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, 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 August 4, 1999, 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
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 716,171 $ 563,685
Short-term investments 860,332 1,411,420
Accounts receivable 247,087 432,604
Inventories 299,878 274,163
Prepaid royalties 184,171 185,144
Other current assets 77,154 93,825
----------- -----------
Total current assets 2,384,793 2,960,841
EQUIPMENT, FURNITURE AND FIXTURES 253,955 273,425
REPERTOIRE DEVELOPMENT COSTS 567,871 643,248
OTHER ASSETS 90,234 87,881
----------- -----------
$ 3,296,853 $ 3,965,395
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 338,325 $ 228,677
Reserve for product returns 239,877 156,787
Accrued expenses 490,701 564,324
Deferred revenue 80,023 61,017
----------- -----------
Total current liabilities 1,148,926 1,010,805
SHAREHOLDERS' EQUITY 2,147,927 2,954,590
----------- -----------
$ 3,296,853 $ 3,965,395
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
Coda Music Technology, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
---------------------------------- ---------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 955,785 $ 1,154,640 $ 2,172,142 $ 2,715,124
COST OF SALES 120,914 197,069 281,742 590,024
------------ ------------- ------------ ------------
GROSS PROFIT 834,871 957,571 1,890,400 2,125,100
------------ ------------- ------------ ------------
OPERATING EXPENSES:
Sales and marketing 433,026 391,519 866,573 900,954
Product development 370,143 404,928 723,622 837,407
General and administrative 578,471 459,573 1,142,017 941,446
Product Repositioning (Note 4) - 176,000 - 856,000
------------ ------------- ------------ ------------
Total operating expenses 1,381,640 1,432,020 2,732,212 3,535,807
------------ ------------- ------------ ------------
LOSS FROM OPERATIONS (546,769) (474,449) (841,812) (1,410,707)
Interest Income, net 15,396 22,049 35,149 49,581
------------ ------------- ------------ ------------
NET LOSS $ (531,373) $ (452,400) $ (806,663) $ (1,361,126)
============ ============= ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 6,194,732 6,199,732 6,194,732 6,199,732
============ ============= ============ ============
BASIC AND DILUTED NET LOSS
PER SHARE $ (.09) $ (.07) $ (.13) $ (.22)
============ ============= ============ ============
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
Coda Music Technology, Inc.
Condensed Statements of Cash Flows
For the Six Months Ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (806,663) $ (1,361,126)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 259,007 268,630
Change in current assets and liabilities:
Accounts receivable 185,517 280,035
Inventories (25,715) 162,670
Prepaid royalties 973 (8,445)
Other current assets 16,671 (93,547)
Accounts payable 109,647 (40,890)
Reserve for product returns 83,090 (156,880)
Accrued product repositioning (Note 3) - 270,093
Accrued expenses (73,623) (12,556)
Deferred revenue 19,006 4,620
----------- ------------
Net cash used in operating activities (232,090) (687,396)
----------- ------------
INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures (68,196) (26,754)
Capitalized repertoire development cost (85,667) (285,492)
Net proceeds from sale of fixed assets - 2,667
Other assets, principally patents and trademarks (12,649) (6,991)
----------- ------------
Net cash used in investing activities (166,512) (316,570)
----------- ------------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS (398,602) (1,003,966)
CASH AND SHORT-TERM INVESTMENTS, beginning of period 1,975,105 2,212,454
----------- ------------
CASH AND SHORT-TERM INVESTMENTS, end of period $ 1,576,503 $ 1,208,488
=========== ============
</TABLE>
See accompanying notes to condensed financial statements
<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,
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
statement have been reclassified to conform to the presentation in
1999.
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 Product Repositioning. The Company developed SmartMusic Studio(TM), a
new and renamed version of the Vivace Practice Studio(TM) product in
1997. In connection with this introduction, the Company no longer
needed to utilize some of the component parts. During the first two
quarters of 1998, the Company recorded the actual and estimated costs
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.
