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, 1998
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: $6,413,045
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of March 15, 1999 was approximately $11,615,123 based upon the
closing price of the Registrant's Common Stock on such date.
There were 6,194,732 shares of Common Stock outstanding as of March 15, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1998 are incorporated into Part II and portions of the
Registrant's definitive Proxy Statement for its 1999 Annual Meeting are
incorporated by reference into Part III.
Transitional Small Business Disclosure Format (check one). Yes No X
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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,
currently called SmartMusic(TM), 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 $6 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
SmartMusic system provides Intelligent Accompaniment(R) which follows the tempo
of the musician in an effort to enhance the process of learning, practicing and
performing music. In 1998 the Company successfully transitioned this product to
a software-based product. The Company's Finale music notation software products,
which include Finale and Finale Allegro(R), allow musicians to enter
compositions into a computer electronically while playing or through a standard
computer keyboard, 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 objectives:
o Expand applications for listening & playback technology. Utilizing
technologies included in both Finale and SmartMusic products, the Company plans
to develop new software applications which assist in training the musician.
o Continue to develop the accompaniment library. Coda has created over
5,000 classical, jazz and musical theatre accompaniments contained on over 500
computer floppy disks for use with the SmartMusic product and plans to create
additional accompaniments covering a broad spectrum of musical genres,
instruments and skill levels. In 1998, the Company introduced SmartMusic
accompaniments for the Belwin 21st Century Band Method II, 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. Selections
from the Beatles and other popular artists were added in 1998.
o Expand the markets for and distribution of all of the products. All of
the products are now software based. The Company intends to utilize the World
Wide Web and direct marketing techniques to sell SmartMusic and Finale and
Finale Allegro upgrades and increase effectiveness of current channels of
distribution, and to continue to develop products at lower price points
directed at the retail channel.
o Establish Finale music notation software as the industry standard.
Coda has established a reputation of quality and power for its Finale notation
software products, and major music publishers are embracing Finale as their
de-facto notation standard. As publishers move toward electronic distribution
and sale of sheet music, the Company intends to work toward positioning Finale
as the de-facto standard for transmission of electronic files.
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Products
SmartMusic Studio
The SmartMusic (formerly 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
SmartMusic 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 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 17
standard band instruments, such as flutes, clarinets, saxophones, trumpets,
trombones and tubas; in 1996, it also became available for vocal applications.
SmartMusic Accompaniments
The sale of a single SmartMusic Studio 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. The accompaniment computer floppy disk will only work with
the Company's SmartMusic Studio system and has been specially designed by the
Company to protect against illegal duplication. A typical accompaniment computer
floppy disk 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 Publishing Corporation and Warner Bros. Publications Inc.
These license agreements allow the Company to produce synthesized versions of
musical arrangements for use with the SmartMusic Studio system. The Company's
royalty arrangements range from payments of $.75 per accompaniment SKU to five
percent of the suggested retail price of the accompaniment SKU. 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.
Coda has created over 5,000 individual classical and jazz
accompaniments contained on approximately 500 computer floppy disks for its
SmartMusic Intelligent Accompaniment product as well as accompaniments for the
Belwin 21st Century Elementary Band Methods I and II. 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 SmartMusic products. Further, the Company plans to expand
its library of accompaniments to cover a broad spectrum of music genres,
instruments and skill levels.
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Finale
Coda is a market leader in music notation software with its Finale
family of products for use with Macintosh(R) and PC Windows(R) 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 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(TM) 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. Pursuant to the terms of a written agreement, Douglas Stewart Company
("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 nonprofit 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 1998 and 1997, respectively, Douglas
Stewart returned $160,000 and $110,000 related to the release of new versions of
the product. The agreement renews monthly unless either party provides the other
with 30 days written notice or it is otherwise earlier terminated.
Product manuals are currently available in German, French, Italian,
Dutch and Japanese. The Company believes the international market is a key
growth opportunity as computer penetration increases worldwide. International
revenues, primarily from the sale of Finale products, represented 13% and 18% of
1998 and 1997 revenues, respectively.
Finale Allegro
The Company introduced the Finale Allegro product, a value version of
the powerful Finale 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 Company released Allegro 98
in November, the first update since the product was first developed.
Finale PrintMusic!
The Company plans to introduce the Finale PrintMusic!(TM) product, an
entry-level powerful music notation software product, in Spring 1999. The Finale
PrintMusic! music notation software product will retail for $69.95 and contains
a subset of the notation tools contained in the Finale and Finale Allegro
products. The Finale PrintMusic! product allows the Company to offer an
entry-level product to the retail customer, thereby expanding the base of
registered users and increasing the potential for sales of notation software
upgrades.
