SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Commission File No.: 0-26192
CODA MUSIC TECHNOLOGY, INC.
(Name of Small Business Issuer as specified in its charter)
Minnesota 41-1716250
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
6210 Bury Drive, Eden Prairie, Minnesota 55346-1718
(Address of principal executive offices)(Zip Code)
Issuer's telephone number, including area code: (612) 937-9611
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:Common Stock
Check whether the Issuer (1) has 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
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $5,500,158
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of March 14, 1997 was approximately $5,311,370 based upon the
closing price of the Registrant's Common Stock on such date.
There were 4,327,035 shares of Common Stock outstanding as of March 14, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1996 are incorporated into Part II and portions of the
Registrant's definitive Proxy Statement for its 1997 Annual Meeting are
incorporated by reference into Part III.
Transitional Small Business Disclosure Format (check one). Yes No X
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Coda Music Technology, Inc. ("Coda" or the "Company") develops and markets
proprietary music technology products designed to enhance music learning and
composition, increase productivity and make practicing and performing music fun.
Since 1988, the Company and its predecessor have marketed the award-winning
Finale(R) music notation software products which eliminate the restrictiveness
and tedium of music notation and have established the Company as a leader in
this market. In June 1994, the Company introduced the Vivace(R) system, an
innovative musical accompaniment system that responds to the musician in
real-time. For students, educators, adult music hobbyists, professional
musicians and composers in the approximately $5 billion music products industry,
Coda's innovative products provide easy-to-use, efficient alternatives to
traditional practice, education and composition techniques.
Coda Strategy
The Company's objective is to use modern technology to provide products
that enhance the process of learning, performing and composing music. The Vivace
system provides accompaniment which follows the tempo of the musician in an
effort to enhance the process of learning, practicing and performing music. The
Company's Finale music notation software products allow musicians to enter
compositions into a computer electronically while playing, thus freeing them
from the tedious task of handwriting notes as they are played, and allows
musicians to manipulate, edit, play back and print compositions. The Company
intends to implement the following strategies in pursuing its objective:
o Expand applications for Vivace technology. The Vivace product is currently
available for band and vocal applications. The technology is available in a
modular system or soundcard configuration. The Company intends to continue to
adapt the technology for the orchestral and MIDI-equipped instrumental markets,
and to develop lower cost applications. These products are designed to permit
more professional and amateur musicians to experience the joy and emotion of
music by performing with accompaniment that listens to and follows the musician.
o Further develop the repertoire library. Coda has created over 2700 classical
and jazz repertoire titles contained on approximately 400 cartridges for use
with the Vivace product and plans to create catalogs of repertoire covering a
broad spectrum of musical genres, instruments and skill levels. In 1997, the
Company will introduce Vivace accompaniments for the Belwin 21st Century Band
Method, a standardized method of instruction targeting elementary students. The
Company intends to continue to select popular titles from the world's existing
and growing body of music to develop additional repertoire for each of its
market segments.
o Expand the markets for and distribution of the Vivace products. The Company
initially introduced its Vivace products to the education and professional music
market segment through a network of band and orchestra dealers, most of which
sell to both schools and individuals. The Company intends to expand to the
student, adult music hobbyist and international markets as it develops products
and distribution channels that are designed to satisfy the unique needs of each
of these market segments.
<PAGE>
o Establish Finale music notation software as the industry standard. Coda has
established a reputation of quality and power for its Finale music notation
software products and intends to promote Finale's file format as the industry
standard as music publishers increasingly move toward electronic distribution
and sale of sheet music.
Products
Coda has established a reputation of quality with its Finale products and
intends to build on that reputation with its Vivace system.
Vivace Products
The Vivace system consists of hardware, Intelligent Accompaniment(R)
software and repertoire. The hardware configurations currently available are a)
a modular system - - a VCR-sized box which incorporates a high quality
synthesizer, converter of acoustic sounds into digital format, digital effects
signal processor, mixer and computer interface and b) an AWE-32 soundcard
packaged with a small repertoire cartridge. The prototype technology upon which
the Vivace system is based was patented by Carnegie Mellon University and
licensed to the Company. Coda then significantly enhanced the prototype
technology with additional patented features, producing a marketable product.
The Intelligent Accompaniment software allows the user to start playing at
any point in the musical piece, repeat difficult-to-play segments, change
instrumentation and adjust the degree to which the accompaniment follows the
musician. In addition, the musician can control tempo and reverb, transpose the
music into any key, play with or without repeats and designate sections of the
music to cut. With a feature called "Remember Tempos," the system can adjust the
accompaniment to handle even the most extreme interpretation of a passage where
there is little input, or few notes, from the musician. The products also
feature warm-up exercises for vocalists, the ability to tap in tempo changes
with variations in speed, and the ability to insert breath marks and cues to
wait for a particular tone. These "variables" can be saved with the music,
creating a personally customized version of the accompaniment.
The Company's Intelligent Accompaniment technology is available for the 17
standard band instruments, such as flutes, clarinets, saxophones, trumpets,
trombones and tubas; in 1996, it also became available for vocal applications.
Vivace Repertoire
The sale of a single Vivace system has the ability to generate multiple and
ongoing sales of repertoire as musicians build their own library of repertoire.
The repertoire delivery system consists of a computer floppy disk and a
cartridge that plugs into the Vivace hardware, similar to the insertion of a CD
into a stereo system. Unlike CDs, however, the repertoire cartridges will only
work with the Company's Vivace system and have been specially designed by the
Company to protect against illegal duplication. A typical repertoire cartridge
retails for $29.95 to $39.95 and may contain more than one musical
accompaniment.
Coda has entered into license agreements with top music publishers,
including Hal Leonard and Warner Bros. These license agreements allow the
Company to produce synthesized versions of musical arrangements for use with the
Vivace system. The Company's royalty arrangements range from payments of $.75
per cartridge to five percent of the suggested retail price of the cartridge.
Coda has also received the exclusive rights from certain major publishers to all
solo classical works for voice, wind, brass, percussion, string and keyboard for
the purpose of musical accompaniment products which respond in real-time to the
musician. These exclusive licenses generally have terms ranging from five to ten
years and require Coda to pay cumulative royalty advances aggregating $75,000
through 2001.
<PAGE>
Coda has created a catalog of over 4,200 individual classical and jazz
accompaniments contained on over 500 cartridge products for its Vivace
Intelligent Accompaniment product, of which over 2,700 accompaniments on
approximately 400 cartridges are currently available for sale. The Company made
its accompaniment selection based on a review of the most frequently performed
titles in state academic soloist contests as well as popular titles of sheet
music sold at retail. These accompaniments vary in complexity from easy to
challenging and cover a broad range of musical genres for almost all band
instruments and voices. The Company intends to use its relationships with key
publishers and other sources to select the most popular titles for development
as repertoire for Vivace products. Further, the Company plans to expand its
library of repertoire to cover a broad spectrum of music genres, instruments and
skill levels.
Finale Music Notation Software Products
Coda is a market leader in music notation software with its Finale,
Academic Edition of Finale and Finale Allegro family of products for use with
Macintosh and PC Windows operating systems. Music notation software enables a
musician to enter musical data into a computer using either the computer
keyboard, a MIDI equipped electronic music keyboard or other MIDI equipped
instrument and contemporaneously display the data on a computer screen as a
musical score. The dramatic improvements in speed and flexibility provided by
programs like Finale and Finale Allegro software have made such software the
dominant method for composers, arrangers, publishers and music teachers to
create printed music.
The Finale product has won five consecutive MacWorld "World Class" awards
for best music notation software and is among those products generally
recognized as one of the most powerful and comprehensive notation software
products in the world. Finale music notation software products retail for $545.
