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 September 30, 1997
[ ] 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
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(Address of Principal Executive Offices)
(612) 937-9611
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(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 November 5, 1997, there were 6,199,732 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>
September 30, December 31,
1997 1996
ASSETS ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and short-term investments $ 2,199,073 $ 1,174,293
Accounts receivable 329,139 596,946
Inventories 852,104 983,375
Prepaid royalties 128,974 118,470
Other current assets 66,138 53,102
----------- ----------
Total current assets 3,575,428 2,926,186
EQUIPMENT, FURNITURE AND FIXTURES 371,550 494,811
REPERTOIRE DEVELOPMENT COSTS 613,748 476,921
OTHER ASSETS 121,712 183,916
----------- ----------
$ 4,682,438 $ 4,081,834
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 267,348 $ 366,271
Accrued expenses 380,114 516,146
Deferred revenue 182,285 201,927
----------- ----------
Total current liabilities 829,747 1,084,344
SHAREHOLDERS' EQUITY 3,852,691 2,997,490
----------- ----------
$ 4,682,438 $ 4,081,834
=========== ==========
See accompanying notes to condensed financial statements
</TABLE>
<PAGE>
Coda Music Technology, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Quarter Ended September 30, September 30,
1997 1996 1997 1996
------- ------ ------ ------
<S> <C> <C> <C> <C>
NET REVENUES $ 952,080 $ 1,209,440 $ 3,584,135 $ 3,756,532
COST OF SALES 335,844 482,817 1,097,802 1,335,433
------------ ------------ ----------- ------------
GROSS PROFIT 616,236 726,623 2,486,333 2,421,099
------------ ------------ ----------- ------------
OPERATING EXPENSES:
Sales and marketing 610,742 592,830 1,598,115 2,071,453
Product development 419,061 361,460 1,122,531 952,745
General and administrative 421,135 386,808 1,237,843 1,116,896
------------ ------------ ----------- ------------
Total operating expenses 1,450,938 1,341,098 3,958,489 4,141,094
------------ ------------ ----------- ------------
LOSS FROM OPERATIONS (834,702) (614,475) (1,472,156) (1,719,995)
Interest Income, net 36,105 21,096 68,252 101,400
------------ ------------ ----------- ------------
NET LOSS $ (798,597) $ (593,379) $ (1,403,904) $ (1,618,595)
============ ============ =========== ============
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING
6,199,832 4,326,867 5,177,637 4,291,536
============ ============ =========== ============
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
$ (.13) $ (.14) $ (.27) $ (.38)
============ ============ =========== ============
See accompanying notes to condensed financial statements
</TABLE>
<PAGE>
Coda Music Technology, Inc.
Condensed Statements of Cash Flows
For the Nine Months Ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,403,904) $ (1,618,595)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 414,487 259,462
Change in current assets and liabilities:
Accounts receivable 267,807 (146,505)
Inventories 131,271 (435,262)
Prepaid royalties (10,504) (16,739)
Other current assets (13,036) 62,609
Accounts payable (98,923) (29,844)
Accrued expenses (136,032) (101,946)
Deferred revenue (19,642) 20,938
---------- ----------
Net cash used in operating activities (868,476) (2,005,882)
---------- ----------
INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures (84,833) (289,359)
Capitalized repertoire development cost (259,345) (419,654)
Other assets, principally patents and trademarks (21,671) (120,294)
---------- ----------
Net cash used in investing activities (365,849) (829,307)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants - 111,564
Proceeds from sale of common stock, net of offering costs 2,259,105 -
Repayment of long-term debt - (3,838)
---------- ----------
Net cash provided by financing activities 2,259,105 107,726
---------- ----------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS
1,024,780 (2,727,463)
CASH AND SHORT-TERM INVESTMENTS, beginning of period 1,174,293 3,960,274
---------- ----------
CASH AND SHORT-TERM INVESTMENTS, end of period $ 2,199,073 $ 1,232,811
========== ==========
See accompanying notes to condensed financial statements
</TABLE>
<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 nine months ended
September 30, 1997 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 New Accounting Pronouncement. The Company will adopt in the fiscal
year ending December 31, 1997, Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS No. 128), which requires
disclosure of basic earnings per share (EPS) and diluted EPS. The
Company anticipates that adoption of this standard will not have a
material impact on previously reported EPS.
Note 3 Private Placement of Common Stock. On May 29, 1997, the Company
sold an aggregate of 1,872,697 shares of Common Stock at a price of
$1.30 per share and issued warrants to purchase, at $2.00 per share,
an aggregate of 936,357 shares of Common Stock. The net proceeds of
the offering totaled $2,259,105.
