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, 1999
[ ] 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 November 9, 1999, there were 6,221,319 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,
1999 1998
------------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,281,685 $ 563,685
Short-term investments 939,897 1,411,420
Accounts receivable 572,360 432,604
Inventories 209,400 274,163
Other current assets 85,296 93,825
------------- ------------
Total current assets 3,088,638 2,775,697
EQUIPMENT, FURNITURE AND FIXTURES 254,445 273,425
REPERTOIRE DEVELOPMENT COSTS 538,036 643,248
PREPAID ROYALTIES 182,451 185,144
OTHER ASSETS 87,726 87,881
------------- ------------
$ 4,151,296 $ 3,965,395
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 180,965 $ 228,677
Reserve for product returns 305,069 156,787
Accrued expenses 1,182,601 564,324
Deferred revenue 97,356 61,017
------------- ------------
Total current liabilities 1,765,991 1,010,805
SHAREHOLDERS' EQUITY 2,385,305 2,954,590
------------- ------------
$ 4,151,296 $ 3,965,395
============= ============
</TABLE>
See accompanying notes to condensed financial statements
2
<PAGE>
Coda Music Technology, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
--------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 2,464,259 $ 2,147,589 $ 4,636,401 $ 4,862,713
COST OF SALES 275,713 355,466 557,454 945,491
------------ ------------- ------------ -------------
GROSS PROFIT 2,188,546 1,792,123 4,078,947 3,917,222
------------ ------------- ------------ -------------
OPERATING EXPENSES:
Sales and marketing 557,407 445,996 1,423,980 1,346,950
Product development 340,990 444,184 1,064,613 1,281,590
General and administrative 1,089,186 567,251 2,231,203 1,508,696
Product Repositioning (Note 3) - - - 856,000
------------ ------------- ------------ -------------
Total operating expenses 1,987,583 1,457,431 4,719,796 4,993,236
------------ ------------- ------------ -------------
INCOME (LOSS) FROM OPERATIONS 200,963 334,692 (640,849) (1,076,014)
Interest Income, net 17,183 17,231 52,332 66,812
------------ ------------- ------------ -------------
NET INCOME (LOSS) $ 218,146 $ 351,923 $ (588,517) $ (1,009,202)
============ ============= ============ =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic 6,207,278 6,199,732 6,202,247 6,199,732
Diluted 7,157,248 6,199,732 6,202,247 6,199,732
============ ============= ============ =============
BASIC AND DILUTED NET
INCOME (LOSS) PER SHARE
Basic $ .03 $ .06 $ (.09) $ (.16)
Diluted $ .03 $ .06 $ (.09) $ (.16)
============ ============= ============ =============
</TABLE>
See accompanying notes to condensed financial statements
3
<PAGE>
Coda Music Technology, Inc.
Condensed Statements of Cash Flows
For the Nine Months Ended September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income Loss $ (588,517) $ (1,009,202)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 376,571 419,728
Change in current assets and liabilities:
Accounts receivable (139,756) 317,634
Inventories 64,763 231,132
Other current assets 8,529 9,192
Accounts payable (47,712) (52,386)
Reserve for product returns 148,282 (149,812)
Accrued expenses 618,277 222,974
Deferred revenue 36,339 16,223
----------------------------
Net cash provided by operating activities 476,776 5,483
----------------------------
INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures (110,131) (18,659)
Capitalized repertoire development cost (126,873) (360,742)
Net proceeds from sale of fixed assets - (10,963)
Other (12,526) (31,763)
----------------------------
Net cash used in investing activities (249,531) (422,127)
FINANCING ACTIVITIES:
Proceeds from sale of common stock 19,232 -
----------------------------
Net cash provided by financing activities 19,232 -
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 246,477 (416,644)
CASH AND SHORT-TERM INVESTMENTS, beginning of period 1,975,105 2,212,454
----------------------------
CASH AND SHORT-TERM INVESTMENTS, end of period $2,221,582 $ 1,795,810
============================
</TABLE>
See accompanying notes to condensed financial statements
4
<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 presentation of the results for the
interim period. The operating results for the nine months ended
September 30, 1999 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. Certain amounts as presented in the 1998
quarterly financial statements have been reclassified to conform to the
presentation in 1999.
Note 2 Net Income (Loss) Per Common Share. Basic and diluted net
income(loss) per common share was computed by dividing the net
income(loss) by the weighted average number of shares of Common Stock.
Common stock equivalents have been excluded from the calculation where
their inclusion would be antidilutive.
Note 3 Product Repositioning. The Company has developed SmartMusic
Studio(TM), a new and renamed version of the Vivace Practice Studio(TM)
product, introduced in 1997. In connection with this introduction, the
Company no longer needed to utilize some of the component parts. During
the first six months of 1998, the Company recorded the actual and
estimated cost of returns, exchanges and inventory obsolescence
resulting from this product repositioning and classified the net charge
as an operating expense.