Finale software is differentiated from other music notation software by its
breadth and depth of features, including patented capabilities such as its
"hyperscribe" feature. Hyperscribe allows users to freely play music with
varying tempos via a MIDI keyboard while the software interpolates the rhythms
and accurately notates the music in real time.
Coda also produces an Academic Edition of the Finale product that is sold
exclusively to schools, school teachers and college students at a suggested
retail price of $275. The Finale Academic Edition product has also been a key
source of revenue and registered user base growth for the Company and it
represents a market that is continually being replenished with new student
users. The Douglas Stewart Company ("Douglas Stewart") is the largest single
distributor of Finale products. Pursuant to the terms of a written agreement,
Douglas Stewart acts as the Company's exclusive distributor of the Finale
Academic Edition products to "college stores" (as defined in the agreement) and
as a nonexclusive distributor of the same products to non-profit educational
institutions and authorized resellers other than "college stores." Douglas
Stewart has agreed to limit its distribution of music notation software products
exclusively to those of the Company. Coda is obligated to provide Douglas
Stewart reasonable sales literature, support and training upon request and to
notify Douglas Stewart of all upgrades. Although the agreement provides limited
restocking rights to Douglas Stewart, historically returns have been immaterial.
The agreement renews monthly unless either party provides the other with 30
days' written notice or it is otherwise earlier terminated.
The Company introduced the Finale Allegro product, a less powerful music
notation software product, in 1993. The Finale Allegro music notation software
product retails for $199 and contains a subset of the notation tools contained
in the Finale product. The Finale Allegro product allows the Company to offer an
entry level product to the retail customer.
<PAGE>
Product manuals are currently available in German, French, Italian, Dutch,
Japanese and Spanish. The Company believes the international market is a key
growth opportunity as computer penetration increases worldwide. International
revenues, primarily from the sale of notation software products, represented 20%
and 21% of 1996 and 1995 revenues, respectively.
Marketing, Sales and Distribution
The Company has adopted different strategies to distribute the Company's
Vivace products and its Finale products to various targeted market segments.
Vivace Products
The Company has selected the education and professional musician market as
its point of entry for a variety of reasons. First, members of this market
typically are regular purchasers of musical products in the current Vivace price
range and could be candidates for multiple Vivace installations. Second, by
penetrating this market the Company believes it will create a long-term customer
base with strong annual repertoire buying rates. Finally, endorsements from this
market will create awareness and credibility among the larger student and adult
hobbyist markets.
After testing alternative distribution methods, the Company concluded that
a band and orchestra dealer network would be the most effective method of
penetrating the market. Coda expanded the dealer network to approximately 100
dealers in 1996 and provided training at the Company's offices to product
specialists employed by those dealers. This network sells to a significant
portion of the educational institutions in the U.S. and Canada. The Company
plans to add dealers and geographies during 1997. In addition, a distributor in
Japan was added to represent the Vivace product in that country.
Finale Music Notation Software Products
Coda's Finale products are currently sold through electronic music
instrument retailers, mail order software retailers, college bookstore
distributors, computer dealers, educational software distributors and
international software distributors. These channels of distribution are designed
to service the composer, arranger, education and theological markets worldwide.
The Company believes it can significantly build on its music notation
software business by continuously expanding the installed base of users and
regularly providing them with upgrades, increasing retail distribution,
producing additional international versions of the products and establishing the
products as a means for electronic transmission of music. The Company introduced
upgrades on both the Windows(R) platform and Macintosh(R) platform in each of
the last three years.
A key marketing strategy of the Company is to introduce the Finale products
to students as they learn so they are more likely to continue to use the product
during their lives. To improve its position in the education market, the Company
introduced a low-priced Academic Edition for students and teachers, developed
product lab packs consisting of five copies of the Finale product sold at a
reduced price per copy, which allow schools and universities to cost-
effectively bring Finale music notation software products into their curriculum,
added an on-campus direct seller network, and developed low-cost music software
bundles that include the Finale product and a high quality music sequencing
program for exclusive distribution to the academic channel. As a result of these
and other targeted programs, the Company has significantly grown its
distribution in the education market over the past three years and now generates
over half of its installed user base growth from that channel.
<PAGE>
Coda currently sells its Finale products in 30 countries around the world.
The product is distributed by a leading music software distributor in each of
the international markets who is responsible for sales, marketing and technical
support.
Product Development
The Company intends to continue to expand its current product offerings by
developing products for new applications and markets.
Vivace Products
Using the core technologies behind its Vivace products, the Company has
recently developed a system for vocalists and intends to develop Vivace systems
to support orchestral instruments (such as violins, violas and cellos), guitars
and keyboards, as well as new Vivace applications for rhythm and intonation
training. In addition, the Company is exploring other cost reductions in order
to lower the price of its products for the student and music hobbyist market.
Vivace Repertoire
The Company plans to expand its support of Vivace products by adding more
titles to the existing repertoire catalog, creating additional catalogs of
repertoire and generally broadening the repertoire library to include other
musical genres (such as popular, rock and country). Vivace repertoire
development has limited risk and short development cycles that range from one
month (solo collection of ten to twelve basic solos with piano accompaniment) to
four months (musical theatre collection with orchestral accompaniment). The
Company has established an expertise in repertoire development by creating
methods to synthesize classical music and mark music sequences. Additionally,
the Company has automated some of the process and developed a technical
specification that is used to standardize both quality and process. Unlike a
game manufacturer which must continually invent new games, the Company need only
look to the most popular titles in the large and growing supply of musical
compositions to develop additional Vivace repertoires.
Finale Music Notation Software Products
To maintain its leadership position in the music notation marketplace, over
the past three years Coda has focused its continuous improvement efforts on
developing upgrades of the Finale product on a regular basis and as a result has
successfully migrated to the third generation of the Macintosh and Windows
platforms. The Company expects to make annual releases of such upgrades. After
an announcement of an upgrade release but prior to the actual release,
purchasers of a Finale product are offered this upgrade at no charge for a
limited period of time. Other Finale users are required to purchase the upgrade
product at prices ranging from $79.95 to $119.95. In addition, the Company
anticipates adapting its Finale products to allow on-line transmission and
viewing of musical scores. Electronic music transmission would be used by music
publishers or distributors to electronically transmit scores in Finale file
format to customers who would be able to view the music, then purchase and print
the score. The Company believes that the use of the Finale file format as the
standard for electronic music distribution may increase demand for the Finale
products. Although a product that may be used for such a purpose is not yet in
commercial production, the Company has an alpha version of such product, which
the Company will demonstrate to key publishers to obtain market feedback. The
Company believes the cost of developing a commercially viable product is within
its product development budget.
<PAGE>
In January 1996, Warner Bros. Publications announced that they required all
submission of compositions for publication by Warner Bros. to be in the Finale
file format. The Company believes that this endorsement from the world leader of
sheet music publishing represents significant progress in establishing Finale as
the industry standard.
Competition
The Company knows of no other musical accompaniment product that responds
to the musician. However, the Company expects that Vivace products will compete
with conventional music accompaniment products such as Music Minus One and
Roland MTS 120. These products offer students the ability to play along with
prerecorded songs. They differ from the Vivace product in that they do not
automatically adjust in real-time to the musician's changes in tempo. Although
the Company believes its Vivace system is unique, there can be no assurance that
competitors will not enter the market.
The market for the Company's Finale music notation software is highly
competitive. The competitors in this market tend to be similar in size to Coda
but many have a more comprehensive line of music software products. The Company
regards Passport Designs, Inc., Opcode Systems, Inc. and Steinberg/Jones as its
closest competitors based on product offerings and price points.
Principal competitive factors in marketing the Company's Vivace and Finale
products include product features, quality, brand recognition, ease of use,
merchandising, access to distribution channels, retail shelf space and price.
