SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 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
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(Address of Principal Executive Offices)
(612) 937-9611
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(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No_____
As of November 9, 1998, there were 6,194,732 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes______ No X
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
Coda Music Technology, Inc.
Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,795,810 $ 2,212,454
Accounts receivable 459,948 477,960
Inventories 385,565 616,696
Prepaid royalties 196,713 181,105
Other current assets 84,008 93,200
------------- ------------
Total current assets 2,922,044 3,581,415
EQUIPMENT, FURNITURE AND FIXTURES 228,186 370,105
REPERTOIRE DEVELOPMENT COSTS 712,112 591,445
OTHER ASSETS 96,323 88,279
------------- ------------
$ 3,958,665 $ 4,631,244
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 242,012 $ 294,398
Accrued product repositioning (Note 4) 149,812 -
Accrued expenses 612,859 389,885
Deferred revenue 218,826 202,603
------------- ------------
Total current liabilities 1,223,509 886,886
SHAREHOLDERS' EQUITY
Common Stock 13,712,572 13,712,572
Accumulated (Deficit) (10,977,416) (9,968,214)
------------- ------------
Total Shareholders' Equity 2,735,156 3,744,358
------------- ------------
$ 3,958,665 $ 4,631,244
============= ============
See accompanying notes to condensed financial statements
</TABLE>
<PAGE>
Coda Music Technology, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30,
-------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 2,147,589 $ 952,080 $ 4,862,713 $ 3,584,135
COST OF SALES 361,620 335,844 929,934 1,097,802
-------------- ------------- ------------ -------------
GROSS PROFIT 1,785,969 616,236 3,932,779 2,486,333
-------------- ------------- ------------ -------------
OPERATING EXPENSES:
Sales and marketing 466,555 610,742 1,415,987 1,598,115
Product development 444,184 419,061 1,281,590 1,122,531
General and administrative 540,538 421,135 1,455,216 1,237,843
Product Repositioning (Note 4) - - 856,000 -
-------------- ------------- ------------ -------------
Total operating expenses 1,451,277 1,450,938 5,008,793 3,958,489
INCOME (LOSS) FROM OPERATIONS 334,692 (834,702) (1,076,014) (1,472,156)
Interest Income, net 17,231 36,105 66,812 68,252
-------------- ------------- ------------ -------------
NET INCOME (LOSS) $ 351,923 $ (798,597) $ (1,009,202) $ (1,403,904)
============== ============= ============ =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,199,732 6,199,732 6,199,732 5,177,637
============== ============= ============ =============
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ .06 $ (.13) $ (.16) $ (.27)
============== ============= ============ =============
See accompanying notes to condensed financial statements.
</TABLE>
<PAGE>
Coda Music Technology, Inc.
Condensed Statements of Cash Flows
For the Nine Months Ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (10,125) $ (868,476)
INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures (18,659) (84,833)
Capitalized repertoire development cost (360,742) (259,345)
Other (27,118) (21,671)
------------- ------------
Net cash used in investing activities (406,519) (365,849)
FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of offering costs - 2,259,105
------------- ------------
Net cash provided by financing activities - 2,259,105
NET (DECREASE) INCREASE IN CASH AND SHORT-TERM INVESTMENTS
(416,644) 1,024,780
CASH AND SHORT-TERM INVESTMENTS, beginning of period 2,212,454 1,174,293
------------- ------------
CASH AND SHORT-TERM INVESTMENTS, end of period $ 1,795,810 $ 2,199,073
============= ============
See accompanying notes to condensed financial statements.
</TABLE>
<PAGE>
Coda Music Technology, Inc.
Notes to Financial Statements
(Unaudited)
Note 1 Accounting Policies. The information furnished in this report is
unaudited but reflects all adjustments which are necessary, in the
opinion of management, for a fair statement of the results for the
interim period. The operating results for the nine months ended
September 30, 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 Income (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
antidilutive.
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(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. During the first six months of
1998, the Company recorded the cost of returns, exchanges and inventory
obsolescense resulting from this product repositioning and classified
the net charges as an operating expense.
Note 5 Income Tax Expense. Because of net operating losses the Company has
not incurred income tax expense. The Company had net tax loss
carryforwards as of December 31, 1997 of approximately $8,600,000.
Currently reserves are not deductible and there are no recorded tax
assets. Deferred tax assets will be reinstated when the Company
believes profits are such that they will be realized.
<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). In the first quarter of 1998, 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 began shipping 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 are being 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.
This is the first quarter as a public company that the Company has
shown income from operations; the Company has an accumulated deficit of
$10,977,416 as of September 30, 1998.
