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, 1997
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. [ ]
Issuer's revenues for its most recent fiscal year: $5,563,105
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of March 12, 1998 was approximately $9,783,177 based upon the
closing price of the Registrant's Common Stock on such date.
There were 6,199,732 shares of Common Stock outstanding as of March 12,1998.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1997 are incorporated into Part II and portions of the
Registrant's definitive Proxy Statement for its 1998 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 Company intends to continue to
adapt the technology for the orchestral and MIDI-equipped piano keyboard
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 accompaniment library. Coda has created over 4,100
classical, jazz and musical theatre accompaniments contained on approximately
500 cartridges for use with the Vivace product and plans to create additional
accompaniments covering a broad spectrum of musical genres, instruments and
skill levels. In 1997, the Company introduced 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
accompaniments 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. With the introduction of the CD-ROM format
for the Vivace application, the Company lowered the suggested retail price for
the technology to $199. At this lower price point, the Company intends to
broaden distribution to the dealer channel and expand distribution channels to
better reach the student, adult hobbyist and professional musician markets.
<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 technology is currently offered in a CD-ROM format, with
optional hardware accessories available to enable the technology to work on
slower computers. 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 its own proprietary
technology and additional patented features, producing a marketable product.
The Intelligent Accompaniment(R) 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 Accompaniments
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
accompaniments. The accompaniment 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 accompaniment
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 accompaniment cartridge retails for $24.95 and typically contains 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.
Coda has created over 4,100 individual classical and jazz
accompaniments contained on approximately 500 cartridge products for its Vivace
Intelligent Accompaniment product as well as accompaniments for the Belwin 21st
<PAGE>
Century Elementary Band Method. 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 accompaniments for Vivace products.
Further, the Company plans to expand its library of accompaniments 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 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. The agreement provides limited
restocking rights to Douglas Stewart. In 1997 and 1996, respectively, Douglas
Stewart returned $110,000 and $32,000 related to the introduction of upgraded
products. 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.
Product manuals are currently available in German, French, Italian,
Dutch, Japanese, Spanish and Swedish. 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 18% and 20% of 1997 and 1996 revenues, respectively.
<PAGE>
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 had selected the education 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. The dealer network currently approximates 110 dealers.
This network sells to a significant portion of the educational institutions in
the U.S. and Canada. In addition, the Company has distribution in Japan,
Australia, Germany and the United Kingdom.
In July 1997, the Company authorized catalog distribution through
selected catalog companies. In addition, the Company began distributing free
demonstration CDs of the Vivace product through the Company's website. The
Company anticipates expansion of these methods of distribution during 1998.
Finale Music Notation Software Products
Coda's Finale products are currently sold through 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. Effective
January 1, 1998, the Company has authorized Thinkware, a music software
distributor, to distribute its products to all of these markets, except selected
large accounts and college bookstores. In 1997, sales of products through the
channels of distribution now being served by Thinkware constituted approximately
25% of Finale product sales. The Company believes that the unit increase
resulting from this distribution will offset the price discounts offered.
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.
Coda currently sells its Finale products in over 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.
<PAGE>
Product Development
During 1997 and 1996, the Company incurred $1,555,660 and $1,306,570 in
product development expenses. 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 been able to provide them in a CD-ROM format. 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 Accompaniments
The Company plans to expand its support of Vivace products by adding
more titles to the existing accompaniment catalog, creating additional
accompaniments and generally broadening the accompaniment library to include
other musical genres (such as popular, rock and country). Vivace accompaniment
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 accompaniment 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 accompaniments.
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 for 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 $144.95. In 1997, the Company
added plug-in capabilities that permit the user to add specialized notation
features. The Company expects to allow independent third parties to develop
additional plug-in capabilities in the future to augment the features and
functions developed internally.
In addition, the Company will continue to explore 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.
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.
<PAGE>
Competition
The Company knows of no other musical accompaniment product for band
instruments and vocalists that responds to the musician. However, a competitor
has recently announced an interactive product for piano and keyboards; this
product is not yet available through general distribution and has not been
evaluated by the Company. 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 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.
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.
