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 March 31, 1998
[ ] 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 May 12, 1998, 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
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 959,758 $1,233,454
Short-term investments 979,000 979,000
Accounts receivable 334,791 477,960
Inventories 360,528 616,696
Other current assets 94,499 93,200
---------- -----------
Total current assets 2,728,576 3,400,310
EQUIPMENT, FURNITURE AND FIXTURES 325,967 370,105
REPERTOIRE DEVELOPMENT COSTS 629,463 591,445
PREPAID ROYALTIES 185,567 181,105
OTHER ASSETS 86,954 88,279
---------- -----------
$3,956,527 $4,631,244
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 210,642 $ 294,398
Accrued expenses 706,150 389,885
Deferred revenue 204,103 202,603
---------- -----------
Total current liabilities 1,120,895 886,886
SHAREHOLDERS' EQUITY 2,835,632 3,744,358
---------- -----------
$3,956,527 $4,631,244
========== ===========
See accompanying notes to financial statements
</TABLE>
<PAGE>
Coda Music Technology, Inc.
Condensed Statements of Operations
For the Quarter Ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
NET REVENUES $1,560,484 $1,617,473
COST OF SALES 377,834 458,249
----------- -----------
GROSS PROFIT 1,182,650 1,159,224
----------- -----------
OPERATING EXPENSES:
Sales and marketing 541,638 541,907
Product development 432,479 333,884
General and administrative 464,791 441,938
Product repositioning (Note 4) 680,000 -
----------- -----------
Total operating expenses 2,118,908 1,317,729
----------- -----------
LOSS FROM OPERATIONS (936,258) (158,505)
INTEREST INCOME, net 27,532 11,529
----------- -----------
Net loss $ (908,726) $ (146,976)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,199,732 4,327,035
=========== ===========
BASID AND DILUTED NET LOSS PER SHARE $ (0.15) $ (0.03)
=========== ===========
See accompanying notes to financial statements
</TABLE>
<PAGE>
Coda Music Technology, Inc.
Condensed Statements of Cash Flows
For the Quarter Ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (908,726) $ (146,976)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 134,044 115,268
Change in current assets and liabilities:
Accounts receivable 143,169 157,450
Inventories 256,168 169,730
Prepaid royalties (4,462) (515)
Other current assets (1,299) 8,720
Accounts payable (83,756) (138,235)
Accrued expenses 316,265 (207,895)
Deferred revenue 1,500 (19,642)
----------- -----------
Net cash used in operating activities (147,097) (62,095)
----------- -----------
INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures (5,356) (25,077)
Capitalized repertoire development cost (118,072) (76,435)
Capitalized patents and trademarks (3,171) (7,337)
----------- -----------
Net cash used in investing activities (126,599) (108,849)
----------- -----------
NET DECREASE IN CASH AND SHORT-TERM INVESMENTS (273,696) (170,944)
CASH AND SHORT-TERM INVESTMENTS, beginning of period 2,212,454 1,174,293
----------- -----------
CASH AND SHORT-TERM INVESTMENTS, end of period $1,938,758 $1,003,349
=========== ===========
See accompanying notes to 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 three months ended
March 31, 1998 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 Net Loss Per Common Share. Basic and diluted net loss per common
share was computed by dividing the net loss by the weighted average
number of shares of Common Stock. In accordance with the requirements
of Financial Accounting Standard No. 128, which the Company adopted
as of December 31, 1997, common stock equivalents have been excluded
from the calculation as their inclusion would be anitdilutive.
Note 3 New Accounting Pronouncement. The Company will adopt in the fiscal
year ending December 31, 1998, Statement of Financial Accounting
Standards No. 131 "Disclosure About Segments of an Enterprise and
Related Information" (SFAS 131). Management is in the process of
determining the impact of SFAS No. 131 on the Company's financial
position, results of operations and footnote disclosures.