The Company believes it competes effectively in these areas. To the extent that
competitors achieve significant advantages in performance, price or other
selling advantages, the Company could be adversely affected. There can be no
assurance that the Company will have the resources to respond to market or
technological changes, or to compete successfully in the future. In addition,
increasing competition in the music software market could cause prices to fall,
which could adversely affect the Company's business, operating results and
financial condition.
Patents
The Company has licensed, on an exclusive world-wide basis for the life of
the patent, from Carnegie Mellon University the use of the U.S. patent which
covers the automated accompaniment that listens to and follows tempo changes
from a live performance. In order to maintain exclusivity, the Company must
achieve specified requirements and pay certain minimum royalties. While no
assurances can be given, the Company believes that the requirements will be met
and that any necessary modifications to the requirements can be made which would
be to the mutual benefit of both the Company and Carnegie Mellon University. The
Company is currently in compliance with these requirements. The Company has
further developed this technology and patented and filed for patents on the
additional features. The Company has obtained a patent that protects
improvements to the user control of the software, certain aspects of the
repertoire file which enhance the following capabilities of the software, and
miscellaneous interface features of the product. A separate patent protects the
Company's cartridge encryption methodology. The Company has received notice of
allowance of a patent covering enhancements to the following algorithm,
accompaniment controls and repertoire data files. The Company has filed for an
additional patent which is currently pending and covers other important aspects
of the Vivace technology. As a result of the additional patented features
developed by the Company and the ability of the Company to develop an extensive
library of repertoire over the next several years, the Company does not believe
that it will be materially adversely affected by the expiration of the Carnegie
Mellon University patent in 2005.
<PAGE>
The Company's Finale product is covered by three separate patents which
protect the data structure, the ability to enter music into the product by
tapping tempo with a pedal device or computer keyboard, and the method of
automatically assigning guitar fingerboards to a notated chord. These patents
are licensed from Wenger Corporation on a royalty-free, exclusive, worldwide
basis for the life of the patents.
Trademarks
The Company owns the registered trademarks in the United States for
Coda(R), Finale(R), Finale Allegro(R), Vivace(R), Intelligent Accompaniment(R),
Intelligent Accompanist(R) and Personal Accompanist(R). In addition, the names
Coda and Finale have been protected in some foreign countries. The Company has
applied for trademark registration in the U.S. for the names Vocal
Accompanist(TM), and The Art of Music Notation(TM). In addition, this report
contains references to trademarks owned by third parties.
Manufacturing
Printing of user manuals and packaging and manufacture of related materials
are performed to the Company's specifications by outside subcontractors.
Customized synthesizer boards for the original Vivace modular configuration are
purchased from E-mu Systems, Inc. ("E-mu"). The company sources AWE32 soundcards
from Creative Labs, Incorporated. Blank repertoire cartridges are purchased from
IVL Technologies Ltd. and cartridge readers from TREC. The Company currently
uses Advanced Duplication Services, Inc. to perform standard copying and
assembling services, including copying the repertoire and Finale music notation
software discs, and assembling the Vivace and Finale product manuals, disks and
other product literature into packages.
Employees
As of December 31, 1996, the Company employed 46 full-time employees. Of
these, 16 served in the product and repertoire development area, 7 in product
testing and end-user support, and 23 in administrative and sales related
activities. The Company believes that its relations with its employees are good.
None of the Company's employees is covered by a collective bargaining agreement.
In addition, the Company relies on independent contractors to develop its
repertoire. The Company has had no difficulty contracting with these individuals
and believes that its relationships are good. Should the Company have difficulty
securing the services of such persons in the future, it could adversely affect
operations.
CAUTIONARY STATEMENTS
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:
Uncertainty of Market Acceptance
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.
<PAGE>
Additional Capital
The Company may seek additional capital through a new line of credit with a
bank, asset based lending or the sale of equity. No assurance can be given that
such capital will be available or available on terms favorable to the Company.
The sale of equity interests would dilute the ownership of current shareholders.
If additional equity funds are obtained, the Company will accelerate the
development of repertoire and expand marketing efforts to reach the student and
consumer markets for its products.
New Product Development
Additional development work is required for the introduction of Vivace
products for the orchestral and MIDI equipped instrument markets and to increase
the breadth of the Company's repertoire for Vivace products. No assurance can be
given that the Company's timetable for these development plans will be achieved,
that sufficient development resources will be available or that development
efforts will be successful.
Dependence on Repertoire Sales and Development
The Company's future success is highly dependent on its ability to obtain
significant ongoing repertoire sales. The Company has entered into license
agreements with leading music publishers, which provide the Company with access
to musical titles for repertoire development. While the Company believes that
its relationships with these publishers are good, there can be no assurance that
the Company will be able to maintain these relationships or make satisfactory
arrangements to receive access to additional styles of music in a timely manner.
Although the loss of a license arrangement with any one publisher would not
materially adversely affect the Company's operations, the lack of a sufficient
number and variety of musical arrangements would greatly limit the Company's
ability to market its Vivace products.
Operating Losses
For the year ended December 31, 1996, the Company incurred a net loss of
$1,771,046 and since inception has an accumulated deficit of $8,455,977.
Dependence on Key Personnel
The Company is highly dependent on a limited number of key management and
technical personnel. The Company's future success will depend, in part, on its
ability to attract and retain highly qualified personnel. There can be no
assurance that the Company will be successful in hiring or retaining qualified
personnel. The loss of key personnel, or inability to hire and retain qualified
personnel, could have an adverse effect on the Company's business, financial
condition and results of operations. The Company does not have key-person life
insurance on any of its key personnel.
Dependence on Schools and Key Customers
The sale of a substantial portion of the Company's Vivace products
initially will be directed toward schools. Budget restrictions may delay or
prohibit the purchase of the Company's products by schools and certain other
customers. The Company's success will depend in part on its ability to sell its
Vivace products to key schools which tend to establish trends and standards in
music education and band performance.
Fluctuations in Operating Results
The Company does not have a significant history of sales of its Vivace
products; however, it believes that its results of operations may fluctuate as a
result of the purchasing cycle of the education market and the timing of
releases of new products and product upgrades. The degree of such fluctuations
will depend, among other things, on the percentage of the Company's revenues
from the education market.
<PAGE>
Competition
Although there are other musical accompaniment products, the Company
believes none have the capability to listen to and follow the musician like the
Company's Vivace products. There can be no assurance that others, such as large
electronic and musical instrument manufacturers, will not enter this market.
Competition in the sale of music notation products such as the Company's Finale
products occurs principally on the basis of price, features and ease of use.
Some of the companies with which the Company may compete have significantly
greater financial and other resources than the Company.
Dependence on Suppliers
The Company is dependent on certain suppliers for delivery of components
and assembly of its Vivace products. While the Company believes that alternative
suppliers are available, any interruption of supply from current vendors could
cause significant delays in the shipment of such products.
Proprietary Technology
The Company is dependent on proprietary technology. A number of patents
have been issued to or licensed by the Company and additional patents are
pending which cover various aspects of the Company's products. There can be no
assurance that the Company's proprietary technology will provide it with
significant competitive advantages, that other companies will not develop
substantially equivalent technology or that the Company will be able to protect
its patented and unpatented technologies. The Company could incur substantial
costs in seeking enforcement of its patents or in defending itself against
patent infringement claims by others. The Company is not aware of any patents
held by others that would prohibit the use of technology currently used by the
Company. Further, there can be no assurance that the Company will be able to
obtain or maintain patent protection in the international markets in which it
intends to offer products.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 12,150 square feet of office and warehouse
space at 6210 Bury Drive, Eden Prairie, Minnesota 55346, for current annual net
rent of approximately $70,000. This lease expires in November 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation and is not aware of any
threatened litigation that would have a material adverse effect on its financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
<PAGE>
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by Item 5 is incorporated herein by reference to
the section entitled "Common Stock Price Ranges" which appears in the
Registrant's 1996 Annual Report to Shareholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
The information required by Item 6 is incorporated herein by reference to
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" which appears in the Registrant's 1996
Annual Report to Shareholders.
