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, 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
- --------------------------------------------------------------------------------
(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 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)
December 31,
June 30, 1997 1996
ASSETS
CURRENT ASSETS:
Cash and short-term investments $ 2,914,605 $ 1,174,293
Accounts receivable 388,358 596,946
Inventories 800,604 983,375
Prepaid royalties 124,610 118,470
Other current assets 60,969 53,102
----------- -----------
Total current assets 4,289,146 2,926,186
EQUIPMENT, FURNITURE AND FIXTURES 390,532 494,811
REPERTOIRE DEVELOPMENT COSTS 564,800 476,921
OTHER ASSETS 155,146 183,916
----------- -----------
$ 5,399,624 $ 4,081,834
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 197,406 $ 366,271
Accrued expenses 350,282 516,146
Deferred revenue 182,285 201,927
----------- -----------
Total current liabilities 729,973 1,084,344
SHAREHOLDERS' EQUITY 4,669,651 2,997,490
----------- -----------
$ 5,399,624 $ 4,081,834
=========== ===========
See accompanying notes to condensed financial statements
<PAGE>
Coda Music Technology, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
NET REVENUES $ 1,014,583 $ 1,292,514 $ 2,632,055 $ 2,547,093
COST OF SALES 303,710 551,534 761,958 852,617
---------- ---------- ---------- ----------
GROSS PROFIT 710,873 740,980 1,870,097 1,694,476
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Sales and marketing 445,465 614,266 987,373 1,478,623
Product development 369,586 268,809 703,470 591,284
General and administrative 374,771 358,088 816,708 730,088
---------- ---------- ---------- ----------
Total operating expenses 1,189,822 1,241,163 2,507,551 2,799,995
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (478,949) (500,183) (637,454) (1,105,519)
Interest Income (Expense), net 20,618 34,941 32,147 80,304
---------- ---------- ---------- ----------
NET LOSS $ (458,331) $ (465,242) $ (605,307) $ (1,025,215)
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 5,006,145 4,280,657 4,666,590 4,273,871
========== ========== ========== ==========
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE $ (.09) $ (.11) $ (.13) $ (.24)
See accompanying notes to condensed financial statements
</TABLE>
<PAGE>
Coda Music Technology, Inc.
Condensed Statements of Cash Flows
For the Six Months Ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (605,307) $ (1,025,215)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 266,441 166,927
Change in current assets and liabilities:
Accounts receivable 208,588 (108,391)
Inventories 182,771 (205,919)
Prepaid royalties (6,140) (16,106)
Other current assets (7,867) 65,013
Accounts payable (168,865) (133,949)
Accrued expenses (165,864) (196,103)
Deferred revenue (19,642) 34,008
---------- ----------
Net cash used in operating activities (315,885) (1,419,735)
---------- ----------
INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures (40,966) (228,774)
Capitalized repertoire development cost (163,663) (276,049)
Other assets, principally patents and trademarks (16,642) (76,247)
---------- ----------
Net cash used in investing activities (221,271) (581,070)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants - 110,364
Proceeds from sale of common stock, net of offering costs 2,277,468 -
Repayment of long-term debt - (3,838)
---------- ----------
Net cash provided by financing activities 2,277,468 106,526
---------- ----------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 1,740,312 (1,894,279)
CASH AND SHORT-TERM INVESTMENTS, beginning of period 1,174,293 3,960,274
---------- ----------
CASH AND SHORT-TERM INVESTMENTS, end of period $ 2,914,605 $ 2,065,995
========== ==========
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 six months ended June
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 $2,277,468.
<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. 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. 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 $9,061,284 as of June 30, 1997. 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. The Company anticipates that this
new product will begin to ship in September, but does not expect significant
unit sales of this new product to occur until at least the fourth quarter. In
addition, the Company expects to release an upgrade to the Finale product in the
third quarter of 1997.
Results of operations
For the periods ended June 30, 1997 compared to the periods ended June 30, 1996
Net Revenues. Revenues of $1,014,583 for the quarter ended June 30, 1997
decreased $277,931 over the quarter ended June 30, 1996. The net decrease in
revenues between the two periods reflects a 28% increase in revenues from the
Finale music notation software product and a 59% decrease in revenues from the
Vivace Intelligent Accompaniment(R) product. Revenues for the six months ended
June 30, 1997 were $2,632,055, a 3% increase over revenues for the six months
ended June 30, 1996. Finale product revenues increased $376,089 or 25% in this
period while Vivace product revenues decreased 28%.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
<PAGE>
between years. The Company's second quarter 1996 Vivace revenues were higher
than second quarter 1997 Vivace revenues, in part because the soundcard version
of Vivace was introduced in May 1996 and the network of retail music dealers
placed stocking orders for that product. Also, in the second quarter of 1996, an
international distributor placed a substantial stocking order for applications
and repertoire. Comparative Vivace unit sales information for the periods is
represented in the table below:
Quarter Ended Six Months Ended
------------------------ ---------------------------
6/30/97 6/30/96 6/30/97 6/30/96
Applications 315 975 732 1,164
Repertoire cartridges 3,977 5,565 9,224 9,938
The Company has announced its intention to release a software version of
the Vivace product in September. Priced at a suggested retail price of $199,
this product will be marketed to the student and home markets, as well as
academic institutional markets. In preparation for marketing to the student and
home markets, the Company has reduced repertoire suggested retail prices. While
the Company intends to encourage sales of its existing configurations, it is
possible that this pre-announcement of the product will negatively impact sales
of the current configurations and that the Company will not achieve sufficient
volume increases at the lower suggested retail price to offset the significant
decrease in the application and repertoire prices.
