SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 1998
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ___________ to ___________
Commission file number 0-26192
Coda Music Technology, Inc.
(Exact Name of Small Business Issuer as Specified in its Charter)
Minnesota 41-1716250
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6210 Bury Drive
Eden Prairie, Minnesota 55346-1718
(Address of Principal Executive Offices)
(612) 937-9611
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
As of August 10, 1998, there were 6,199,732 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
Coda Music Technology, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,208,488 $ 2,212,454
Accounts receivable 354,805 477,960
Inventories 454,026 616,696
Prepaid royalties 189,550 181,105
Other current assets 186,747 93,200
------------ ------------
Total current assets 2,393,616 3,581,415
EQUIPMENT, FURNITURE AND FIXTURES 281,145 370,105
REPERTOIRE DEVELOPMENT COSTS 726,154 591,445
OTHER ASSETS 90,470 88,279
------------ ------------
$ 3,491,385 $ 4,631,244
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 253,508 $ 294,398
Accrued product repositioning (Note 4) 270,093 -
Accrued expenses 377,329 389,885
Deferred revenue 207,223 202,603
------------ -------------
Total current liabilities 1,108,153 886,886
SHAREHOLDERS' EQUITY 2,383,232 3,744,358
------------ -------------
$ 3,491,385 $ 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUES $ 1,154,640 $ 1,014,583 $ 2,715,124 $ 2,632,055
COST OF SALES 190,480 303,710 568,314 761,958
------------- ------------- ------------- -------------
GROSS PROFIT 964,160 710,873 2,146,810 1,870,097
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Sales and marketing 407,794 445,465 949,433 987,373
Product development 404,927 369,586 837,407 703,470
General and administrative 449,887 374,771 914,678 816,708
Product Repositioning (Note 4) 176,000 - 856,000 -
------------- ------------- ------------- -------------
Total operating expenses 1,438,609 1,189,822 3,557,517 2,507,551
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (474,449) (478,949) (1,410,706) (637,454)
Interest Income, net 22,049 20,618 49,581 32,147
------------- ------------- ------------- -------------
NET LOSS $ (452,400) $ (458,331) $ (1,361,126) $ (605,307)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
6,199,732 5,006,145 6,199,732 4,666,590
============= ============= ============= =============
BASIC AND DILUTED NET LOSS PER SHARE $ (.07) $ (.09) $ (.22) $ (.13)
============= ============= ============= =============
See accompanying notes to condensed financial statements
</TABLE>
<PAGE>
Coda Music Technology, Inc.
Condensed Statements of Cash Flows
For the Six Months Ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,361,126) $ (605,307)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 268,630 266,441
Change in current assets and liabilities:
Accounts receivable 123,155 208,588
Inventories 162,670 182,771
Prepaid royalties (8,445) (6,140)
Other current assets (93,547) (7,867)
Accounts payable (40,890) (168,865)
Accrued product repositioning (Note 4) 270,093 -
Accrued expenses (12,556) (165,864)
Deferred revenue 4,620 (19,642)
------------ -----------
Net cash used in operating activities (687,396) (315,885)
------------ -----------
INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures (26,754) (40,966)
Capitalized repertoire development cost (285,492) (163,663)
Net proceeds from sale of fixed assets 2,667 -
Other assets, principally patents and trademarks (6,991) (16,642)
------------ -----------
Net cash used in investing activities (316,570) (221,271)
------------ -----------
FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of offering costs - 2,277,468
------------ -----------
Net cash provided by financing activities - 2,277,468
------------ -----------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS (1,003,966) 1,740,312
CASH AND SHORT-TERM INVESTMENTS, beginning of period 2,212,454 1,174,293
------------ -----------
CASH AND SHORT-TERM INVESTMENTS, end of period $ 1,208,488 $ 2,914,605
============ ===========
See accompanying notes to condensed financial statements
</TABLE>
<PAGE>
Coda Music Technology, Inc.
Notes to Financial Statements
(Unaudited)
Note 1 Accounting Policies. The information furnished in this report is
unaudited but reflects all adjustments which are necessary, in the
opinion of management, for a fair statement of the results for the
interim period. The operating results for the six months ended June
30, 1998 are not necessarily indicative of the operating results to
be expected for the full fiscal year. These statements should be read
in conjunction with the Company's most recent Annual Report on Form
10-KSB.