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Marketing, Sales and Distribution
In 1998 the Company has realigned its sales and marketing staff to
present a more cohesive approach to the marketing of all of its products.
SmartMusic products are currently being sold through domestic and
international distributors. Distributors service the music instrument retailers,
college bookstore and educational software markets. The Company is also selling
directly on the Web and through its customer service department. Finale products
are sold through distributors. In addition, Finale products are also sold
through music instrument retailers, mail order software retailers, and computer
dealers.
The Company believes it can significantly build on its Finale and
Finale Allegro 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 platform and Macintosh platform
in each of the last four years. The Company also introduced the first upgrade
for Finale Allegro in 1998.
A key marketing strategy of the Company is to introduce both the
SmartMusic and 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 Finale 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, and added an on-campus direct seller
network The Company is testing various marketing initiatives for SmartMusic
Studio to determine the most viable methods of penetrating the student market.
Coda currently sells its products in over 30 countries around the
world. The products are distributed by leading music software distributors in
each of the international markets who are responsible for sales, marketing and
technical support.
Product Development
During 1998 and 1997, the Company incurred $1,657,213 and $1,555,660 in
product development expenses. The Company intends to continue to expand its
current product offerings by developing products for new applications and
markets.
SmartMusic Studio
Using the core technologies behind its SmartMusic products, the Company
was able to transition its product to a software based system and open a whole
new market at a much lower price point for students and music hobbyists.
SmartMusic Accompaniments
The Company plans to continue adding 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). SmartMusic 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 SmartMusic
accompaniments.
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Finale
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 Inc. 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.
Finale Allegro
In 1998 the Company released the first upgrade of the Finale Allegro
product, which is based on Finale. The Company intends to continue utilizing
development efforts across as many software products as possible.
Competition
The Company knows of no other musical accompaniment product for band
instruments and vocalists that responds to the musician with the exception of In
Concert(TM), which is an interactive product for midi keyboards. The Company
expects that SmartMusic products will also 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 SmartMusic product in that they do not automatically adjust in
real-time to the musician's changes in tempo. The Company believes its
SmartMusic system is unique because this product listens to wind instruments and
voice. In addition, Coda sells accompaniments, while competitors sell only the
applications. However, there can be no assurance that competitors will not enter
the market.
The market for the Company's Finale and Finale Allegro 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.(acquired out of
bankruptcy by Lyrrus Inc.), Opcode Systems, Inc., Sibelius and Steinberg/Jones
as its closest competitors based on product offerings and price points.
Principal competitive factors in marketing the Company's SmartMusic and
Finale products include product features, quality, brand recognition, ease of
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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. Some of the
companies with which the Company may compete have significantly greater
financial and other resources than the Company. 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 a worldwide basis for the life of the
patent, from Carnegie Mellon University ("CMU") the use of the U.S. patent which
covers the automated accompaniment that listens to and follows tempo changes
from a live performance. The Company has further developed this technology and
patented additional features. The Company has obtained five patents, in addition
to the CMU patent, that protect improvements to the user control of the
software, certain aspects of the repertoire file which enhance the following
capabilities of the software, enhancements to the following algorithm,
accompaniment controls and repertoire data files and miscellaneous interface
features of the product. 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 CMU
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.
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), SmartMusic(TM), SmartMusic
Studio(TM), SmartMusic Accompaniments(TM), Hyperscribe(TM) and Finale
PrintMusic!(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. Currently BBI Computer Systems, Inc. ("BBI") provides key-disk
protection for accompaniment products. While BBI is not the only seller of copy
disk protection, the Company has a significant investment in incorporating their
protection mechanism into the accompaniment product inventory. No other products
are vendor specific. The Company currently uses Advanced Duplication Services,
Inc. to perform standard copying and assembling services, including copying the
accompaniment floppy disks and other product software CD-ROM disks, and
assembling the product manuals, disks and other product literature into
packages.
Employees
As of December 31, 1998, the Company employed 43 full-time employees.
Of these, 12 served in the product and repertoire development area, 8 in product
testing and end-user support, and 23 in administrative and sales-related
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activities. The Company believes that its relations with its employees are good.
None of the Company's employees are 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 and 1998 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
SmartMusic Studio (formerly Vivace) sales through catalog companies and direct
sales through the Company's web site (www.codamusic.com). The Company expanded
and utilized new methods of distribution during 1998. While unit sales have
increased, no assurance can be given that sales of SmartMusic products will
achieve significantly higher levels.