ITEM 7. FINANCIAL STATEMENTS
The information required by Item 7 is incorporated herein by reference to
the Financial Statements, Notes thereto and Report of Independent Public
Accountants thereon which appear in the Registrant's 1996 Annual Report to
Shareholders.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
The names and ages of the executive officers of the Company and their
positions and offices presently held are as follows:
Name Age Position
John W. Paulson 49 Chief Executive Officer and Chairman
of the Board of Directors
Ronald B. Raup 46 President, Chief Operating Officer and
Director
Joan K. Berg 45 Chief Financial Officer and Secretary
Mark E. Dunn 48 Senior Vice President of Product
Development
Julia D. Fraser 39 Vice President of Vivace Repertoire
Development
John W. Paulson has been Chief Executive Officer and Chairman of the Board
of Directors of Coda since December 1990. From 1982 to 1990, Mr. Paulson was
Chairman of Springboard Software, Inc., a publicly-held company he founded to
develop and market educational and consumer software products. Springboard was
subsequently purchased by Spinnaker Software Corp. Prior to founding
Springboard, Mr. Paulson was a public school music teacher for nine years during
which time he taught band, keyboard and electronic music classes. He has a
Master of Arts in Music Education from the Eastman School of Music, is a
published composer, and has performed as a professional musician for over ten
years. Mr. Paulson was recently elected to the NAMM Board of Directors.
Ronald B. Raup has been President and Chief Operating Officer of Coda since
January 1, 1996, and served as Executive Vice President from August 1995 through
December 1995. From 1977 through 1995, Mr. Raup was employed by Yamaha
Corporation of American and was Senior Vice President of Sales and Marketing
from 1989 through 1995. Mr. Raup served on the Yamaha Board of Directors from
1990 to 1995.
Joan K. Berg has been Chief Financial Officer of Coda since January 1995.
From 1986 to 1994, Ms. Berg was Vice President and Controller of ADC
Telecommunications, Inc., a manufacturer of telecommunications equipment. She
also has eight years of public accounting experience with Arthur Andersen LLP.
Mark E. Dunn has been Senior Vice President of Product Development of Coda
since October 1991. For nine years prior to joining the Company, Mr. Dunn was
Vice President of Product Development for Springboard Software, Inc. and then
Spinnaker Software Corp. upon its acquisition of Springboard.
Julia D. Fraser has been Vice President of Vivace Repertoire Development of
Coda since March 1996. From 1984 to 1996, Ms. Fraser was employed by Alfred
Publishing Co., Inc., and was Vice President of Product Development from 1993 to
1996 and Vice President of Marketing from 1989 to 1993. She previously worked in
the retail and wholesale sectors of the print music industry. Ms. Fraser is on
the Executive Board of the Music Industry Conference.
<PAGE>
The information required by Item 9 relating to directors is incorporated
herein by reference to the section labeled "Election of Directors" which appears
in the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein by reference to
the section labeled "Executive Compensation" which appears in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 11 is incorporated herein by reference to
the sections labeled "Principal Shareholders and Management Shareholdings" which
appear in the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated by reference to the
section labeled "Certain Transactions" which appears in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See "Exhibit Index" immediately following the signature
page of this Form 10-KSB.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last fiscal
quarter of the Registrant's 1996 fiscal year.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CODA MUSIC TECHNOLOGY, INC.
Dated: March 21, 1997 By: s/ Ronald B. Raup
Ronald B. Raup, President
In accordance with the Exchange Act, this Report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints JOHN W.
PAULSON and RONALD B. RAUP as true and lawful attorneys-in-fact and agents, each
acting alone, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any or all
amendments to this Annual Report on Form 10-KSB and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
Signature and Title Date
March 21, 1997
s/ John W. Paulson
John W. Paulson, Chairman of the Board and Chief
Executive Officer (principal executive officer)
March 21, 1997
s/ Ronald B. Raup
Ronald B. Raup, President, Chief Operating Officer and
Director
March 21, 1997
s/ Joan K. Berg
Joan K. Berg, Chief Financial Officer (principal
financial and accounting officer)
March 21, 1997
s/ David A. Henderson
David A. Henderson, Director
March 21, 1997
s/ Gordon F. Stofer
Gordon F. Stofer, Director
March 21, 1997
s/ Larry A. Pape
Larry A. Pape, Director
March 21, 1997
s/ Karl T. Bruhn
Karl T. Bruhn, Director
<PAGE>
CODA MUSIC TECHNOLOGY, INC.
EXHIBIT INDEX FOR
FORM 10-KSB FOR 1995 FISCAL YEAR
Exhibit
Number Description
3.1 Restated Articles of Incorporation--incorporated by reference to
Exhibit 3.1 to the Registrant's Form SB-2 Registration Statement,
Reg. No. 33-92212C
3.2 Bylaws--incorporated by reference to Exhibit 3.2 to the
Registrant's Form SB-2 Registration Statement, Reg. No. 33-
92212C
10.1 Lease dated October 23, 1992 between the Registrant and
Jorandcor, Inc.--incorporated by reference to Exhibit 10.1 to the
Registrant's Form SB-2 Registration Statement, Reg. No. 33-
92212C
10.2* 1992 Stock Option Plan--incorporated by reference to Exhibit
10.3 to the Registrant's Form SB-2 Registration Statement, Reg.
No. 33-92212C
10.3 Loan Agreement dated May 5, 1995 between the Registrant and
Riverside Bank and related waivers dated May 30, 1995 and June
6, 1995--incorporated by reference to Exhibit 10.4 to the
Registrant's Form SB-2 Registration Statement, Reg. No. 33-
92212C
10.4 Registration Rights Agreement dated May 26, 1994 between the
Registrant, John G. Kinnard and Company, Incorporated and
holders of Series B Convertible Preferred Stock--incorporated by
reference to Exhibit 10.6 to the Registrant's Form SB-2
Registration Statement, Reg. No. 33-92212C
10.5 License Agreement dated June 10, 1992 between the Registrant
and Carnegie Mellon University--incorporated by reference to
Exhibit 10.11 to the Registrant's Form SB-2 Registration
Statement, Reg. No. 33-92212C
10.6 License Agreement dated December 31, 1992 between the
Registrant and Wenger Corporation--incorporated by reference to
Exhibit 10.12 to the Registrant's Form SB-2 Registration
Statement, Reg. No. 33-92212C
10.7* Form of Nonqualified Stock Option Agreement for Options
Granted Outside the 1992 Stock Option Plan--incorporated by
reference to Exhibit 10.13 to the Registrant's Form SB-2
Registration Statement, Reg. No. 33-92212C
10.8 Letter Agreement between the Registrant and IVL Technologies
Ltd. dated June 15, 1992--incorporated by reference to Exhibit
10.14 to the Registrant's Form SB-2 Registration Statement, Reg.
No. 33-92212C
<PAGE>
10.9 OEM Standard Products Quotation Terms and Conditions
between the Registrant and E-mu Systems, Inc. dated September
10, 1992--incorporated by reference to Exhibit 10.15 to the
Registrant's Form SB-2 Registration Statement, Reg. No. 33-
92212C
10.10 Educational Software Distribution Agreement dated July 26, 1991
between the Registrant and The Douglas Stewart Company--
incorporated by reference to Exhibit 10.17 to the Registrant's
Form SB-2 Registration Statement, Reg. No. 33-92212C
10.11* Amendments to Employment and Stock Option Agreements
between the Registrant and Craig Evanich dated November 30,
1995--incorporated by reference to Exhibit 10.11 to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996.