Note 2 Net Loss Per Common Share. Basic and diluted net loss per common
share was computed by dividing the net loss by the weighted average
number of shares of Common Stock. In accordance with the requirements
of Financial Accounting Standard No. 128, which the Company adopted
as of December 31, 1997, common stock equivalents have been excluded
from the calculation as their inclusion would be 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 Studio
(TM), a new and renamed version of the Vivace(R)Practice Studio
product. In connection with this introduction, the Company will no
longer need to utilize some of the hardware component parts. During
the first quarter of 1998, the Company estimated the impact of
returns, exchanges and inventory obsolescence resulting from
this product repositioning and classified the net charge as an
operating expense. Additional expenses from this repositioning were
recorded during the second quarter due to higher than planned product
returns.
<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
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. 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 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.
The Company has incurred losses from operations since inception and has an
accumulated deficit of $11,329,340 as of June 30, 1998.
Results of operations
For the periods ended June 30, 1998 compared to the periods ended June 30, 1997
Net Revenues. Revenues of $1,154,640 for the quarter ended June 30, 1998
increased $140,057, or 14%, over the quarter ended June 30, 1997. The net
increase in revenues between the two periods reflects a 25% increase in revenues
from the Finale music notation software product and a 12% decrease in revenues
from the SmartMusic Studio (formerly Vivace Intelligent Accompaniment) products.
Revenues for the six months ended June 30, 1998 were $2,715,124, a 3%
increase over revenues for the six months ended June 30, 1997. Finale product
revenues increased $156,180 or 8% in this period while SmartMusic (formerly
Vivace) product revenues decreased $73,086 or 10%.
<PAGE>
Finale product revenues increased in both the quarterly and year to date
comparisons 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 revenues are the
greatest immediately after a new product is released.
The Company's newly embraced strategy is to dramatically expand the number
of applications in the market in order to pursue the core business of
establishing recurring revenues generated from repetitive sales of SmartMusic
accompaniments. The elimination of cartridge readers significantly reduced the
software cost and as a result, the sell price could be significantly reduced for
both SmartMusic application software and SmartMusic Studio, which includes
additional equipment for added features. Under this strategy, while revenue for
SmartMusic Products decreased in both a quarterly and year to date comparison
with the same periods last year, actual units sold increased 222%. In addition,
over 13,500 SmartMusic Studio trial CD's have been distributed through June 30,
1998. The number of accompaniments (formerly referred to as repertoires) sold
for the six months ended June 30, 1998 increased 44%.
Gross profit. The gross profit of $964,160 for the quarter ended June 30,
1998 represented a gross profit margin of 83.5%. This is an increase of 36% over
the second quarter of 1997, when the gross profit was $710,873 with a gross
profit margin of 70%. Comparing the first half of 1998 with the first half of
1997, the gross profit margins were 79% and 71%, 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 Finale
revenue level in total and the higher percentage of Finale revenue to total
revenue in 1998 compared to 1997.
Product Repositioning. The Company announced in April 1998 that it would
introduce SmartMusic Studio, a new and renamed version of the Vivace Practice
Studio product. Because of changes in the hardware components required for this
product, the Company established a reserve for excess and obsolete inventory in
the quarter ended March 31, 1998. During the quarter ended June 30, 1998, the
Company accepted returns from music retailers with inventory in stock. The
Company recorded an additional $176,000 in the second quarter due to higher than
planned product returns. The total impact of returns and excess and obsolete
inventory are classified in the line item titled "Product Repositioning" in the
accompanying statements of operations.
Sales and marketing expenses. For the quarter ended June 30, 1998 sales and
marketing expenses of $407,794 are 8% lower than for the quarter ended June 30,
1997. Sales and marketing expenses for the first six months of 1998 were
approximately the same as the first six months of 1997. The largest category of
savings was salary and commission expense for the Smart Music/Vivace product
line.
<PAGE>
Product development expenses. Product development expenses of $404,927 for
the quarter ended June 30, 1998 were $35,341 higher (10%) than for the quarter
ended June 30, 1997. For the six months ended June 30, 1998, product development
expenses of $837,407 were $133,937 higher (19%) than for the six months ended
June 30, 1997. The major reason for the increase in expense in both periods is
related to increased salary and outside contractor costs.