Note 4 Product Repositioning. The Company has developed SmartMusic
Studio(TM), a new and renamed version of the Vivace Practice
Studio(TM) product. In connection with this introduction, the Company
will no longer need to utilize some of the component parts. The
Company has estimated the impact of returns, exchanges and inventory
obsolescence resulting from this product repositioning and classified
the net charge as an operating expense.
<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.
The Company acquired the Finale(R) music notation product on December
31, 1992 and enhanced and marketed this product while developing Vivace(R)
accompaniment products. In June 1994, the first test markets of the Vivace
product were launched. Technological advancements enabled the Company to
dramatically reduce costs and related price points in 1996 and again in the
fourth quarter of 1997 when the Company began shipping the Vivace Practice
Studio(TM). Ongoing advancements enabled the Company to develop a more cost
effective delivery mechanism for this technology and the product line has been
renamed SmartMusic(TM).
SmartMusic products will begin to ship in the second quarter of 1998, and
include the basic software application at a nominal sell price and the full
system sold under the name SmartMusic Studio(TM) which includes accessory items
at $99. These products will be marketed with a strategy to gain wide
distribution of the software which is expected to drive increased sales revenues
of the related song accompaniment products.
The Company has incurred losses from operations since inception and has an
accumulated deficit of $10,876,940 as of March 31, 1998.
Results of operations
For the period ended March 31, 1998 compared to the period ended March 31, 1997
Net Revenues. Revenues of $1,560,484 for the quarter ended March 31, 1998
were $56,989 or 4% lower than for the quarter ended March 31, 1997. Of this
decrease, approximately $20,000 is due to a decrease in Finale product revenues
and the remainder relates to a decrease in Vivace product revenues. The number
of Vivace applications sold during the first quarter of 1998 increased 231% to
1,381 units, while the number of accompaniment cartridges increased 50% to 7,921
units. These unit increases were offset by price decreases resulting in lower
revenue. These changes do not reflect the impact of the product repositioning to
SmartMusic Studio discussed below.
Due to the recent introduction of SmartMusic Studio, the Company anticipates
that second quarter 1998 revenues will be less than second quarter 1997
revenues.
Gross profit. The gross profit of $1,182,650 for the quarter ended March
31, 1998 represented a gross profit margin of 76%. For the first quarter ended
March 31, 1997, the gross profit margin was 72%. The increase is attributable to
higher Finale margins associated with reduction of component costs of the
product as well as a higher percentage of Finale revenue to total revenue in
1998 compared to 1997.
<PAGE>
Product Repositioning. The Company announced in April 1998 that it would
introduce SmartMusic Studio, a new and renamed version of the Vivace Practice
Studio product. Because of changes in the components required for this product,
the Company has established a reserve for excess and obsolete inventory. In
addition, the Company anticipates accepting returns from music retailers with
inventory in stock. The Company has estimated the total impact of returns and
excess and obsolete inventory and classified this cost in the line item titled
"Product Repositioning" in the accompanying statements of operations.
Sales and marketing expenses. For the quarter ended March 31, 1998, sales
and marketing expenses of $541,638 are approximately the same as for the first
quarter of 1997.
Product development expenses. Product development expenses of $432,479 for
the quarter ended March 31, 1998 were $98,595 higher than for the quarter ended
March 31, 1997. Approximately half of this increase relates to increases in
software developer compensation and the remaining difference relates to
increased amortization of capitalized repertoire development costs.
General and Administrative Expenses. General and administrative expenses
for the first quarter of 1998 were $464,791 compared to $441,938 for the first
quarter of 1997, primarily due to reduced incentive compensation accruals for
the first quarter of 1997.
Interest Income, net. The Company had net interest income of $27,532 for
the quarter ended March 31, 1998 compared to $11,529 for the quarter ended March
31, 1997 due to higher levels of cash and short-term investments in 1998
compared to 1997. The Company's financing is discussed further under the caption
"Liquidity and Capital Resources".
Net loss. The net loss of $908,726 or $.15 per basic and diluted share for
the quarter ended March 31, 1998 is unfavorable to the $146,976 or $.03 per
basic and diluted share loss in the quarter ended March 31, 1997. This increase
in the loss is attributable to the changes in revenues and costs described
above.