<PAGE>
Trademarks
The Company owns the registered trademarks in the United States for
Coda(R), Finale(R), Finale Allegro(R), The Art of Music Notation(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 name Practice Studio(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, 1997, 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:
Distribution and Sales Level Issues
The Company's initial Vivace product was introduced in 1994 and new
Vivace products were introduced in 1997 but the Company has achieved only
limited sales of Vivace products. Initial distribution was aimed primarily at
schools and made through a network of band and orchestral instrument dealers.
More recently, the Company has also made sales through catalog companies and
direct sales through the Company's website. The Company anticipates expanding
and utilizing new methods of distribution during 1998. No assurance can be given
that sales of Vivace products will achieve significantly higher levels.
Effective January 1, 1998 the company authorized a distributor to
service Finale product retailers and dealers (other than selected large accounts
and college bookstore distributors). In 1997, approximately 25% of total Finale
sales came from markets that may now be served by this distributor. The Company
believes that the unit sales will increase and offset the price discount offered
to this distributor; however, no assurance can be given that such increases will
be achieved.
<PAGE>
Additional Capital
The Company believes that 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. If the Company does determine in the future
to seek additional capital through a new line of credit, 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.
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 Accompaniment Sales and Development
The Company's future success is highly dependent on its ability to
obtain significant ongoing accompaniment sales. The Company has entered into
license agreements with leading music publishers, which provide the Company with
access to musical titles for accompaniment 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, 1997, the Company incurred a net loss
of $1,512,237 and since inception has an accumulated deficit of $9,968,214.
Dependence on Key Personnel
The Company is highly dependent on a limited number of key management
and technical personnel, including software programmers that are in limited
supply in the current labor market. 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.
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
The Company knows of no other musical accompaniment product for band
instruments and vocalists that responds to the musician. However, a competitor
has recently announced an interactive product for piano and keyboards; this
product is not yet available through general distribution and has not been
evaluated by the Company. 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 $85,000. This lease expires in November 2000.
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 1997 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 1997
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 1997 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 50 Chief Executive Officer and Chairman of the
Board of Directors
Ronald B. Raup 47 President, Chief Operating Officer and
Director
Joan K. Berg 46 Chief Financial Officer and Secretary
Mark E. Dunn 49 Senior Vice President of Product Development
Julia D. Fraser 40 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 also serves on the Board of Directors of the National
Association of Music Merchants ("NAMM").
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 and compliance
with Section 16(a) of the Exchange Act is incorporated herein by reference to
the sections labeled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" which appear in the Registrant's definitive
Proxy Statement for its 1998 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 1998 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 1998 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 1998 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 1997 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 23, 1998 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
s/ John W. Paulson March 23, 1998
- --------------------------------------
John W. Paulson, Chairman of the Board
and Chief Executive Officer
(principal executive officer)
s/ Ronald B. Raup March 23, 1998
- ---------------------------------------
Ronald B. Raup, President, Chief
Operating Officer and Director
s/ Joan K. Berg March 23, 1998
- ---------------------------------------
Joan K. Berg, Chief Financial Officer
(principal financial and accounting
officer)
s/ David A. Henderson March 23, 1998
- ---------------------------------------
David A. Henderson, Director
s/ Gordon F. Stofer March 23, 1998
- ---------------------------------------
Gordon F. Stofer, Director
s/ Larry A. Pape March 23, 1998
- ---------------------------------------
Larry A. Pape, Director
s/ Karl T. Bruhn March 23, 1998
- ---------------------------------------
Karl T. Bruhn, Director
s/ Benson K. Whitney March 23, 1998
- ---------------------------------------
Benson K. Whitney, Director
<PAGE>
CODA MUSIC TECHNOLOGY, INC.
EXHIBIT INDEX FOR
FORM 10-KSB FOR 1997 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
10.12* Employment Agreement between Registrant and Ronald B. Raup dated
January 1, 1996--incorporated by reference to Exhibit 10.12 to the
Registrant's Form 10-KSB for the year ended December 31, 1995
10.13 Amendment No. 3 to License Agreement between the Registrant and Carnegie
Mellon University dated August 28, 1996--incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-QSB for the quarter ended
September 30, 1996
10.14 Second Amendment to Lease by and between Jorandcor, Inc. and the
Registrant
13 Portions of Annual Report to Shareholders for fiscal year ended
December 31, 1997 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 10.14
SECOND AMENDMENT TO LEASE BY AND BETWEEN
JORANDCOR, INC. ("LANDLORD") AND
CODA MUSIC TECHNOLOGY, INC. F/N/A VIVACE, INC.,
SUCCESSOR TO CODA COMPANY, ("TENANT"),
DATED OCTOBER 23, 1992
THIS SECOND AMENDMENT TO LEASE is made as of the 30th day of June,
1997.