<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) music notation software products while
developing Vivace(R) Intelligent Accompaniment(R) products. In June 1994, the
first test markets of the Vivace product were launched with a modular system at
a suggested retail price of $2,295. In the spring of 1996, the Company released
new configurations of the Vivace product at lower suggested retail prices, as
well as an application and repertoire for vocalists. The Company announced in
July 1997 the introduction of a software version of the product with a suggested
retail price of $199 and repositioned the product as a complete practice system,
the Vivace Practice Studio(TM). The Company began shipping this new product for
the Macintosh(R) platform at the beginning of October, 1997. The Windows(R)
version of this product is still in development.
Initially, the Company's marketing efforts were primarily directed towards
the retail music dealer channel, with a long-term objective of penetrating the
amateur musician market. As the Company adapts its product to technologies with
lower cost and continues to expand the amount and styles of repertoire available
for use with the Vivace product, the Company's distribution channels will expand
beyond the retail music dealer channel. The Company cannot predict the time it
will take to establish new methods of distribution which will more effectively
reach the student and home markets. However, the Company intends to continue to
work with the retail music dealer channel to penetrate the academic
institutional market and to solicit students renting instruments through these
dealers.
The Company has incurred losses from operations since inception and has an
accumulated deficit of $9,859,881 as of September 30, 1997.
Results of operations
For the periods ended September 30, 1997 compared to the periods ended September
30, 1996
Net Revenues. Revenues of $952,080 for the quarter ended September 30, 1997
decreased $257,360 over the quarter ended September 30, 1996. The net decrease
in revenues between the two periods reflects a 9% increase in revenues from the
Finale music notation software product and a 63% decrease in revenues from the
Vivace Intelligent Accompaniment(R) product. Revenues for the nine months ended
September 30, 1997 were $3,584,135, a 5% decrease over revenues for the nine
months ended September 30, 1996. Finale product revenues increased $437,715 or
20% in this period while Vivace product revenues decreased 40%. The increase in
Finale revenue results from a change in the timing of the release of product
upgrades between years as well as an increase in the price of the Finale for Mac
upgrade between years. The decrease in Vivace revenue is primarily associated
with unit volume decreases, as represented in the table below:
<PAGE>
Quarter Ended Nine Months Ended
------------------------- -------------------------
9/30/97 9/30/96 9/30/97 9/30/96
------- ------- ------- -------
Applications 220 478 952 1,642
Repertoire cartridges 3,790 7,566 13,014 17,504
During 1996, the Company promoted the Vivace product with a special offer,
whereby music educators received a free soundcard if they purchased $995 of
repertoire. In addition, the Company benefited from inventory stocking orders
placed by several of the music retail dealers and a large international
distributor. These factors were not significant to 1997 results. In addition,
delays in shipping the software version of the Vivace product may have
negatively affected 1997 results. Until the Windows version of this product is
shipping, the Company does not expect Vivace revenues to exceed those from
comparable periods of the prior year.
The Company released an upgrade to the Finale product for the Windows
platform on October 14th, and expects to begin shipping this upgrade on the
Macintosh platform in November, 1997. The timing of the release is expected to
result in a favorable Finale revenue comparison in the fourth quarter of 1997.
Gross profit. The gross profit of $616,236 for the quarter ended September
30, 1997 represented a gross profit margin of 65%. For the third quarter ended
September 30, 1996, the gross profit margin was 60%. The increase in the gross
margin percentage is primarily attributable to the higher mix of Finale sales in
the 1997 quarter compared to 1996.
The gross profit for the first nine months of 1997 was 69% compared to 64%
in the first nine months of 1996. The increase principally relates to a stronger
mix of the higher margin Finale products in the first nine months of 1997
compared to the first nine months of 1996. It is expected that the gross profit
percentage will decline as Vivace products constitute a higher percentage of
total revenues of the Company.
Sales and marketing expenses. For the quarter ended September 30, 1997
sales and marketing expenses of $610,742 are 3% higher than for the quarter
ended September 30, 1996. Sales and marketing expenses of $1,598,115 for the
first nine months of 1997 decreased 23% or $473,338 over the first nine months
of 1996. Of this decrease, approximately $110,000 is related to lower personnel
costs, $255,000 is related to decreased travel and attendance at educator trade
shows, and $105,000 is attributable to lower advertising and public relations
costs. The Company intentionally postponed certain selling expenses pending
announcement of the software version of the Vivace product, which announcement
was made in July 1997.