Liquidity and Capital Resources
In May 1997, the Company received net proceeds of $2,259,105 from the
private placement of 1,872,697 shares of its common stock. The proceeds were
invested in short-term securities.
The Company has a $500,000 line of credit with a bank which is available to
finance its working capital requirements. The borrowings under the line of
credit are limited to 75% of eligible accounts receivable plus 25% of eligible
inventories, as defined, 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. As of March 31, 1998 there were no borrowings under
the line of credit.
<PAGE>
Net cash used in operating activities totaled $147,097 for the quarter
ended March 31, 1998. In addition, the Company made capital expenditures for
furniture, equipment and fixtures of $5,356 and repertoire development costs of
$118,072 in the first quarter of 1998. The Company used cash for operating
activities of $62,095 and made capital expenditures for furniture, equipment and
fixtures of $25,077 and repertoire development costs of $76,435 during the three
months ended March 31, 1997.
The Company anticipates that capital expenditures for 1998 will approximate
$120,000. 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 through 1998.
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 sales and distribution issues, the potential need for
additional capital, the need for additional product and development work,
dependence on accompaniment sales and development, 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, 1997.
<PAGE>
PART 2. OTHER INFORMATION
Item 1. Litigation
The Company has been served with a complaint dated February 5,
1998 and filed in United States District Court for the District of Massachusetts
in which Twelve Tone Systems, Inc. seeks a declaratory judgment that certain
patents owned by and licensed to the Company are not infringed by Twelve Tone.
The patents relate to the Company's Intelligent Accompaniment(R) technology. The
Company believes that the patents are valid and intends to enforce its rights.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the Registrant's shareholders was held on
April 29, 1998.
(b) At the Annual Meeting a proposal to set the number of
directors at seven was adopted by a vote of 4,845,923 shares in
favor, with 48,857 shares against, 15,700 shares abstaining and 0
shares represented by broker nonvotes.
(c) Proxies for the Annual Meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934,
there was no solicitation in opposition to management's
nominees, and the following persons were elected directors of
the Registrant to serve until the next annual meeting of
shareholders and until their successors shall have been duly
elected and qualified:
Nominee Number of Votes For Number of Votes Withheld
John W. Paulson 4,846,263 64,217
Ronald B. Raup 4,846,533 63,947
David A. Henderson 4,760,289 150,191
Gordon R. Stofer 4,846,533 63,947
Larry A. Pape 4,846,533 63,947
Karl T. Bruhn 4,846,533 63,947
Benson K. Whitney 4,846,533 63,947
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: See Exhibit Index on page following Signature page.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the
registrant during the quarter ended March 31, 1998.
<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: May 12, 1998 CODA MUSIC TECHNOLOGY, INC.
By: /s/ Ronald B. Raup
Ronald B. Raup, President and
Chief Operating Officer
And: /s/ Joan K. Berg
Joan K. Berg, Chief Financial Officer
<PAGE>
EXHIBIT INDEX
FORM 10-QSB
For the Quarter Ended
March 31, 1997
Exhibit
Number Description
27 Financial Data Schedule (filed in electronic format only)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,938,758
<SECURITIES> 0
<RECEIVABLES> 334,791
<ALLOWANCES> 0
<INVENTORY> 360,528
<CURRENT-ASSETS> 2,728,576
<PP&E> 325,967
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,956,527
<CURRENT-LIABILITIES> 1,120,895
<BONDS> 0
0
0
<COMMON> 13,712,572
<OTHER-SE> (10,876,940)
<TOTAL-LIABILITY-AND-EQUITY> 3,956,527
<SALES> 1,560,484
<TOTAL-REVENUES> 1,560,484
<CGS> 377,834
<TOTAL-COSTS> 377,834
<OTHER-EXPENSES> 2,118,908
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (936,258)
<INCOME-TAX> 0
<INCOME-CONTINUING> (936,258)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (936,258)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