Note 4 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, 1998 of approximately $9,560,000, of
which $9,300,000 was available to offset the Company's future taxable
income as of December 31, 1998. Deferred tax assets will be reinstated
when the Company believes profits are such that they will be realized.
5
<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.
SmartMusic(TM) products began shipping in the second quarter of 1998, and
include the basic software application at a nominal 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 an accumulated deficit of $11,341,187 as of September 30, 1999.
Results of operations
For the periods ended September 30, 1999 compared to the periods ended September
30, 1998
Net Sales. Net sales of $2,464,259 for the quarter ended September 30, 1999
increased $316,670 or 15% over the quarter ended September 30, 1998. The net
increase in net sales between the two periods reflects a 15% increase in net
sales from the Finale(R) music notation software product. A decrease in net
sales from the SmartMusic products was offset by increases in Allegro(R) and
PrintMusic!(TM), two other notation products.
Year to date net sales of $4,636,401 for the period ended September 30,
1999 decreased $226,313, or 5% over the same period in 1998. This year to date
decrease is due to a 162% increase in Allegro and PrintMusic!, the mid-tier and
entry level notation products, a 1% decrease in Finale and a 42% decrease in
SmartMusic.
The Finale net sales decrease on a calendar basis is due to the timing of
the annual releases between the years; sales for Finale 2000 are up 12% over
Finale 98 when comparing Finale 2000 to Finale 98 on a product life cycle basis.
Finale net sales increased due to the increased acceptance of Finale 2000, the
Company's latest release of its premier notation product.
SmartMusic product sales decreased on a quarterly and year to date basis in
comparison to the same periods in 1998. Both application and accompaniment sales
are down due to the transition from a dealer to a direct sales program during
the second quarter of 1998. Coda is in the process of rebuilding the business on
a direct to consumer model.
6
<PAGE>
Comparative unit sales information for the periods is represented in the
table below:
Quarter Ended Nine Months Ended
------------------------- ------------------------
9/30/99 9/30/98 9/30/99 9/30/98
------- ------- ------- -------
Applications 413 1,052 1,410 3,410
Accompaniments 2,639 4,992 15,631 18,247
(Repertoires)
Note 1. 1998 numbers do not reflect product returns, which are included in
the product repositioning line.
Gross profit. The gross profit of $2,188,546 for the quarter ended
September 30, 1999 represented a gross profit margin of 89%. This is an increase
in profits of 22% over the third quarter of 1998, when the gross profit was
$1,792,123 with a gross profit margin of 83%. Comparing the first nine months of
1999 with the first nine months of 1998, the gross profit margins were 88% and
81%, respectively. The increase in both comparison periods can be attributed to
mix changes. Finale, a higher margined product, represents a larger portion of
total sales in both periods as compared to the sum year.
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. The total impact of product returns and product write downs for
excess and obsolete inventory during the first six months of 1998, totaling
$856,000, were classified in the line item titled "Product Repositioning" in the
accompanying statements of operations.
Sales and marketing expenses. For the quarter ended September 30, 1999
sales and marketing expenses of $557,407 are 25% higher than for the quarter
ended September 30, 1998. Sales and marketing expenses for the first nine months
of 1999 were $1,423,980, a 6% increase from the $1,346,950 of expenses for the
first nine months of 1998. Quarterly increases are due to the timing of design,
duplication and mail expenses relating to marketing materials for the release of
Finale 2000 in 1999, which was later than the release of Finale 98 in 1998. Year
to date expenses were up in 1999 due to the addition of staff and general
compensation increases, to remain competitive in the market place, and
additional material design costs for the Finale 2000 product line.
Product development expenses. Product development expenses of $340,990 for
the quarter ended September 30, 1999 were $103,194 or 23% lower than for the
quarter ended September 30, 1998. For the nine months ended September 30, 1999,
product development expenses of $1,064,613 were $216,977 or 17% lower than for
the nine months ended September 30, 1998. Product development decreases are the
result of staff and outside contractor cost decreases in both periods, partially
offset by higher amortization rates of previously capitalized development costs.
7
<PAGE>
General and Administrative Expenses. General and administrative expenses
for the third quarter of 1999 were $1,089,186, an increase of $521,935 or 92%
when compared to $567,251 for the third quarter of 1998. General and
administrative expenses of $2,231,203 for the nine months ended September 30,
1999 increased $722,507 or 48% over the nine months ended September 30, 1998.
The increase in both periods relates to exploration of e-commerce and Internet
opportunities including consulting expenses spent with US Web/CKS, offset by
decreases in recruiting, insurance, legal and director expenses.