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 possible capital expenditure, product
development and working capital requirements through 1999. Any significant
change in the Company's product development plans or marketing and distribution
methods would require additional capital. 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 to increase the
breadth of the Company's repertoire for SmartMusic products. The Company plans
to release PrintMusic! in 1999, which is an introductory version of Finale. The
Company plans to develop new training and assessment products using technologies
developed while producing Finale and SmartMusic. The Company continues to
explore the possibilities in using Finale to develop the ability to sell sheet
music which can be downloaded by the consumer via the internet and change clef
and key as desired. No assurance can be given that the Company's timetable for
any of 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 have a materially
adverse effect on 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 SmartMusic products.
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Operating Losses. For the year ended December 31, 1998, the Company incurred a
net loss of $804,455 and since inception has an accumulated deficit of
$10,752,669.
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 SmartMusic products. Sales of Finale products
historically fluctuated with higher sales levels achieved following the release
of product upgrades. The Company 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.
Competition. While competition for the SmartMusic products is limited, 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 Finale and Finale Allegro 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 SmartMusic 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. 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 nonpatented 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 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 $81,000. 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.
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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 1998 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 1998
Annual Report to Shareholders.
ITEM 7. FINANCIAL STATEMENTS
Except for the Report of the Company's previous independent
accountants, which is set forth below, the information required by Item 7 is
incorporated herein by reference to the Financial Statements, Notes thereto and
Reports of Independent Public Accountants thereon which appear in the
Registrant's 1998 Annual Report to Shareholders.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Coda Music Technology, Inc.:
We have audited the accompanying balance sheet of Coda Music Technology, Inc. (a
Minnesota corporation) as of December 31, 1997 and the related statements of
operations, shareholders' equity and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
February 20, 1998
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previously reported in the Company's Form 8-K dated November 3, 1998,
filed on November 9, 1998.
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 51 Chief Executive Officer and Chairman of the
Board of Directors
Ronald B. Raup 48 President, Chief Operating Officer and
Director
Barbara S. Remley 47 Chief Financial Officer, Treasurer and
Secretary
Mark E. Dunn 49 Senior Vice President of Product Development
Glenna A. Dibrell 48 Vice President of Marketing
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 has served on the Board of Directors of the National
Association of Music Merchants ("NAMM") and the St. Paul Chamber Orchestra.
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 America 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.
Barbara S. Remley has been Chief Financial Officer of Coda since May
1998. In 1997 and 1998 Ms. Remley consulted for various entities. From 1992 to
1997, Ms. Remley held various titles including President, Chief Operating
Officer and Chief Financial Officer of Garment Graphics, Inc., a designer,
marketer and distributor of licensed sports apparel. She also has ten years of
public accounting experience with Ernst & Young (formerly Ernst & Ernst).
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.
<PAGE>
Glenna A. Dibrell has been Vice President of Marketing of Coda since
November 1998. In 1997 and 1998 Ms. Dibrell owned a strategic consulting
business working with Eagle River Interactive (now Agency.com) and 3M. From 1994
to 1997 Ms. Dibrell was Vice President-Management Supervisor at Martin/Williams.
Prior to that she held key executive positions with top marketing agencies and
specialized in response marketing; and served in key marketing positions for
major retailers.
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 1999 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 1999 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 1999 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 1999 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
Report dated November 3, 1998, reporting under Item 4 a
change in the Registrant's Certifying Accountant.
<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 22, 1999 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 22, 1999
John W. Paulson, Chairman of the Board and Chief
Executive Officer (principal executive officer)
s/ Ronald B. Raup March 22, 1999
Ronald B. Raup, President, Chief Operating Officer
and Director
s/ Barbara S. Remley March 22, 1999
Barbara S. Remley, Chief Financial Officer
(principal financial and accounting officer)
s/ David A. Henderson March 22, 1999
David A. Henderson, Director
s/ Gordon F. Stofer March 22, 1999
Gordon F. Stofer, Director
s/ Larry A. Pape March 22, 1999
Larry A. Pape, Director
s/ Karl T. Bruhn March 22, 1999
Karl T. Bruhn, Director
s/ Benson K. Whitney March 22, 1999
Benson K. Whitney, Director
<PAGE>
CODA MUSIC TECHNOLOGY, INC.