Results of operations
For the periods ended September 30, 1998 compared to the periods ended
September 30, 1997
Net Sales. Net sales of $2,147,589 for the quarter ended September 30,
1998 increased $1,195,510 or 126% over the quarter ended September 30, 1997. The
net increase in net sales between the two periods reflects a 147% increase in
net sales from the Finale music notation software product and a 38% increase in
net sales from the SmartMusic Studio (formerly Vivace Intelligent
Accompaniment(R)) products.
Year to date net sales of $4,862,713 for the period ended September 30,
1998 increased $1,278,579 or 36% over the same period in 1997. This year to date
increase is due to a 48% increase in Finale product line sales. Finale product
net sales increased due to the release of Finale 98 in June 1998 as compared to
the release of Finale 97 in November 1997. Upgrade and new product sales are the
greatest immediately after a new product is released.
<PAGE>
SmartMusic product sales increased $70,040, or 38%, in the quarter
ending September 30, 1998 compared to the quarter ending September 30, 1997. On
a year to date basis, SmartMusic applications sold increased 258% and the number
of accompaniments (formerly referred to as repertoires) sold increased 40% over
the same period in 1997. In addition, almost 25,000 SmartMusic Studio trial CD's
have been distributed through September 30, 1998. Net sales were flat, due to a
combination of a reduction in the application selling price offset by an
increase in unit sales. Comparative Vivace/SmartMusic unit sales information for
the periods is represented in the table below:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
--------------------------- ----------------------------
9/30/98 9/30/97 9/30/98 9/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Applications 1,052 220 3,410 952
Accompaniments 4,992 3,790 18,247 13,014
(Repertoires)
</TABLE>
Gross profit. The gross profit of $1,785,969 for the quarter ended
September 30, 1998 represented a gross profit margin of 83.2%. This is an
increase in profits of 190% over the third quarter of 1997, when the gross
profit was $616,235 with a gross profit margin of 64.7%. Comparing the first
nine months of 1998 with the first nine months of 1997, the gross profit margins
were 81% and 69%, respectively. The increase in both comparison periods can be
attributed to higher gross profit margin percentages in both the Finale and
SmartMusic product lines due to decreased product costs. Gross profit margin
dollars also increased due to higher revenue levels for the Finale product line
in 1998 when compared to 1997.
Product Repositioning. Earlier this year the Company introduced
SmartMusic Studio, a new and renamed version of the Vivace Practice Studio
product. The total impact of product returns and product writedowns for excess
and obsolete inventory during the first six months of the year are classified in
the line item titled "Product Repositioning" in the accompanying statements of
operations.
Sales and marketing expenses. For the quarter ended September 30, 1998
sales and marketing expenses of $466,555 are 24% lower than for the quarter
ended September 30, 1997. Sales and marketing expenses for the first nine months
of 1998 were $1,415,987, an 11% reduction from the $1,598,114 of expenses for
the first nine months of 1997. The largest categories of savings were in the
SmartMusic/Vivace product line: material design was the largest expense cut in
dollars, followed by salary expense.
Product development expenses. Product development expenses of $444,184
for the quarter ended September 30, 1998 were $25,123 or 6% higher than for the
quarter ended September 30, 1997. For the nine months ended September 30, 1998,
product development expenses of $1,281,590 were $159,058 or 14% higher than for
the nine months ended September 30, 1997.
<PAGE>
Product development increases are the result of staff and salary level
increases partially offset by decreases in outside contractor costs in the third
quarter.
General and Administrative Expenses. General and administrative
expenses for the third quarter of 1998 were $540,538, an increase of $119,403 or
28% when compared to $421,135 for the third quarter of 1997. General and
administrative expenses of $1,455,216 for the nine months ended September 30,
1998 increased $217,373 or 18% over the nine months ended September 30, 1997.
This increase in expenses is due to an increase in salary and bonus expenses,
legal expenses, travel expenses, and consulting fees for e-commerce.
Interest Income, Net. The Company had net interest income of $17,231
for the quarter ended September 30, 1998 compared to $36,105 for the quarter
ended September 30, 1997. For the first nine months of 1998, the Company had
interest income of $66,812 compared to interest income of $68,252 for the first
nine months of 1997. The lower interest income is attributable to the Company's
lower average cash and investment balances in 1998 compared to 1997. The
Company's financing is discussed further under the caption "Liquidity and
Capital Resources".
Income Tax Expense. The Company had no income tax expense for the three
and nine months ended September 30, 1998 due to the availability of net
operating loss carryforwards.