<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 to ship in the second quarter of 1998, and
included 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 of the related song
accompaniment products.
The Company has incurred losses from operations since inception and has an
accumulated deficit of $11,559,333 as of June 30, 1999.
Results of operations
For the periods ended June 30, 1999 compared to the periods ended June 30, 1998
Net Sales. Net sales of $955,785 for the quarter ended June 30, 1999
decreased $198,855, or 17%, over the quarter ended June 30, 1998. The decrease
in net sales between the two periods reflects a 13% decrease in net sales from
the Finale music notation software product and a 31% decrease in net sales from
the SmartMusic Studio (formerly Vivace Intelligent Accompaniment(R)) products.
Net sales for the six months ended June 30, 1999 were $2,172,142, a
$542,982 or 20% decrease over net sales for the six months ended June 30, 1998.
Finale product sales represented 54% and SmartMusic product sales represented
46% of the decrease.
Both the quarter and six months ended June 30, 1999 were impacted by the
fact that Finale 98 was released towards the end of the second quarter in 1998
and Finale 2000 was released at the start of the third quarter in 1999. In
addition, Finale sales were lower in the first quarter of 1999 as compared to
1998 because it was much later in the product life cycle of Finale 98 than the
prior year comparative period was for Finale 97. However, when comparing total
product sales of Finale 98 to Finale 97, sales are up overall 42%.
Net Sales dollars and units for SmartMusic products decreased on a
quarterly and year to date comparison with the same periods in 1998. Comparative
unit sales information for the periods is represented in the table below:
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------------- ------------------------
6/30/99 6/30/98(1) 6/30/99 6/30/98(1)
------- --------- ------- ----------
<S> <C> <C> <C> <C>
Applications 331 977 997 2,358
Accompaniments 4,963 5,334 12,992 13,255
(Repertoires)
</TABLE>
Note 1 - 1998 numbers do not reflect product returns, which were included
in the product repositioning expense line.
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, and a
reduction in sales and marketing expenses. Management believes that the changes
in distribution coupled with stronger direct marketing efforts will lead to more
favorable results.
Gross profit. The gross profit of $834,871 for the quarter ended June
30, 1999 decreased by $122,700, or 13% from the second quarter of 1998 due to
lower sales levels. However, the gross profit margin percentage improved to 87%
for the quarter ended June 30, 1999 from 83% in the comparable quarter in 1998.
Comparing the first six months of 1999 with the first six months of 1998, gross
profit margins were 87% and 78%, respectively. The increase in both periods is
attributed to higher gross profit margin percentages in SmartMusic due to
decreased product costs.
Product Repositioning. The Company announced in April 1998 that it would
introduce SmartMusic Studio, a new and renamed version of the Vivace Practice
Studio product. Because of changes in the components required for this product,
the Company 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 of 1998 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, 1999 sales and
marketing expenses of $433,026 were $41,506 or 11% higher than for the quarter
ended June 30, 1998. Sales and marketing expenses for the first six months of
1999 of $866,573 were $34,381 or 4% lower than for the six months ended June 30,
1998. The change in both periods is related to the timing of advertising and
direct mail costs relating to various projects, including the release of Finale
2000.
<PAGE>
Product development expenses. Product development expenses of $370,143 for
the quarter ended June 30, 1999 were $34,785 or 9% lower than for the quarter
ended June 30, 1998. For the six months ended June 30, 1999, product development
expenses of $723,622 were $113,785 or 14% lower than for the six months ended
June 30, 1998. The major reason for the decrease in expense in both periods is
related to decreased staffing and outside contractor costs, partially offset by
higher amortization rates of previously capitalized development costs.
General and Administrative Expenses. General and administrative expenses
for the second quarter of 1999 were $578,471, up 26% when compared to $459,573
for the second quarter of 1998. General and administrative expenses of
$1,142,017 for the six months ended June 30, 1999 increased $200,571 or 21% over
the six months ended June 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 $15,396 for
the quarter ended June 30, 1999, down $6,653 or 30% when compared to the quarter
ended June 30, 1998. For the first six months of 1999, the Company had interest
income of $35,149, down $14,432 or 29% when compared to the first six 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".