Landlord and Tenant are parties to that certain Lease Agreement dated
October 23, 1992, as amended by that First Amendment To Lease dated May 26,
1993, for certain property located in the City of Eden Prairie ("Lease").
WHEREAS, Tenant has exercised its option to renew the Lease as set
forth in paragraph 24 of the Lease ("Option"), extending the terms of the Lease
for a three (3) year period commencing December 1, 1997;
WHEREAS, the parties wish to set forth the base rent to be paid by the
Tenant to the Landlord from December 1, 1997 to November 30, 2000, and to
reaffirm all other terms and conditions of the Lease:
NOW, THEREFORE, in consideration of the premises and the agreements
herein contained, the Lease is hereby amended as follows:
1. The Termination Date as defined in the Lease shall be November 30,
2000.
2. The monthly base rent to be paid by Tenant to Landlord pursuant to
the terms of the Lease from December 1, 1997 to November 30, 2000 shall be paid
as follows:
a. From December 1, 1997 to November 30, 1998, $6,571.12 per month;
b. From December 1, 1998 to November 30, 1999, $6,702.75 per month;
c. From December 1, 1999 to November 30, 2000, $6,834.38 per month.
d. November 2000 rent shall be paid as follows:
(i) Tenant shall pay $1,953.38; and
(ii) The Security Deposit of $4,881.00 shall be applied
to the balance.
Landlord's agreement to apply the Security Deposit to the
November 2000 rent or the actual application thereof does not
constitute a waiver of any of Tenant's obligations under the
lease, nor is Tenant relieved of any obligations thereunder.
<PAGE>
3. The rent for November 1997 shall be $5,821.87, and Landlord will
retain $4,881.00 as the security deposit required under the lease.
4. Except as expressly modified by this Amendment to the Lease, all
the other terms and conditions of the Lease, and any prior amendments thereto,
are hereby ratified and confirmed by the parties.
IN WITNESS WHEREOF, the undersigned have placed their hands the date
and year first above written.
LANDLORD: TENANT:
JORANDCOR, INC. CODA MUSIC TECHNOLOGY, INC.
By: /s/ Richard A. Broms By: /s/ Joan K. Berg
Its: President Its: Chief Financial Officer
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 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 with a modular
system product at a suggested retail price of $2,295. In the spring of 1996, the
Company released new configurations of the Vivace product at lower suggested
retail prices together with upgraded features which included support for
vocalists. The Company announced in July 1997 the introduction of a software
version of the product with a suggested retail price of $199 and repositioned
the product as a complete practice system, the Vivace Practice Studio(TM). The
Company began shipping this new product in the fourth quarter of 1997.
To date, the Company's marketing efforts have been primarily directed toward the
retail music dealer channel, with a long-term objective of penetrating the
amateur musician market. As the Company adapts its product to technologies with
lower cost and continues to expand the amount and styles of accompaniments
available for use with the Vivace product, the Company's distribution channels
will change. The Company cannot predict the time it will take to establish new
methods of distribution which will more effectively reach the student and home
markets.
The Company has incurred losses from operations since inception and has an
accumulated deficit of $9,968,214 as of December 31, 1997.
Results of operations
For the year ended December 31, 1997 compared to the year ended December 31,
1996-Net revenues. Revenues for 1997 were $62,947 higher than revenues for
1996. This total increase reflects a 20% increase in revenues from the Finale
music notation product, offset by a 35% decrease in revenues from the Vivace
Intelligent Accompaniment(R) product. The increase in Finale revenue results
from a change in the timing of the release of product upgrades between years as
well as an increase in the price of the Finale for Macintosh upgrade between
years. As the Company transitioned the Vivace Intelligent Accompaniment product
to its new software version, Vivace revenues decreased 35% due to transitional
price decreases implemented in July 1997, stock balancing and unit volume
changes. The Company sold 2,600 Vivace applications in 197, a 30% increase over
the number of units sold during 1996. The number of application cartridges
declined from 26,000 units in 1996 to 19,000 units in 1997. This decrease is
primarily related to the termination of the soundcard promotion opportunity
whereby customers purchasing $995 of application cartridges received a free
soundcard unit. Vivace product revenues in 1997 included the sale of 1,527 of
the new Vivace Practice Studio application released in the fourth quarter of
1997.