The Company also plans to release an upgrade to the Finale product in the
third quarter of 1997. As a result, the Company expects third quarter 1997
Finale revenues to be higher than for the third quarter of 1996.
Gross profit. The gross profit of $710,873 for the quarter ended June 30,
1997 represented a gross profit margin of 70%. For the second quarter ended June
30, 1996, the gross profit margin was 57%. The increase in the gross margin
percentage is primarily attributable to the higher mix of Finale sales in the
1997 quarter compared to 1996. In addition, 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. The low margins
resulting from this promotion, as well as the lower margins on Vivace products
compared to Finale products, accounted for the low gross margin during the
quarter.
The gross profit for the first half of 1997 was 71% compared to 67% in the
first half of 1996. The increase principally relates to a stronger mix of the
higher margin Finale products in the first half of 1997 compared to the first
half 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 June 30, 1997 sales and
marketing expenses of $445,465 are 27% lower than for the quarter ended June 30,
1996. Sales and marketing expenses of $987,373 for the first six months of 1997
decreased 33% or $491,250 over the first six months of 1996. Of this decrease,
<PAGE>
approximately $85,000 is related to lower personnel costs, $215,000 is related
to decreased travel and attendance at educator trade shows, and $130,000 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. The Company expects to incur higher sales and marketing expenses in the
second half of 1997 than in the first half of 1997.
Product development expenses. Product development expenses of $369,586 for
the quarter ended June 30, 1997 were approximately 37% higher than for the
quarter ended June 30, 1996. For the six months ended June 30, 1997, product
development expenses of $703,470 were $112,186 higher than for the six months
ended June 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 second quarter of 1997 were $374,771 compared to $358,088 for the second
quarter of 1996. General and administrative expenses of $816,708 for the six
months ended June 30, 1997 increased $86,620 or 12% over the six months ended
June 30, 1996. This increase in expenses on a comparative basis with the first
half of 1996 is 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
$20,618 for the quarter ended June 30, 1997 compared to $34,941 for the quarter
ended June 30, 1996. For the first six months of 1996, the Company had interest
income of $32,147 compared to interest income of $80,304 for the first six
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 $458,331 for the quarter ended June 30, 1997 is
an improvement from the $465,242 loss in the quarter ended June 30, 1996. For
the six months ended June 30, 1997, the Company's loss of $605,307 was a
favorable change of $419,908 over the six months ended June 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 $2,277,468 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
<PAGE>
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, 1997 there were no borrowings under the line
of credit.
Net cash used in operating activities totaled $315,885 for the six months
ended June 30, 1997. In addition, the Company made capital expenditures for
furniture, equipment and fixtures of $40,966 and repertoire development costs of
$163,663 in the six months ended June 30, 1997. During the six months ended June
30, 1996, the Company used cash for operating activities of $1,419,735, made
capital expenditures for furniture, equipment and fixtures of $228,774 and
repertoire development of $276,049.
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 2. Changes in Securities.
On May 29, 1997, the Registrant 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 securities
were sold to 33 accredited investors through directors and officers of the
Registrant and through John G. Kinnard and Company, Incorporated, as Agent. The
total proceeds of the offering were $2,434,506, and the Agent received
commissions of $125,750. The sale of such securities was deemed to be exempt
from registration under the Securities Act of 1933 by virtue of Rule 506 of
Regulation D thereunder. The purchasers represented their intention to acquire
the securities for investment purposes only and not with a view to the
distribution thereof; in addition, a restrictive securities legend has been
placed on the certificates representing the securities.
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 June 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: August 5, 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 2,914,605
<SECURITIES> 0
<RECEIVABLES> 388,358
<ALLOWANCES> 0
<INVENTORY> 800,604
<CURRENT-ASSETS> 4,289,146
<PP&E> 390,532
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,399,624
<CURRENT-LIABILITIES> 729,973
<BONDS> 0
0
0
<COMMON> 13,730,935
<OTHER-SE> (9,061,284)
<TOTAL-LIABILITY-AND-EQUITY> 5,399,624
<SALES> 2,632,055
<TOTAL-REVENUES> 2,632,055
<CGS> 761,958
<TOTAL-COSTS> 761,958
<OTHER-EXPENSES> 2,507,551
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (605,307)
<INCOME-TAX> 0
<INCOME-CONTINUING> (605,307)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (605,307)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