10.12* Employment Agreement between Registrant and Ronald B. Raup
dated January 1, 1996--incorporated by reference to Exhibit 10.12 to
the Registrant's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996.
10.13 Amendment No. 3 to License Agreement between the Registrant
and Carnegie Mellon University dated August 28, 1996
11 Statement re computation of pro forma per share earnings
13 Portion of Annual Report to Shareholders for fiscal year ended
December 31, 1996 incorporated herein by reference
23 Consent of Arthur Andersen LLP, independent public accountants
24 Power of Attorney (included on the "Signatures" page of this
Form 10-KSB)
27 Financial Data Schedule
- ---------------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-KSB.
Exhibit 10.13
Amendment #3 (August 28, 1996) to
License Agreement between CMU and Coda Music Technology/Vivace
The License Agreement made on June 10, 1992 between Carnegie Mellon University
("CMU") and the LICENSEE Coda Music Technology Inc. ("Coda", formerly known as
Vivace, Inc., the name of which was legally changed to Coda Music Technology,
Inc. on March 17, 1994), having its current principal office at 6210 Bury Drive,
Eden Prairie, MN 55346-1718, as first amended by the letter agreement, dated
November 12, 1993, and further amended by Amendment #2 dated May 12, 1994, is
hereby further amended, (the June 10, 1992 Agreement as modified by the three
amendments is referred to as the "License Agreement") and the parties hereto do
hereby mutually covenant and agree as follows.
A. Intent and Purposes of this Amendment.
The general purposes and intent of this Amendment are :
1 To have the License adjusted to changes and developments in technology and
markets which have occurred since the conception of the original License
Agreement.
2 To encourage and facilitate cooperation between Coda and CMU toward (1) the
success of Coda and (2) the widest possible dissemination and use of the
CMU music technology subject to the License Agreement.
3 To simplify certain provisions of the License Agreement in order to avoid
complicated, time consuming and potentially costly issues and
disagreements, including adaptation of certain definitions and provisions
of the License Agreement; to accomplish these changes while maintaining the
original intent of the parties.
B. Royalties; License Maintenance and Exclusivity Requirements.
Paragraph 4.1 of the License Agreement is hereby amended to read as follows :
LICENSEE agrees to pay CMU Annual Royalties as follows :
* For calendar year 1996 -- $100,000 (one hundred thousand dollars)
* for 1997 -- $100,000 (one hundred thousand dollars);
* for 1998 -- $200,000 (two hundred thousand dollars);
* for each of the following years - 1999, 2000, 2001, 2002, 2003, 2004 -
$300,000 (three hundred thousand dollars) per year;
* for the period from 1/1/2005 through 5/24/2005 -
$150,000 (one hundred and fifty thousand dollars).
<PAGE>
Annual Royalties shall be due and payable on the following Due Dates, in the
following Payment Increments :
<TABLE>
<CAPTION>
March 31 June 30 Sept. 30 Dec. 31 (Annual Total)
-------- ------- -------- ------- -------------
<S> <C> <C> <C> <C> <C>
1996 0 0 $50,000 $50,000 $100,000
1997 $15,000 $15,000 $35,000 $35,000 $100,000
1998 $40,000 $40,000 $60,000 $60,000 $200,000
1999 through
2004 $60,000 $60,000 $90,000 $90,000 $300,000
May 31, 2005
2005 $75,000 $75,000 $150,000
</TABLE>
Payment of the above specified Annual Royalty amounts on the specified Due Dates
shall discharge the payment obligations of LICENSEE required to keep the
exclusive licenses in effect as provided in Section 2.1 of the License Agreement
(as amended by Amendment #2, Section III,) subject to the other provisions of
the License Agreement.
Paragraphs 4.2 and 4.3 of the License Agreement and any amendments thereto are
deleted.
Any payments due from LICENSEE to CMU for (1) CMU Sub-license Royalty Splits
(per Section 2.5 of the License Agreement), (2) Future Related CMU Technology
(Section 2.2 of the License Agreement), (3) any new license agreements between
CMU and LICENSEE, (4) Penalty Payments (see Section C below), and/or (5) any
reason other than Annual Royalties, shall be amounts due and payable by LICENSEE
to CMU in addition to the Annual Royalties specified herein.
<PAGE>
C. CMU MusicTutor Products and Features.
LICENSEE has presented to CMU its plans to introduce two Assessment Products
and/or Features ("Assessment Products") during 1997 calendar year, tentatively
defined as the Intonation Trainer and The Rhythm Trainer; LICENSEE reserves the
right to change these names in the event that research indicates that another
name would enhance marketability. LICENSEE has requested, and CMU hereby agrees,
that meeting of the following conditions will meet the Due Diligence marketing
and sales performance Requirements of Article III of the License Agreement with
regard to MusicTutor products ("Requirements") :
Starting during the third quarter of 1997, both Assessment Products have been
developed and introduced to the market, are included in LICENSEE's product
brochures and selling programs, and are promoted in LICENSEE's general
promotion programs, including LICENSEE's customer exhibits and presentations.
LICENSEE and CMU agree that, in the event that LICENSEE should not meet these
Requirements, LICENSEE will pay CMU an annual Penalty Payment of $10,000 for
1997 and/or for each year of the remaining Term of the License Agreement during
which such a deficiency exists; such Payments shall be due at the end of each
such year.
D. Reports
In addition to the reporting requirements of Article V (Reports and Records) of
the License Agreement, LICENSEE will report to CMU, quarterly and for each
calendar year -
(1) total number of Licensed Products sold
(2) number of each Coda / Vivace Assessment product sold - (a) as a
separate unit or module, and/or (b) as a built-in component or
function of other Vivace / Coda products.
Where classification is unclear, LICENSEE will consult with CMU as to proper
method of reporting.
<PAGE>
E. Termination.
Paragraph 13.2 of the License Agreement is hereby amended to read as follows :
Should LICENSEE fail to pay amounts due for payment to CMU within fourteen (14
days) after the date when due and payable hereunder, CMU shall have the right to
terminate this Agreement on thirty (30) days' written notice, unless LICENSEE
pays CMU within that thirty (30) day period all such amounts due. Upon the
expiration of the thirty (30) day period, if LICENSEE has not paid such amounts
due, the rights, privileges and License granted to LICENSEE shall thereupon
terminate, except as provided for in paragraph 13.6 of the License Agreement as
amended below.
Paragraph 13.5 of the License Agreement, is hereby amended to read as follows :
LICENSEE may initiate or cause the Termination of the License Agreement only as
of the end of a calendar year during the remaining Term of the license (with the
exception of the last period, ending 5/24/2005) ("Permitted Effective
Termination Dates"), with minimum required written Termination Notice to CMU to
be in accordance with the following schedule :
Latest date when Termination Notice must Permitted Effecitve Dates for
be received by CMU, as related to Termination initiated or
Permitted Effective Termination Dates caused by LICENSEE
12/20/1996 12/31/1997
12/20/1997 12/31/1998
12/20/1998 12/31/1999
12/20/1999 12/31/2000
6/30/2000 12/31/2001
6/30/2001 12/31/2002
6/30/2002 12/31/2003
11/24/2003 5/24/2005
<PAGE>
Paragraph 13.6 of the License Agreement is hereby amended to read as follows :
Upon Termination of this Agreement for any reason, nothing herein shall be
construed to release either party from any obligation that has matured prior to
the Effective Date of the Termination. LICENSEE and any sub-licensee thereof
may, however, after the Effective Date of such Termination, sell all Licensed
Products and complete the manufacture and sale of all Licensed Products which
were in LICENSEE's or sub-licensee's physical inventory or were in the process
of manufacture at the time of such Termination, provided that LICENSEE shall (1)
report to CMU a complete listing of any such products with within 30 days after
such Termination, (2) pay to CMU any Annual Royalties specified in this
Amendment for any calendar year during which such sales occurred until all such
products have been sold, (3) pay to CMU any remaining CMU Sub-license Royalty
Split amounts as provided for in Section 2.5 of the License Agreement, and (4)
submit to CMU the reports required under the License Agreement until all such
sales have been completed.