<PAGE>
Gross profit. The 6% increase in gross profit between years reflects the
favorable mix of sales related to the higher margin music notation product line.
The 1997 gross profit percentage of 69% compares favorably to the 1996 gross
profit percentage of 66%. The 1997 gross profit amount is net of approximately
$180,000 charged to obsolescence expense attributable to the change in the
products during the year.
Sales and marketing expenses. Sales and marketing expenses of $2,330,241
decreased $322,379 or 12% compared to 1996. The principal components of this
decrease include approximately $245,000 related to lower personnel costs and
$280,000 related to decreased travel and attendance at trade shows, offset by
approximately$205,000 increase in the design and duplication costs incurred with
the introduction of the Vivace Practice Studio product and Finale upgrade.
Product development expenses. The Company expensed product development costs of
$1,555,660 in 1997, an increase of $249,090 or19% over 1996 expenses. The
increase includes approximately$121,000 related to increased amortization of
software translation costs and $130,000 related to increased amortization of
capitalized repertoire development costs.
General and administrative expenses. General and administrative expenses of
$1,589,968 in 1997 were $40,687 or 2% greater than the amount incurred in 1996.
Interest income, net. The Company had net interest income of $98,438 in 1997
compared to $110,832 in 1996.
Net loss. The net loss of $1,512,237 for 1997 is favorable compared to the loss
of $1,771,046 incurred in 1996. This decrease in the loss is attributable to the
changes in revenues and costs described above.
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, 1997, the Company
had an NOL carryforward of approximately $8,600,00, of which $7,300,000 is
currently available to offset future taxable income. The carryforwards begin 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 May 1997, the Company received net proceeds of $2,259,105 from the private
placement of 1,872,697 shares of its Common Stock and warrants to purchase
additional shares. The proceeds were invested in short-term securities.
<PAGE>
The Company has a $500,000 line of credit with a bank 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. 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, 1997, 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 $742,604 in 1997 and $1,925,381 in
1996. In addition, the Company made capital expenditures for furniture,
equipment and fixtures of $158,792 in 1997 and $344,477 in 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 though 1998.
Year 2000 Issue
The software products which the Company markets and sells do not use any
reference to dates that will require modification to recognize the four-digit
year 2000. The Company's internal business systems will require modification to
recognize this date; however, such modification will be handled through a
routine upgrade to existing software, and the cost of such upgrade is not
expected to be material.
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,
distribution and sales level issues,the potential need for additional capital,
the need for additional product and repertoire development work, 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, 1997.
<PAGE>
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 for the years ending December 31, 1997 and
1996:
1997 1996
Quarter High Low High Low
- ------- -------------------------------------------------------------
First $2.38 $1.63 $5.25 $3.00
Second 2.50 1.13 5.50 4.00
Third 1.81 1.13 5.50 3.50
Fourth 1.25 .75 3.94 1.50
As of December 31, 1997, there were approximately 150 shareholders of record of
the Company's Common Stock. In addition, the Company estimates that an
additional 1,500 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. The company's current bank line of credit prohibits the
payment of dividends without prior approval of the lender.
<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, 1997 and 1996, 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, 1997 and 1996, and
the results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 20, 1998
<PAGE>
CODA MUSIC TECHNOLOGY, INC.