Product development expenses. Product development expenses of $419,061 for
the quarter ended September 30, 1997 were approximately 16% higher than for the
quarter ended September 30, 1996. For the nine months ended September 30, 1997,
<PAGE>
product development expenses of $1,122,531 were $169,786 higher than for the
nine months ended September 30, 1996. The major reason for the increase in
expense is related to increased amortization of repertoire development and
software translation costs in 1997.
General and Administrative Expenses. General and administrative expenses
for the third quarter of 1997 were $421,135 compared to $386,808 for the third
quarter of 1996. The increase over the comparable quarter in 1996 is primarily
attributable to personnel recruiting expenses due to the tight labor market, the
timing of travel and legal expenses. General and administrative expenses of
$1,237,843 for the nine months ended September 30, 1997 increased $120,947 or
11% over the nine months ended September 30, 1996. This increase in expenses on
a comparative basis with the first nine months of 1996 is primarily due to that
period having been abnormally low as adjustments related to employee termination
costs were recorded in the first quarter of 1996.
Interest Income (Expense), Net. The Company had net interest income of
$36,105 for the quarter ended September 30, 1997 compared to $21,096 for the
quarter ended September 30, 1996. For the first nine months of 1996, the Company
had interest income of $68,252 compared to interest income of $101,400 for the
first nine months of 1996. The lower interest income is attributable to the
Company's lower average cash and investment balances in 1997 compared to 1996.
The Company's financing is discussed further under the caption "Liquidity and
Capital Resources".
Net loss. The net loss of $798,597 for the quarter ended September 30, 1997
is unfavorable compared to the $593,379 loss in the quarter ended September 30,
1996. For the nine months ended September 30, 1997, the Company's loss of
$1,403,904 was a favorable change of $214,691 over the nine months ended
September 30, 1996. The changes in the loss are attributable to the changes in
revenues and costs described above.
Liquidity and Capital Resources
In May 1997, the Company received net proceeds of $2,259,105 from the
private placement of 1,872,697 shares of its common stock and the issuance of
warrants to purchase 936,357 shares of common stock at a price of $2.00. The
proceeds were invested in short-term securities.
The Company has a $500,000 line of credit with a bank. 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, inventory and general
intangibles of the Company. Among other requirements, the loan agreement
requires the Company to maintain minimum levels of tangible net worth, 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 September 30, 1997 there were no borrowings under the
line of credit.
Net cash used in operating activities totaled $868,476 for the nine months
ended September 30, 1997. In addition, the Company made capital expenditures for
furniture, equipment and fixtures of $84,833 and repertoire development costs of
$259,345 in the nine months ended September 30, 1997. During the nine months
ended September 30, 1996, the Company used cash for operating activities of
$2,005,882, made capital expenditures for furniture, equipment and fixtures of
$289,359 and repertoire development of $419,654.
<PAGE>
The Company anticipates that capital expenditures for 1997 will approximate
$150,000 and that increased working capital will be required to support planned
revenue growth. Management believes existing cash and short-term investments,
proceeds from line of credit borrowings, and funds generated from the sale of
products will be sufficient to fund its capital expenditure, product development
and working capital requirements through 1998. Management expects that, in the
future, cash in excess of current requirements will be invested in investment
grade interest-bearing securities.
Cautionary Statements
The Company cautions investors that actual results of future operations may
differ from those anticipated in forward looking statements due to a number of
factors including market acceptance of the Company's Vivace products, the
potential need for additional capital, the need for additional product and
repertoire development work, 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, 1996.
<PAGE>
PART 2. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: 27 - Financial Data Schedule
(filed in electronic format only)
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the
registrant during the quarter ended September 30, 1997.
<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: November 7, 1997 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
CODA MUSIC TECHNOLOGY, INC.
FORM 10-QSB
For Fiscal Quarter Ended September 30, 1997
Exhibit No. Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS CONTAINED IN THE REGISTRANT'S FORM
10-QSB FOR THE QUARTER ENDED 9/30/97 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 2,199,073
<SECURITIES> 0
<RECEIVABLES> 329,139
<ALLOWANCES> 0
<INVENTORY> 852,104
<CURRENT-ASSETS> 3,575,428
<PP&E> 371,550
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,682,438
<CURRENT-LIABILITIES> 829,747
<BONDS> 0
0
0
<COMMON> 13,712,572
<OTHER-SE> (9,859,881)
<TOTAL-LIABILITY-AND-EQUITY> 4,682,438
<SALES> 3,584,135
<TOTAL-REVENUES> 3,584,135
<CGS> 1,097,802
<TOTAL-COSTS> 1,097,802
<OTHER-EXPENSES> 3,958,489
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,403,904)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,403,904)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,403,904)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