Net Income (Loss). The net income of $351,923 for the quarter ended
September 30, 1998 compares favorably to the ($798,598) net loss in the quarter
ended September 30, 1997. For the nine months ended September 30, 1998, the
Company's net loss of ($1,009,202) was a favorable change of $394,703 over the
nine months ended September 30, 1997 net loss of ($1,403,904). The changes in
the loss are attributable to the changes in net sales and costs described above.
Liquidity and Capital Resources
In May 1997, the Company received net proceeds of $2,259,105 from the
private placement of 1,872,697 shares of its common stock and the issuance of
warrants to purchase 936,357 shares of common stock at a price of $2.00. The
proceeds were invested in short-term securities.
The Company has a $500,000 line of credit with a bank. Borrowings under
the line of credit bear interest at 1% over the bank's reference rate and are
collateralized by all of the accounts receivable, inventory and general
intangibles of the Company. Among other requirements, the loan agreement
requires the Company to maintain minimum levels of tangible net worth, as
defined in the agreement. While the agreement is in effect, the Company may not
incur additional indebtedness, liquidate or merge the Company, pay dividends or
acquire any other entity without the prior approval of the lender. Further, a
25% or more change in ownership of the Company constitutes an event of default
under the agreement. As of September 30, 1998 there were no borrowings under the
line of credit.
<PAGE>
Net cash used in operating activities totaled $10,125 for the nine
months ended September 30, 1998. In addition, the Company made capital
expenditures for furniture, equipment and fixtures of $18,659 and repertoire
development of $360,742 in the nine months ended September 30, 1998. During the
nine months ended September 30, 1997, the Company used cash for operating
activities of $868,476, and made capital expenditures for furniture, equipment
and fixtures of $84,833 and repertoire development of $259,345.
The Company anticipates that 1998 total capital expenditures for
equipment, furniture and fixtures will approximate $100,000. Capital
expenditures for repertoire development are anticipated to total $450,000 for
1998. Management believes existing cash and short-term investments, proceeds
from line of credit borrowings, and funds generated from the sale of products
will be sufficient to fund its capital expenditure, product development and
working capital requirements through the following twelve months. Management
expects that cash in excess of current requirements will continue to be invested
in investment grade interest-bearing securities.
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. This modification will be handled through a routine upgrade
to existing software, scheduled for the fourth quarter of 1998. The cost of such
upgrade is not expected to be material and is included in anticipated capital
expenditures. We anticipate that this upgrade will minimize problems resulting
from accounting date errors.
The Company uses several key vendors to produce and warehouse inventory
components, ship finished goods, and provide other basic services such as
utilities. The degree to which these outside vendors are Year 2000 ("Y2K")
compliant will affect the risk to which the Company is exposed. To assess this
risk more accurately, the Company intends on verifying Y2K readiness with select
key vendors. However, the Company is not dependent on any one vendor for the
production of components, product warehousing or finished good shipments. The
availability of multiple vendors should help to minimize the Company's risk from
third parties.
Once the Company has more fully estimated its vulnerability to third
party failures, contingency plans will be set forth to try to minimize this
risk. These plans will be set forth by a Y2K committee and will address risks in
the supply chain of the Company's suppliers and utility vendors. However, the
Company cannot predict the outcome of other companies' remediation efforts.
<PAGE>
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. The Company has a limited operating history from which investors
might judge its ability to market at a profit its SmartMusic products. Investors
should also consider: the impact on revenues and earnings of the timing of
releases of upgrades and new products; sales and distribution issues; the
potential need for additional capital; additional development work required for
new products; dependence on accompaniment sales and development; competition;
dependence on suppliers; the impact of Year 2000 issues internally and from
third parties, and dependence on proprietary technology. For a more complete
description, 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 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 September 30, 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: November 9, 1998 CODA MUSIC TECHNOLOGY, INC.
By: s/ Ronald B. Raup
Ronald B. Raup, President and
Chief Operating Officer
And: s/ Barbara S. Remley
Barbara S. Remley,
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
FORM 10-QSB
For the Quarter Ended
September 30, 1998
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,795,810
<SECURITIES> 0
<RECEIVABLES> 459,948
<ALLOWANCES> 0
<INVENTORY> 385,565
<CURRENT-ASSETS> 2,922,044
<PP&E> 228,186
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,958,665
<CURRENT-LIABILITIES> 1,223,509
<BONDS> 0
0
0
<COMMON> 13,712,572
<OTHER-SE> (10,977,416)
<TOTAL-LIABILITY-AND-EQUITY> 3,958,665
<SALES> 4,862,713
<TOTAL-REVENUES> 4,862,713
<CGS> 929,934
<TOTAL-COSTS> 929,934
<OTHER-EXPENSES> 5,008,793
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (66,812)
<INCOME-PRETAX> (1,009,202)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,009,202)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,009,202)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