F. Notices (General)
Article XIV is amended as follows : The designated name and address for CMU
shall be
Benno A. Bernt, Director of Technology Transfer
Carnegie Mellon University, Warner Hall 407
5000 Forbes Avenue,
Pittsburgh, PA 15213-3890
Fax 412-268-7395
G. Other Provisions
Except as amended hereby, the License Agreement shall continue in full force and
effect.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement, with the intention
of being legally bound, as of August 28, 1996.
Accepted and agreed to :
For Carnegie Mellon University For Coda Music Technology, Inc.
/s/ Benno A. Bernt /s/ Ron Raup
Benno A. Bernt, Ron Raup,
Director of Technology Transfer President
9/22/96 9/9/96
Date Date
/s/ Susan Burkett
Susan Burkett,
Associate Provost
9/23/96
Date
Exhibit 11
CODA MUSIC TECHNOLOGY, INC.
COMPUTATION OF EARNINGS PER SHARE
For the Year Ended December 31
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
<S> <C> <C>
NET LOSS $ (1,771,046) $ (1,650,421)
================= =================
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Common Shares Outstanding(1) 4,300,411 3,681,872
Common Stock equivalents calculated pursuant to
Securities and Exchange Commission Staff
Bulletin No. 83(2) 86,095
----------------- -----------------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 4,300,411 3,767,967
================= =================
NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE ($0.41) ($0.44)
================= =================
- ---------------------------------------------
</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.
EXHIBIT 13
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. On December 31, 1992, the Company acquired
Coda Company, a partnership with an established music notation software business
and a reputation for producing quality music technology products. Coda Company
also had established distribution relationships and an existing infrastructure
with product development, sales, marketing and administrative capabilities.
Following the acquisition, the primary business of the Company consisted of
enhancing, marketing and selling Finale products while developing Vivace
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 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
the spring of 1996, the Company released new configurations of the Vivace
product at lower suggested retail prices together with upgraded features which
now include an application for vocalists. With a long-term objective of
penetrating the amateur music making market, the Company intends to continue
adapting 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 $8,455,977 as of December 31, 1996. In November 1996, the
Company reduced its headcount by 17 positions to align fixed operating expenses
with current revenues.
Results of operations
For the year ended December 31, 1996 compared to the year ended December 31,
1995-
Net Revenues. Revenues for 1996 were $565,900 higher than revenues for
1995. This total increase reflects a 99% increase in revenues from the Vivace
Intelligent Accompaniment product, offset by a 10% decrease in revenues from the
Finale music notation product.
Vivace product revenues in 1996 included the sale of approximately 2,000
application systems (modular systems, soundcard products, or software
applications) compared to 700 application sales in 1995. The unit increase had a
lower percentage impact on revenue due to price reductions. In addition,
approximately 26,000 repertoire cartridges were sold in 1996 compared to 4,500
repertoire cartridges sold in 1995.
<PAGE>
The decrease in music notation product sales resulted from the delay in
releasing the Finale 3.7 upgrade. This delay impacted sales to the academic
market and pushed sales of upgrades into 1997.
Gross profit. The 1996 gross profit percentage of 66% compared unfavorably to
the 1995 gross profit percentage of 76%. The decrease in gross profits from
$3,737,053 in 1995 to $3,626,593 in 1996 is attributable to the decrease in
sales of the higher margin music notation product, a reduction in pricing for
the Vivace application and the impact of introductory promotional pricing for
the Vivace product.
Sales and marketing expenses. Sales and marketing expenses of $2,652,620 in 1996
increased $270,753 or 11% compared to 1995. This increase is due to the addition
of personnel and travel costs associated with expanding distribution of the
Vivace product. The Company had approximately 100 dealers for its Vivace product
as of December 31, 1996, compared to 40 dealers as of December 31, 1995.
Product development expenses. The Company expensed product development costs of
$1,306,570 in 1996 and capitalized costs incurred in repertoire development of
$476,921. This compares to a total of $1,382,051 incurred for repertoire and
product development in 1995. The increased total investment in product
development is due to the Company's decision to accelerate the development of
lower cost technologies for the Vivace application and to broaden the amount of
repertoire available.
General and administrative expenses. General and administrative expenses of
$1,549,281 in 1996 were $129,365 less than the amount incurred in 1995. This
decrease is primarily attributable to lower compensation costs.
Interest income, net. The Company had net interest income of $110,832 in 1996
compared to $55,090 in 1995. The increased income results from the availability
of proceeds from the Company's initial public offering for a full year in 1996.
The offering proceeds were received in July, 1995, so the company only had
interest earnings for a portion of the year in 1995.
Net loss. The net loss of $1,771,046 for 1996 exceeds the loss of $1,650,421
incurred in 1995. This increase in the loss is attributable to the changes in
revenues and costs described above.
<PAGE>
Income Taxes
In accordance with Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"), a change in ownership of greater than 50% of the Company within a
three-year period results in an annual limitation on the Company's ability to
utilize its net operating loss ("NOL") carryforward which accrued during the tax
periods prior to the change in ownership. As of December 31, 1996, the Company
had an NOL carryforward of approximately $4,800,000 which begins to expire in
2005. The amount of the Company's taxable income that may be offset with
pre-ownership change net operating loss carryforwards is limited annually to
approximately $1,000,000.
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. The 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 December 31, 1996, there were no borrowings under the line of credit and
the Company was in compliance with all terms of the agreement, as amended.
Net cash used in operating activities totaled $1,925,381 in 1996 and $1,516,423
in 1995. In addition, the Company made capital expenditures for furniture,
equipment and fixtures of $344,477 in 1996 and $189,601 in 1995.
The Company anticipates that capital expenditures for 1997 will approximate
$150,000. Management believes existing cash and proceeds from line of credit
borrowings, together with funds generated from the sale of products will be
sufficient to fund its capital expenditure, product development and working
capital requirements though 1997. However, additional capital may be sought
through a new line of credit with a bank, asset based lending or the sale of
equity. No assurance can be given that such capital will be available or
available on terms favorable to the Company. The sale of equity interests would
dilute the ownership of current shareholders. If additional equity funds are
obtained, the Company will accelerate the development of repertoire and expand
marketing efforts to reach the student and consumer markets for its products.
<PAGE>
Future Results
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, 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 I of the Company's Form 10-KSB
for the year ended December 31, 1996.
Common Stock Price Ranges
The Company's Common Stock trades on The Nasdaq SmallCap Market tier of The
Nasdaq Stock Market under the symbol: COMT. The following table sets forth the
quarterly high and low trade prices from June 29, 1995 (the date of the
Company's initial public offering) to December 31, 1996:
<TABLE>
<CAPTION>
1995 1996
---------------------------------------------- -----------------------------------------------
Quarter High Low High Low
------- ----
<S> <C> <C> <C> <C>
First $5.25 $3.00
Second $6.00 $6.00 5.50 4.00
Third 6.75 6.00 5.50 3.50
Fourth 6.88 4.38 3.94 1.50
</TABLE>
As of December 31, 1996, there were approximately 170 shareholders of record of
the Company's Common Stock. In addition, the Company estimates that an
additional 1,450 shareholders own stock held for their accounts at brokerage
firms and financial institutions. The Company has never paid cash dividends on
any of its securities. The Company currently intends to retain any earnings for
use in its operations and does not anticipate paying cash dividends in the
foreseeable future.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Coda Music Technology, Inc.:
We have audited the accompanying balance sheets of Coda Music Technology, Inc.