Balance Sheets
As of December 31
<TABLE>
<CAPTION>
1997 1996
ASSETS ----------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,233,454 $ 1,174,293
Short-term investments 979,000 -
Accounts receivable, less allowance of $25,000 477,960 596,946
Inventories 616,696 983,375
Other current assets 93,200 53,102
----------------- --------------
Total current assets 3,400,310 2,807,716
EQUIPMENT, FURNITURE AND FIXTURES, less accumulated depreciation of
$891,209 and $671,791 370,105 494,811
REPERTOIRE DEVELOPMENT COSTS, net of accumulated amortization of $226,611
and $48,298 591,445 476,921
PREPAID ROYALTIES 181,105 118,470
OTHER ASSETS 88,279 183,916
----------------- --------------
$ 4,631,244 $ 4,081,834
================= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 294,398 $ 366,271
Accrued expenses 389,885 516,146
Deferred revenue 202,603 201,927
----------------- --------------
Total current liabilities 886,886 1,084,344
----------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY (Note 4):
Common Stock, without par value, 15,000,000 shares authorized; 6,199,732
and 4,327,035 issued and outstanding 13,712,572 11,453,467
Accumulated deficit (9,968,214) (8,455,977)
----------------- --------------
Total shareholders' equity 3,744,358 2,997,490
----------------- --------------
$ 4,631,244 $ 4,081,834
================= ==============
</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>
1997 1996
-----------------------------------
<S> <C> <C>
NET REVENUES $ 5,563,105 $ 5,500,158
COST OF SALES 1,697,911 1,873,565
--------------- -------------
GROSS PROFIT 3,865,194 3,626,593
--------------- -------------
OPERATING EXPENSES:
Sales and marketing 2,330,241 2,652,620
Product development 1,555,660 1,306,570
General and administrative 1,589,968 1,549,281
--------------- -------------
Total operating expenses 5,475,869 5,508,471
--------------- -------------
LOSS FROM OPERATIONS (1,610,675) (1,881,878)
INTEREST INCOME, net 98,438 110,832
--------------- -------------
Net loss $(1,512,237) $(1,771,046)
=============== =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(Note 2) 5,435,261 4,300,411
=============== =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE
(Note 2) $ (.28) $ (.41)
============== ============
</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>
Common Stock Accumulated
Shares Amount Deficit Total
--------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
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
Sale of Common Stock, net of offering costs 1,872,697 2,259,105 - 2,259,105
Net loss - - (1,512,237) (1,512,237)
--------- ----------- ----------- -----------
BALANCE, December 31, 1997 6,199,732 $13,712,572 $(9,968,214) $3,744,358
========= =========== =========== ===========
</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>
1997 1996
---------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,512,237) $(1,771,046)
Adjustments to reconcile net loss to net cash used in operating
activities-
Depreciation and amortization 584,159 372,796
Change in current assets and liabilities:
Accounts receivable 118,986 (191,418)
Inventories 366,679 (419,634)
Prepaid royalties (62,635) (27,353)
Other current assets (40,098) 71,574
Accounts payable (71,873) 26,717
Accrued expenses (126,261) (66,252)
Deferred revenue 676 79,235
---------------- -----------
Net cash used in operating activities (742,604) (1,925,381)
---------------- -----------
INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures (158,792) (344,477)
Capitalized repertoire development cost (292,837) (525,219)
Patent expenditures (26,711) (98,630)
---------------- -----------
Net cash used in investing activities (478,340) (968,326)
---------------- -----------
FINANCING ACTIVITIES:
Proceeds from private placement of Common Stock, net of offering costs 2,259,105 -
Sale (purchase) of short-term investments (979,000) 1,460,798
Proceeds from stock options and warrants exercised - 111,564
Repayment of long-term debt - (3,838)
---------------- -----------
Net cash provided by financing activities 1,280,105 1,568,524
---------------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 59,161 (1,325,183)
CASH AND CASH EQUIVALENTS, beginning of year 1,174,293 2,499,476
---------------- -----------
CASH AND CASH EQUIVALENTS, end of year 1,233,454 1,174,293
SHORT-TERM INVESTMENTS, end of year 979,000 -
---------------- -----------
Total cash equivalents and short-term investments, end of year $ 2,212,454 $ 1,174,293
================ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CODA MUSIC TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1997 and 1996
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 has incurred losses
since inception and at December 31, 1997 had an accumulated deficit of
$9,968,214. Management believes that cash and cash equivalents, short-term
investments, its line of credit and funds generated from the sale of products
will be sufficient to meet operating requirements in 1998.
2. Summary of Significant Accounting Policies:
Cash and 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. Unrealized gains or losses were immaterial at December 31,
1997.
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
The Company capitalizes the costs incurred in the development of repertoire
software in accordance with Statement of Financial Accounting Standards (SFAS)
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed." The Company has capitalized $818,056 and $525,219 as of
December 31, 1997 and 1996, respectively, 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. The Company periodically evaluates whether
events and circumstances have occurred that indicate the remaining balance of
repertoire development costs may not be recoverable. Other product development
costs associated with development of software applications are charged to
expense since the costs incurred between the point in time 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.
