478,147 or 87% in this period while Finale product revenues
decreased 8%. The Company had 72 North American dealers for Vivace as of June
30, 1996 and distributors in Australia and Japan. At June 30, 1995 the Company
had approximately 40 dealers. The increase in the number of dealers, the
introduction of the soundboard configuration of the product and the vocal
features of the application, together with increased emphasis on repertoire
sales all resulted in the increased sales of Vivace during 1996.
<PAGE>
In the third quarter of 1995, the Company introduced an upgrade to the
Finale music notation software product which resulted in significant revenues at
high gross profit margins in that quarter. This year's upgrade is expected to be
released in the fourth quarter of 1996. The timing of the Finale upgrades will
have an unfavorable impact on third quarter 1996 revenues and a favorable impact
on fourth quarter 1996 revenues.
Gross profit. The gross profit of $740,980 for the quarter ended June 30,
1996 represented a gross profit margin of 57%. For the second quarter ended June
30, 1995, the gross profit margin was 77%. The decrease in the gross margin
percentage is primarily attributable to the higher mix of Vivace sales in the
1996 quarter compared to 1995. During the second quarter of 1996, the Company
offered a special promotion whereby customers who purchased $995 of repertoire
received a soundcard application at no charge. This promotion will expire on
September 30, 1996. The low margins resulting from this promotion, as well as
the lower margins on Vivace products compared to Finale products, accounted for
the decline in the gross margin during the quarter.
The gross profit for the first half of 1996 was 67% compared to 77% in the
first half of 1995. The decrease principally relates to lower Vivace margins
associated with price reductions which were announced in December 1995. It is
expected that the gross profit percentage will continue to decline as
introductory promotions on Vivace hardware constitute a higher percentage of
total revenues of the Company.
Sales and marketing expenses. For the quarter ended June 30, 1996 sales and
marketing expenses of $614,266 are 15% higher than for the quarter ended June
30, 1995. Approximately $65,000 of this increase relates to compensation costs
for additional personnel.
Sales and marketing expenses of $1,478,623 for the first six months of 1996
increased 35% or $380,836 over the first six months of 1995. This increase in
spending is attributable to attendance at more trade shows in 1996 than in 1995
as well as costs incurred to train approximately 70 specialists employed by our
dealer network to sell Vivace products.
Product development expenses. Product development expenses of $268,809 for
the quarter ended June 30, 1996 were approximately 16% lower than for the
quarter ended June 30, 1995. The Company capitalized repertoire development
expenses of $143,410 during the quarter ended June 30, 1996. For the six months
ended June 30, 1996, product development expenses of $591,284 were $60,841 less
than for the six months ended June 30, 1995. In addition, the Company
capitalized $276,049 of costs incurred in the development of repertoire in 1996.
The total expenses related to the development of application and repertoire
products increased as the Company invested in developing new configurations of
the Vivace product with expanded features, including vocal accompaniment. In
addition, the Company has accelerated the development of repertoire and
broadened the types (vocal as well as instrumental) and genres being offered
(classical, jazz, musical theatre and pop).
<PAGE>
General and Administrative Expenses. General and administrative expenses
for the second quarter of 1996 were $358,088 compared to $334,025 for the second
quarter of 1995. General and administrative expenses of $730,088 for the six
months ended June 30, 1996 increased $3,274 over the six months ended June 30,
1995.
Interest Income (Expense), Net. The Company had net interest income of
$34,941 for the quarter ended June 30, 1996 and net interest expense of $38,557
during the second quarter of 1995. For the first six months of 1996, the company
had interest income of $80,304 compared to net interest expense of $59,147 for
the first six months of 1995. The Company's financing is discussed further under
the caption "Liquidity and Capital Resources".
Net loss. The net loss of $465,242 for the quarter ended June 30, 1996 is
an improvement from the $583,702 loss in the quarter ended June 30, 1995. For
the six months ended June 30, the Company's loss of $1,025,215 increased
$189,742 over the six months ended June 30, 1995. The changes in the loss are
attributable to the changes in revenues and costs described above.
Liquidity and Capital Resources
In July 1995, the Company received net proceeds of $5,891,725 from the
initial public offering of 1,135,000 shares of its common stock. The proceeds
were used to repay subordinated debt and accrued interest totaling $1,262,592,
and the remainder was invested in short-term securities.