(a Minnesota corporation) as of December 31, 1996 and 1995, and the related
statements of operations, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial
position of Coda Music Technology, Inc. as of December 31, 1996 and 1995, and
the results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 14, 1997
<PAGE>
<TABLE>
<CAPTION>
CODA MUSIC TECHNOLOGY, INC.
Balance Sheets
As of December 31
1996 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,174,293 $ 2,499,476
Short-term investments - 1,460,798
Accounts receivable, less allowance of $25,000 and $20,000 596,946 405,528
Inventories 983,375 563,741
Prepaid royalties 118,470 91,117
Other current assets 53,102 124,676
Total current assets 2,926,186 5,145,336
----------- ----------
EQUIPMENT, FURNITURE AND FIXTURES, less accumulated
depreciation of $671,791 and $669,918 494,811 466,592
REPERTOIRE DEVELOPMENT COSTS, net of accumulated
amortization of $48,298 476,921 -
OTHER ASSETS 183,916 93,526
----------- ----------
$ 4,081,834 $ 5,705,454
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 366,271 $ 343,392
Accrued expenses 516,146 582,398
Deferred revenue 201,927 122,692
----------- ----------
Total current liabilities 1,084,344 1,048,482
----------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY (Note 4):
Common Stock, without par value, 15,000,000 shares
authorized; 4,327,035 and 4,261,288 issued and outstanding 11,453,467 11,341,903
Accumulated deficit (8,455,977) (6,684,931)
----------- ----------
Total shareholders' equity 2,997,490 4,656,972
----------- ----------
$ 4,081,834 $ 5,705,454
=========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
CODA MUSIC TECHNOLOGY, INC.
Statements of Operations
For the Years Ended December 31
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
NET REVENUES $ 5,500,158 $ 4,934,258
COST OF SALES 1,873,565 1,197,205
--------- ---------
GROSS PROFIT 3,626,593 3,737,053
--------- ---------
OPERATING EXPENSES:
Sales and marketing 2,652,620 2,381,867
Product development 1,306,570 1,382,051
General and administrative 1,549,281 1,678,646
--------- ---------
Total operating expenses 5,508,471 5,442,564
--------- ---------
LOSS FROM OPERATIONS (1,881,878) (1,705,511)
INTEREST INCOME, net 110,832 55,090
--------- ---------
Net loss $(1,771,046) $(1,650,421)
========= =========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (Note 2) 4,300,411 3,767,967
========= =========
NET LOSS PER COMMON AND COMMON EQUIVALENT
SHARE (Note 2) $ (.41) $ (.44)
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CODA MUSIC TECHNOLOGY, INC.
Statements of Shareholders' Equity
For the Years Ended December 31
<TABLE>
<CAPTION>
Convertible Preferred Stock Common Stock Accumulated
Shares Amount Shares Amount Deficit Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 4,916,500 $5,008,993 1,320,052 $ 425,185 $(5,034,510) $ 399,668
Conversion of Convertible Preferred Stock
to Common Stock (Note 4) (4,916,500) (5,008,993) 4,916,500 5,008,993 - -
Effects of 1-for-2 reverse stock split (Note 4) - - (3,118,264) - - -
Sale of Common Stock, net of offering costs - - 1,135,000 5,891,725 - 5,891,725
Exercise of stock warrants - - 8,000 16,000 - 16,000
Net loss - - - - (1,650,421) (1,650,421)
--------- --------- --------- --------- --------- ---------
BALANCE, December 31, 1995 - - 4,261,288 11,341,903 (6,684,931) 4,656,972
Stock options exercised - - 65,747 111,564 - 111,564
Net loss - - - - (1,771,046) (1,771,046)
--------- --------- --------- ---------- --------- ---------
BALANCE, December 31, 1996 - $ - 4,327,035 $11,453,467 $(8,455,977) $2,997,490
========= ========= ========= ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CODA MUSIC TECHNOLOGY, INC.
Statements of Cash Flows
For the Years Ended December 31
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,771,046) $(1,650,421)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 372,796 274,611
Change in current assets and liabilities:
Accounts receivable (191,418) 49,924
Inventories (419,634) (27,633)
Prepaid royalties (27,353) (9,492)
Other current assets 71,574 (39,979)
Accounts payable 26,717 (285,490)
Accrued expenses (66,252) 149,365
Deferred revenue 79,235 22,692
--------- ---------
Net cash used in operating activities (1,925,381) (1,516,423)
--------- ---------
INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures (344,477) (189,601)
Capitalized repertoire development cost (525,219) -
Change in other assets (98,630) (93,526)
--------- ---------
Net cash used in investing activities (968,326) (283,127)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from initial public offering, net of offering costs - 5,891,725
Proceeds from subordinated debt - 700,000
Repayment of subordinated debt - (1,200,000)
Sale (purchase) of short-term investments 1,460,798 (1,460,798)
Proceeds from stock options and warrants exercised 111,564 16,000
Repayment of short-term borrowings - (300,000)
Repayment of long-term debt (3,838) (32,628)
--------- ---------
Net cash provided by financing activities 1,568,524 3,614,299
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,325,183) 1,814,749
CASH AND CASH EQUIVALENTS, beginning of year 2,499,476 684,727
--------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 1,174,293 $ 2,499,476
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CODA MUSIC TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1996 and 1995
1. Organization and Nature of Business:
Coda Music Technology, Inc. (the Company) develops and markets proprietary music
technology products that enhance music learning and composition, increase
productivity and make practicing and performing music fun. The Company's
innovative products provide easy-to-use, efficient alternatives to traditional
practice, education and composition techniques. The Company's products are
marketed primarily in North America, Japan and Europe. International revenues
represented 20% and 21% of 1996 and 1995 revenues, respectively.
The Company was organized in November 1990 under the name Vivace, Inc. On
December 31, 1992, the Company acquired Coda Company and subsequently changed
Vivace, Inc.'s name to Coda Music Technology, Inc. The acquisition was accounted
for using the purchase method of accounting, and the acquired software
technology was amortized over the two-year period ended December 31, 1994.
The Company has incurred losses since inception and at December 31, 1996 had an
accumulated deficit of $8,455,977, which includes amortization expense of
software acquired of $2,309,036. Management believes cash equivalents, its line
of credit and funds generated from the sale of products will be sufficient to
meet operating requirements in 1997.
2. Summary of Significant Accounting Policies:
Cash Equivalents and Short-Term Investments
Cash equivalents consist of money market instruments with original maturities of
90 days or less. Short-term investments consist of U. S. Treasury securities
with original maturities of 12 months or less which are not cash equivalents.
Cash equivalents and short-term investments are recorded at cost, which
approximates fair value. All short-term investments are considered to be
available for sale.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market and
consist of finished products and components.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are stated at cost and are depreciated using
the straight-line method over their estimated useful lives of two to five years.
Repairs and maintenance are charged to expense as incurred.
Repertoire Development Costs
Effective January 1, 1996, the Company began to capitalize the costs incurred in
the development of repertoire software since sales history related to such
software had been established. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer
<PAGE>
Software to Be Sold, Leased, or Otherwise Marketed," the Company has capitalized
$525,219 of costs incurred in the development of repertoire. These costs are
amortized using the straight-line method over the economic lives of the assets,
not to exceed five years, beginning when the repertoire products are released.
Other product development costs associated with development of software
applications are charged to expense since the costs incurred between the point
the technological feasibility of these products is established and the time when
such products are available for general release to customers has not
historically been significant.
Patents and Trademarks
The Company capitalizes the costs associated with obtaining patents and
trademarks. These costs are being amortized over the estimated useful lives of
the assets, not to exceed 20 years.
Revenue Recognition
Revenues and related cost of sales are recorded at the time of shipment. In the
event that software upgrade rights are granted to customers at no charge,
associated revenues are deferred until shipment of the upgrade. Costs related to
insignificant obligations, which include telephone support, are accrued.