General and Administrative Expenses. General and administrative expenses
for the second quarter of 1998 were $449,887, up 20% when compared to $374,771
for the second quarter of 1997. General and administrative expenses of $914,678
for the six months ended June 30, 1998 increased $97,970 or 12% over the six
months ended June 30, 1997. This increase in expenses is due to an increase in
recruiting expenses and legal fees for both periods in 1998 when compared to
1997 and reduced incentive compensation accruals in 1997.
Interest Income, Net. The Company had net interest income of $22,049 for
the quarter ended June 30, 1998, up 7% when compared to $20,618 for the quarter
ended June 30, 1997. For the first six months of 1998, the Company had interest
income of $49,581, up 54% when compared to $32,147 for the first six months of
1997. The higher interest income is attributable to the Company's higher average
cash and investment balances in 1998 compared to 1997, as well as to slightly
higher interest rates. The Company's financing is discussed further under the
caption "Liquidity and Capital Resources".
Net loss. The net loss of $452,400 for the quarter ended June 30, 1998 is a
slight improvement from the $458,331 loss in the quarter ended June 30, 1997.
For the six months ended June 30, 1998, the Company's loss of $1,361,126 was an
unfavorable change from the loss of $605,307 over the six months ended June 30,
1997.
If the Product Repositioning expense (see Note 4) is removed from 1998,
the comparisons improve significantly: the second quarter of 1998 would have a
net loss of $276,400, an improvement of $181,931 or 40% over the second quarter
1997 loss of $458,331. The first half of 1998 would have a loss of $505,126, an
improvement of $100,181 or 17% over the first half loss from 1997 of $605,307.
Liquidity and Capital Resources
In May 1997, the Company received net proceeds of $2,277,468 from the
private placement of 1,872,697 shares of its common stock and the issuance of
warrants to purchase 936,357 shares of common stock at a price of $2.00. The
proceeds were invested in short-term securities.
<PAGE>
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 June 30, 1998 there were no borrowings under the line
of credit.
Net cash used in operating activities totaled $687,396 for the six months
ended June 30, 1998. In addition, the Company made capital expenditures for
repertoire development costs of $285,492 in the six months ended June 30, 1998.
The sale and disposal of fixed assets resulted in net proceeds of $2,667 in the
six months ended June 30, 1998. During the six months ended June 30, 1997, the
Company used cash for operating activities of $315,885, made capital
expenditures for furniture, equipment and fixtures of $40,966 and repertoire
development of $163,663.
The Company anticipates that total fixed asset capital expenditures for
1998 will approximate $120,000. Capital expenditures for repertoire development
will be significantly lower during the last six months as compared to the first
six months of 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; 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.
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 recently announced changes in technology and prices of
its Intelligent Accompaniment products and in the method of distribution. There
is no history from which to predict whether the changes will successfully
increase revenues. Investors should also consider the potential need for
additional capital; additional development work required for new products;
competition; dependence on suppliers; and dependence on proprietary technology.
For a more complete description of such factors see "Cautionary Statements"
under Item 1 of the Company's Form 10-KSB for the year ended December 31, 1997.
<PAGE>
PART 2. OTHER INFORMATION
Item 1. Litigation
The Company has been served with a complaint dated February 5, 1998 and
filed in United States District Court for the District of Massachusetts in which
Twelve Tone Systems, Inc. seeks a declaratory judgment that certain patents
owned by and licensed to the Company are not infringed by Twelve Tone. The
patents relate to the Company's Intelligent Accompaniment(R) technology. The
Company believes that the patents are valid.
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 June 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: August 14, 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
June 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,208,488
<SECURITIES> 0
<RECEIVABLES> 354,805
<ALLOWANCES> 0
<INVENTORY> 454,026
<CURRENT-ASSETS> 2,393,616
<PP&E> 281,145
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,491,385
<CURRENT-LIABILITIES> 1,108,153
<BONDS> 0
0
0
<COMMON> 13,712,572
<OTHER-SE> (11,329,340)
<TOTAL-LIABILITY-AND-EQUITY> 3,491,385
<SALES> 1,154,640
<TOTAL-REVENUES> 1,154,640
<CGS> 190,480
<TOTAL-COSTS> 190,480
<OTHER-EXPENSES> 1,438,609
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (22,049)
<INCOME-PRETAX> (452,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> (452,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (452,400)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