The Company has a $500,000 line of credit with a bank which has been used
to finance its working capital requirements and which will expire on February
16, 1997 if not renewed. During 1995, the Company borrowed up to $300,000 under
this line of credit, which balance was repaid in February 1995. Borrowings under
the line of credit bear interest at 1% over the bank's reference rate and are
collateralized by all of the accounts receivable, inventories and general
intangibles of the Company. Among other requirements, the loan agreement
requires the Company to maintain tangible net worth of $3,000,000 as defined in
the agreement. While the agreement is in effect, the Company may not incur
additional indebtedness, liquidate or merge the Company, pay dividends or
acquire any other entity without the prior approval of the lender. Further, a
25% or more change in ownership of the Company constitutes an event of default
under the agreement. As of June 30, 1996 there were no borrowings under the line
of credit.
Net cash used in operating activities totaled $1,419,735 for the six months
ended June 30, 1996. In addition, the Company made capital expenditures for
furniture, equipment and fixtures of $228,774 and repertoire development costs
of $276,049 in the six months ended June 30, 1996. The Company used cash for
operating activities of $830,469 and made capital expenditures of $43,358 during
the six months ended June 30, 1995.
The Company anticipates that capital expenditures for 1996 will approximate
$350,000 and that increased working capital will be required to support planned
revenue growth. Management believes existing cash and short-term investments
together with funds generated from the sale of products will be sufficient to
fund its capital expenditure, product development and working capital
requirements through 1996. Management expects that, in the future, cash in
excess of current requirements will be invested in investment grade
interest-bearing securities.
<PAGE>
Cautionary Statements
As provided for under the Private Securities Litigation Reform Act of 1995,
the Company wishes to caution investors that the following important factors,
among others, in some cases have affected and in the future could affect the
Company's actual results of operations and cause such results to differ
materially from those anticipated in forward-looking statements made in this
document and elsewhere by or on behalf of the Company.
The Company's initial Vivace product was introduced in 1994 and new Vivace
products were introduced in 1996. The Company thus has a limited operating
history from which investors might judge its ability to market at a profit its
Vivace products. The success of the Company will be highly dependent on market
acceptance of these products and the success of its distribution arrangements.
Investors should also consider: additional development work required for new
products; dependence on repertoire sales and development; the Company's
dependence on sales to schools and key customers; fluctuations in operating
results; competition; dependence on suppliers; and dependence on proprietary
technology. For a more complete description of such factors see "Cautionary
Statements" under Item 1 of the Company's Form 10-KSB for the year ended
December 31, 1995.
<PAGE>
PART 2. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: See Exhibit Index on page following Signature page.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the
registrant during the quarter ended June 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 7, 1996 CODA MUSIC TECHNOLOGY, INC.
By: /s/ Ronald B. Raup
Ronald B. Raup, President and
Chief Operating Officer
And: /s/ Joan K. Berg
Joan K. Berg, Chief Financial Officer
<PAGE>
EXHIBIT INDEX
FORM 10-QSB
For the Quarter Ended
June 30, 1996
Exhibit
Number Description
11 Statement re: computation of earnings per share
27 Financial Data Schedule (filed in electronic format only)
EXHIBIT 11
CODA MUSIC TECHNOLOGY, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET LOSS $ (465,242) $ (583,702) $ (1,025,215) $ (835,473)
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Common Shares Outstanding(1) 4,280,657 3,129,277 4,273,871 3,123,788
Common Stock Equivalents calculated
pursuant to Securities and Exchange
Commission Staff Bulletin No. 83(2) -- 171,238 -- 172,184
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 4,280,657 3,300,515 4,273,871 3,295,972
NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE $ (0.11) $ (0.18) $ (0.24) $ (0.25)
</TABLE>
1 Reflects the effect of conversion of Series A and Series B Convertible
Preferred Stock to common stock and a 1-for-2 reverse stock split for all
periods presented.
2 Reflects the issuance of Series B Convertible Preferred Stock, issuance of
common stock for services, stock options granted, warrants issued to
purchase Series B Convertible Preferred Stock and warrants issued to
purchase common stock within the twelve month period prior to the Company's
initial public offering at a price less than the public offering price.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 2,065,995
<SECURITIES> 0
<RECEIVABLES> 513,919
<ALLOWANCES> 0
<INVENTORY> 769,660
<CURRENT-ASSETS> 3,516,460
<PP&E> 534,773
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,490,721
<CURRENT-LIABILITIES> 748,600
<BONDS> 0
0
0
<COMMON> 11,452,267
<OTHER-SE> (7,710,146)
<TOTAL-LIABILITY-AND-EQUITY> 4,490,721
<SALES> 2,547,093
<TOTAL-REVENUES> 2,547,093
<CGS> 852,617
<TOTAL-COSTS> 852,617
<OTHER-EXPENSES> 2,799,995
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,025,215)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,025,215)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,025,215)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