Income Taxes
The Company accounts for income taxes using the liability method, whereby
deferred taxes are based on the estimated future tax effects of differences
between the financial statement and tax bases of assets and liabilities, given
the provisions of enacted tax laws.
Net Loss Per Common and Common Equivalent Share
Net loss per common and common equivalent share was computed by dividing net
loss by the weighted average number of shares of Common Stock, and common stock
equivalents have been excluded from the calculation as their inclusion would be
antidilutive. For the computation of common and common equivalent shares for
1995, the Convertible Preferred Stock issued during the 12-month period prior to
the initial public offering of Common Stock, at prices below the offering price,
is included in the calculation as if it was outstanding for all periods
presented using the treasury stock method.
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.
Ultimate results could differ from those estimates.
3. Debt:
Line of Credit
The Company has a $500,000 line-of-credit agreement that expires on February 14,
1998. There were no borrowings outstanding as of December 31, 1996 and 1995.
Borrowings under the agreement are limited to 75% of eligible accounts
receivable plus 25% of eligible inventories, as defined, bear interest at the
<PAGE>
bank's reference rate (8.25% as of December 31, 1996) plus 1% and are
collateralized by all of the accounts receivable, inventories and general
intangibles of the Company. The loan agreement supporting the line of credit
requires the Company to maintain certain levels of tangible net worth. While
this 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. At
December 31, 1996, the Company was in compliance with all covenants of this
agreement, as amended.
4. Shareholders' Equity:
Authorized Shares
The Company's Restated Articles of Incorporation authorized the issuance of
30,000,000 shares of no par value capital stock. Of such authorized shares,
15,000,000 have been designated as common shares and 15,000,000 are undesignated
as of December 31, 1996.
Initial Public Offering of Common Stock and Recapitalization
During June and July 1995, the Company completed an initial public offering of
its Common Stock through the issuance of 1,135,000 shares of Common Stock for
net proceeds of $5,891,725. In conjunction with the initial public offering, the
Company's Convertible Preferred Stock outstanding was converted into an equal
number of shares of Common Stock on a share-for-share basis. In addition, the
Company effected a 1-for-2 reverse stock split. All per share information has
been restated to reflect the reverse stock split.
Stock Options
The Company has a stock option plan pursuant to which options for up to 775,000
shares of its Common Stock may be issued to key employees, directors and
officers of the Company. The options vest over periods of up to five years and
are granted at prices which must be at least equal to the fair market value of
the Common Stock at the date of grant. The Company has also granted nonqualified
stock options to key employees, directors and investors of the Company. The
options vest over periods of up to four years and have been granted at prices
which were equal to the fair market value of the Common Stock at the date of
grant.
<PAGE>
The following summarizes stock issued under the Company's stock option plans.
Weighted
Average
Outstanding Price
Balance at December 31, 1994 533,598 $1.98
Granted 91,501 4.77
Canceled (136,520) 2.15
------- -----
Balance at December 31, 1995 488,579 2.44
Granted 266,000 3.17
Exercised (65,747) 1.70
Canceled (116,296) 2.08
------- -----
Balance at December 31, 1996 572,536 $2.94
======= =====
Exercisable at December 31, 1996 308,653 $2.57
======= =====
The Company accounts for stock options under Accounting Principles Board Opinion
No. 25, under which no compensation cost has been recognized. Had compensation
cost for these options been determined consistent with SFAS No. 123, "Accounting
for Stock-Based Compensation," the net loss and loss per share would have been
increased to the following pro forma amounts:
1996 1995
Net loss As reported $(1,771,046) $(1,650,421)
Pro forma (2,195,037) (1,826,745)
Net loss per share As reported (.41) (.44)
Pro forma (.51) (.48)
All options outstanding at December 31, 1996 were granted with exercise prices
equal to the fair market value of the Common Stock at the date of grant. The
Company's Common Stock price at December 31, 1996 was $1.95, which is below the
exercise price of all options issued during 1996 and 1995. However, for purposes
of calculating the above required disclosure, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants in 1996
and 1995, respectively: risk-free interest rates of 5.21% and 6.51%, no expected
dividend yield, expected lives of seven years and expected volatility of 53% and
22%. The weighted average fair value of options granted during 1996 and 1995 was
$1.92 and $1.99, respectively. Options issued during 1995 and 1996, which remain
outstanding at December 31, 1996, have an exercise price between $2.40 and
$6.00, a weighted average exercise price of $3.66 and a weighted average
remaining contractual life of 5.9 years.
Warrants
In connection with certain financing transactions, the Company has issued
warrants to purchase 381,584 shares of Common Stock at prices between $2.00 and
$7.20 per share, exercisable over periods of five to seven years from the date
of grant. Warrants outstanding at December 31, 1996 totaled 373,334.
<PAGE>
5. Income Taxes:
For income tax reporting purposes, net operating loss carryforwards approximated
$4,821,000 as of December 31, 1996 and begin to expire in 2005. A valuation
allowance equal to the full amount of the related deferred tax asset has been
established due to the uncertainty of its realization. Certain restrictions
under the Tax Reform Act of 1986, caused by the change in ownership resulting
from sales of Common Stock, limit annual utilization of the net operating loss
carryforwards. The amount of the Company's taxable income that may be offset
with preownership change net operating loss carryforwards is limited annually to
approximately $1,000,000.
6. Commitments and Contingencies:
Operating Leases
The Company leases office and warehouse space and certain equipment under
operating leases through 1998. The future minimum lease payments as of December
31, 1996 under these leases are $102,000 in 1997 and $6,000 in 1998.
Licensing and Exclusivity Agreements
The Company has entered into license/exclusivity agreements which require
payments based on sales of its products or, in some cases, annual minimum
payments. Minimum royalties pursuant to an agreement with a significant licensor
are as follows:
1997 $ 100,000
1998 200,000
1999 300,000
2000 300,000
2001 and thereafter 1,350,000
Royalty expense, including amounts related to the agreement referred to above,
totaled $217,018 and $123,734 in the years ended December 31, 1996 and 1995,
respectively, and are reflected as a component of cost of sales in the
accompanying statements of operations.
Employment Agreements
Effective January 1, 1996, the Company entered into an employment agreement with
an officer which requires the Company to pay the officer one year's base salary
of $150,000 plus medical insurance premiums, in the event of termination.
401(k) Savings Plan
The Company has established a 401(k) savings plan for the benefit of qualified
employees. Under the plan, qualified employees may elect to defer up to 15% of
their compensation, subject to a maximum limit determined by the Internal
Revenue Service. The Company, at the discretion of the board of directors, may
elect to make additional contributions. The Company has made no contributions to
the plan as of December 31, 1996.
7. Related-Party Transactions:
Management Fee
The Company paid management fees totaling $24,000 during the years ended
December 31, 1996 and 1995 to an affiliate of a director for management services
provided to the Company.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report incorporated by reference in this Form 10-KSB, into the Company's
previously filed Registration Statement File No. 33-96624.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 920707
<NAME> CODA MUSIC TECHNOLOGY, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,174,293
<SECURITIES> 0
<RECEIVABLES> 596,946
<ALLOWANCES> 0
<INVENTORY> 983,375
<CURRENT-ASSETS> 2,926,186
<PP&E> 494,811
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,081,834
<CURRENT-LIABILITIES> 1,084,344
<BONDS> 0
0
0
<COMMON> 11,453,467
<OTHER-SE> (8,455,977)
<TOTAL-LIABILITY-AND-EQUITY> 4,081,834
<SALES> 5,500,158
<TOTAL-REVENUES> 5,500,158
<CGS> 1,873,565
<TOTAL-COSTS> 1,873,565
<OTHER-EXPENSES> 5,508,471
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,771,046)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,771,046)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,711,046)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