<PAGE>
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 Share
Basic and diluted net loss per common 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 antidilutive.
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,
1999. There were no borrowings outstanding as of December 31, 1997 and 1996.
Borrowings under the agreement are limited to 75% of eligible accounts
receivable plus 25% of eligible inventories, as defined, bear interest at the
bank's reference rate (8.5% as of December 31, 1997) 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, 1997, 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, 1997.
<PAGE>
Private Placement of Common Stock
On May 29, 1997, the Company sold an aggregate of 1,872,697 shares of Common
Stock and issued warrants to purchase, at $2.00 per share, an aggregate of
936,357 shares of Common Stock. The net proceeds of the offering totaled
$2,259,105.
Stock Options
The Company has a stock option plan pursuant to which options for up to 975,000
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. In 1997, the Company repriced certain stock options previously granted to
the fair market value at the date of repricing. The following summarizes stock
issued under the Company's stock option plans.
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Outstanding Price
------------ ---------
<S> <C> <C>
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
Granted 599,500 1.35
Canceled (422,416) 3.17
--------- ------
Balance at December 31, 1997 749,620 $1.56
========= ======
Exercisable at December 31, 1997 395,957 $1.76
========= ======
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C> <C>
Net loss As reported $(1,512,237) $(1,771,046)
Pro forma (1,764,810) (2,195,037)
Basic and fully diluted
net loss per share As reported (.28) (.41)
Pro forma (.32) (.51)
</TABLE>
All options outstanding at December 31, 1997 were granted with exercise prices
greater than or equal to the fair market value of the Common Stock at the date
of grant. The Company's Common Stock price at December 31, 1997 was $1.00, which
is less than or equal to the exercise price of all options issued during 1997
and 1996. 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
<PAGE>
assumptions used for grants in 1997 and 1996, respectively: risk-free interest
rates of 5.78 and 5.21, no expected dividend yield, expected lives of seven
years and expected volatility of 34% and 53%. The weighted average fair value of
options granted during 1997 and 1996 was $.42 and $1.92, respectively. Options
issued during 1996 and 1997, which remain outstanding at December 31, 1997, have
an exercise price between $1.00 and $4.50, a weighted average exercise price of
$1.38 and a weighted average remaining contractual life of 5.9 years.
Warrants
In connection with certain financing transactions including the private
placement of Common Stock in 1997, the Company has issued warrants to purchase
1,317,941 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, 1997 totaled 1,309,691.
5. Income Taxes:
For income tax reporting purposes, net operating loss carryforwards approximated
$8,600,000, of which $7,300,000 million is currently available to offset the
Company's future taxable income as of December 31, 1997. These carryforwards
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 2000. Lease expense during 1997 totaled $118,676. The
future minimum lease payments as of December 31, 1997 under these leases are
$128,600 in 1998, $126,400 in 1999 and $114,200 in 2000.
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 related to a significant licensor are as follows:
1998 $ 200,000
1999 300,000
2000 300,000
2001 300,000
2002 and thereafter 1,050,000
Royalty expense, including amounts related to the agreement referred to above,
totaled $190,649 and $217,018 in the years ended December 31, 1997 and 1996,
respectively, and are reflected as a component of cost of sales in the
accompanying statements of operations.
Employment Agreement
The Company has an employment agreement with an officer which requires the
Company to pay the officer one year's base salary of $157,500 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 made no contributions to the
plan in 1997 or 1996.
<PAGE>
7. Management Fee:
The Company paid management fees totaling $24,000 during the years ended
December 31, 1997 and 1996 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
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,212,454
<SECURITIES> 0
<RECEIVABLES> 477,960
<ALLOWANCES> 0
<INVENTORY> 616,696
<CURRENT-ASSETS> 3,400,310
<PP&E> 370,105
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,631,244
<CURRENT-LIABILITIES> 886,886
<BONDS> 0
0
0
<COMMON> 13,712,572
<OTHER-SE> (9,968,214)
<TOTAL-LIABILITY-AND-EQUITY> 4,631,244
<SALES> 5,563,105
<TOTAL-REVENUES> 5,563,105
<CGS> 1,697,911
<TOTAL-COSTS> 1,697,911
<OTHER-EXPENSES> 5,475,869
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,512,237)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,512,237)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,512,237)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