Net loss. The net loss of $531,373 for the quarter ended June 30, 1999 is
$78,973 or 17% higher than the $452,400 loss in the quarter ended June 30, 1998.
For the six months ended June 30, 1999, the Company's loss of $806,663 is
favorable to the loss of $1,361,126 for the six months ended June 30, 1998.
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 June 30, 1999 there were no borrowings under the line of credit.
Net cash used in operating activities totaled $232,090 for the six months
ended June 30, 1999. In addition, the Company made capital expenditures for
furniture, equipment and fixtures of $68,196 and repertoire development costs of
$85,667 in the six months ended June 30, 1999. During the six months ended June
30, 1998, the Company used cash for operating activities of $687,396, and made
capital expenditures for furniture, equipment and fixtures of $26,754 and
repertoire development of $285,492.
<PAGE>
The Company anticipates that total fixed asset capital expenditures for
1999 will approximate $120,000. The Company increased its Internet expenditures
in the second quarter and expects to continue to increase them in the third and
future quarters. 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 1999 for its historic levels and
methods of doing business. 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's overall goal is to be Year 2000 ready by September 1999,
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. The
Company began addressing the Year 2000 issue in 1997 by beginning to assess its
business computer systems, such as general ledger, payroll, customer billing and
inventory control. The Company's major systems were upgraded at the end of 1998
with systems that were designed to be Year 2000 ready. The Company is in the
process of evaluating remaining systems to ensure they are Year 2000 ready.
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 current
Finale and Finale Allegro(R) applications do not use any date calculations in
their operations. The Company's current SmartMusic Studio, Vivace(R) and
Practice Studio applications do 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. The Company currently plans to complete
the Year 2000 Project by September 1999. To date approximately $50,000 has been
spent, primarily all for new software and hardware purchases, which have been
capitalized. The remaining costs are not expected to be significant. The costs
of the project and the date on which the Company plans to complete the Year 2000
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events.
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 will be 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.
<PAGE>
Cautionary Statements
Coda Music Technology, Inc. develops and markets proprietary music
technology products, including Finale music notation software products and the
SmartMusic Intelligent Accompaniment products, a comprehensive system that makes
practicing music fun and productive.
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 to expand its
Internet opportunities; the pursuit of these opportunities may not be
successful. Investors should also consider: 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 Statement" under Item 1 of the Company's Form
10-KSB for the year ended December 31, 1998.
<PAGE>
PART 2. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
At a Special Meeting of Shareholders of the Company held on
June 30, 1999, the shareholders approved the reservation of
350,000 additional shares for issuance under the Company's 1992
Stock Option Plan by a vote of 3,532,706 shares in favor with
390,022 shares opposed, 17,350 shares abstaining and 25,570 shares
represented by broker non-votes.
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, 1999.
<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 12, 1999 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, 1999
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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,576,503
<SECURITIES> 0
<RECEIVABLES> 273,605
<ALLOWANCES> (26,518)
<INVENTORY> 299,878
<CURRENT-ASSETS> 2,384,793
<PP&E> 1,300,445
<DEPRECIATION> (1,046,490)
<TOTAL-ASSETS> 3,296,853
<CURRENT-LIABILITIES> 1,148,926
<BONDS> 0
0
0
<COMMON> 13,707,259
<OTHER-SE> (11,559,332)
<TOTAL-LIABILITY-AND-EQUITY> 3,296,853
<SALES> 2,172,142
<TOTAL-REVENUES> 2,172,142
<CGS> 281,742
<TOTAL-COSTS> 281,742
<OTHER-EXPENSES> 2,732,212
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (35,149)
<INCOME-PRETAX> (806,663)
<INCOME-TAX> 0
<INCOME-CONTINUING> (806,663)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (806,663)
<EPS-BASIC> (.13)
<EPS-DILUTED> (.13)
</TABLE>