Interest Income, Net. The Company had net interest income of $17,183 for
the quarter ended September 30, 1999 compared to $17,231 for the quarter ended
September 30, 1998. For the first nine months of 1999, the Company had interest
income of $52,332 compared to interest income of $66,812 for the first nine
months of 1998. The lower interest income is attributable to the Company's lower
average cash and investment balances in 1999 compared to 1998. 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, 1999 due to the availability of net operating
loss carryforwards.
Net Income (Loss). The net income of $218,146 for the quarter ended
September 30, 1999 is $133,777 or 38% lower than the net income of $351,923 in
the quarter ended September 30, 1998. For the nine months ended September 30,
1999, the Company's net loss of ($588,517) was a favorable change of $420,685
over the nine months ended September 30, 1998 net loss of ($1,009,202). The
changes in the loss are attributable to the changes in net sales and costs
described above.
After removing expenses not related to ongoing operations (product
repositioning in 1998 and e-commerce in 1999 and 1998), 1999 year to date
operations resulted in net income of $263,142, a $353,273 increase over the 1998
adjusted Net Loss of ($90,131).
Liquidity and Capital Resources
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 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, 1999 there were no borrowings under the line of credit.
Net cash provided by operating activities totaled $476,776 for the nine
months ended September 30, 1999. In addition, the Company made capital
expenditures for furniture, equipment and fixtures of $110,131 and repertoire
development of $126,873 in the nine months ended September 30, 1999. During the
nine months ended September 30, 1998, the Company made cash from operating
activities of $5,483, and made capital expenditures for furniture, equipment and
fixtures of $18,659 and repertoire development of $360,742.
8
<PAGE>
The Company anticipates that total fixed asset capital expenditures for
1999 fixtures will approximate $130,000. Capital expenditures for repertoire
development are anticipated to total $175,000 for 1999. 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 Company considers itself to be Year 2000 ready, which means that
critical systems, devices, applications and business relationships have been
evaluated and are expected to be suitable for continued use into and beyond the
Year 2000, or contingency plans are in place.
During mid-1998 a Year 2000 Committee was established, which includes the
Chief Financial Officer and Vice President of Development, to provide direction
to the Year 2000 efforts. The first steps included evaluating in-house systems
and the software programs the Company currently markets. The Company's major
systems were upgraded at the end of 1998 with systems that were designed to be
Year 2000 ready. The Company has evaluated remaining systems to ensure they are
Year 2000 ready and in October in-house systems were tested by moving the dates
forward to March 2000.
The Company's current Finale, Finale Allegro, and PrintMusic! applications
do not use any date calculations in their operations. The Company's current
SmartMusic Studio does use a date calculation in the Practice Reports feature;
however, no Year 2000 problems were encountered while testing these applications
in both Macintosh(R) and Windows(R) operating systems.
The Company has communicated with suppliers, which are active in our
system, to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issue. The Company
cannot predict the outcome of other companies' remediation efforts. To date
approximately $50,000 has been spent, primarily all for new software and
hardware purchases, which have been capitalized. We do not expect any additional
significant expenditures for Year 2000 issues.
9
<PAGE>
At this time, the Company believes its most likely worst-case scenario is
that operations could be temporarily suspended, although the Company does not
expect that it would have a material adverse effect on the Company's financial
position and results of operations.
Contingency plans have been prepared so that the Company's critical
business processes can be expected to continue to function on January 1, 2000
and beyond. These plans are intended to mitigate both internal risks as well as
potential risks in the supply chain of the Company's suppliers and customers.
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 increased its spending on Internet
opportunities; the pursuit of these may not be successful. 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, 1998.
10
<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, 1999.
11
<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 10, 1999 CODA MUSIC TECHNOLOGY, INC.
By: s/John W. Paulson
John W. Paulson,
Chief Executive Officer
And: s/Barbara S. Remley
Barbara S. Remley,
Chief Financial Officer
12
<PAGE>
EXHIBIT INDEX
FORM 10-QSB
For the Quarter Ended
September 30, 1999
Exhibit
Number Description
27 Financial Data Schedule (filed in electronic format only)
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 2,221,582
<SECURITIES> 0
<RECEIVABLES> 601,230
<ALLOWANCES> (28,870)
<INVENTORY> 209,400
<CURRENT-ASSETS> 3,088,638
<PP&E> 1,262,314
<DEPRECIATION> (1,007,869)
<TOTAL-ASSETS> 4,151,296
<CURRENT-LIABILITIES> 1,765,991
<BONDS> 0
0
0
<COMMON> 13,726,492
<OTHER-SE> (11,341,187)
<TOTAL-LIABILITY-AND-EQUITY> 4,151,296
<SALES> 4,636,401
<TOTAL-REVENUES> 4,636,401
<CGS> 557,454
<TOTAL-COSTS> 557,454
<OTHER-EXPENSES> 4,719,796
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (52,332)
<INCOME-PRETAX> (588,517)
<INCOME-TAX> 0
<INCOME-CONTINUING> (588,517)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (588,517)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