EXHIBIT INDEX FOR
FORM 10-KSB FOR 1998 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 License Agreement dated June 10, 1992 between the Registrant and
Carnegie Mellon University, including Amendments 1 and 2--incorporated
by reference to Exhibit 10.11 to the Registrant's Form SB-2
Registration Statement, Reg. No. 33-92212C
10.4 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
10.5* 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
10.6 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
10.7* 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
10.8 Amendment No. 3 to License Agreement between the Registrant and
Carnegie Mellon University dated August 28, 1996 -- incorporated by
reference to Exhibit 10-QSB for the quarter ended September 30, 1996
10.9 Second Amendment to Lease by and between Jorandcor, Inc. and the
Registrant--incorporated by reference to Exhibit 10.14 to the
Registrant's Form 10KSB for the year ended December 31, 1997
10.10 Amendment No. 4 to License Agreement between the Registrant and
Carnegie Mellon University dated December 30, 1998
<PAGE>
10.11 Loan Agreement dated February 14, 1999 between the Registrant and
Riverside Bank
13 Portion of Annual Report to Shareholders for fiscal year ended December
31, 1998 incorporated herein by reference
23.1 Consent of McGladrey & Pullen LLP, independent public accountants
23.2 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.
Amendment #4 - Effective December 30, 1998 - to
License Agreement between CMU and Coda Music Technology/Vivace
The License Agreement made on June 10, 1992 between Carnegie Mellon University
("CMU") and the Coda Music Technology Inc., formerly known as Vivace, Inc., the
name of which was legally changed to Coda Music Technology, Inc. on March 17,
1994, having its current principal office at 6210 Bury Drive, Eden Prairie, MN
55346-1718 ("LICENSEE"), as amended by the letter agreement dated November 12,
1993, Amendment #2 dated May 12, 1994, and Amendment #3 dated August 28, 1996,
is hereby further amended by this Amendment #4 and the parties hereto do hereby
mutually covenant and agree as follows:
A. Definitions.
1. The June 10, 1992 License Agreement ("the Original License Agreement")
as amended by the four Amendments will herein he referred to as the
"Amended License Agreement" or the "License".
2. "Previous Amendments" shall mean Amendments #1, 2 and/or 3.
3. Articles and Paragraphs numbers specified in this Amendment with no
other reference shall refer to the Original License Agreement.
4. Paragraph 1.3 is hereby amended to read as follows:
The term "Licensed Product(s)" shall mean (a) all products and services
which include, wholly or in part, technology covered by U.S. Patent No.
4,745,836 (initially called PracticeMate Products), (b) computer
software based on software developed by CMU called "Piano Tutor" or
derivative works thereof developed by or for LICENSEE (initially called
CMU MusicTutor Products), and (c) repertory and/or accompaniment that
may be used with the foregoing parts (a) and/or (b) of this sentence.
Licensed Products shall include, but shall not be limited to, all
products covered under the preceding sentence which (i) are now or were
previously called Vivace and/or SmartMusic, and/or (ii) are
applications, software, hardware, repertory, or accompaniment, sold
either as a branded product under any brand name or without a brand
name or as an OEM product.
5. Paragraph 1.4 is hereby amended to read as follows:
(1) "Net Sales" shall mean total revenues received by LICENSEE from the
manufacture, use, sale or other disposition of Licensed Products, less
the total of all:
(a) discounts allowed in amounts customary in the trade;
(b) sales tariffs, sales duties and/or sales taxes directly
imposed and invoiced with reference to particular products or
sales dispositions;
<PAGE>
(c) outbound transportation prepaid or allowed; and
(d) amounts allowed or credited on returns.
No deductions shall be made for commissions paid to individuals whether
they be with independent sales agencies or regularly employed by
LICENSEE and on its payroll, or for cost of collections.
(2) CMU agrees that LICENSEE may distribute free copies of Licensed
Products to others (either on a stand-alone basis or in conjunction
with the sale of other products of LICENSEE) with the business goal of
generating additional sales of repertory and/or accompaniments for use
therewith. No Net Sales price shall be imputed to such distribution of
any such free Licensed Products. In exchange, LICENSEE has agreed to
include sales of repertory and accompaniments in the determination of
Net Sales.
(3) In a situation other than that covered by the foregoing paragraph
(2), if Licensed Product(s) and other software products are sold by
LICENSEE in one transaction ("Combined Sale") at a single, combined
price ("Combined Price"), the imputed Net Sales revenue shall be
calculated according to the following formula:
A - shall mean the maximum price charged by LICENSEE during
the previous six months for the Licensed Product included
in the Combined Sale
B - shall mean the maximum price charged by LICENSEE during
the previous six months for the other software product(s)
included in the Combined Sale
C - shall mean the Combined Price minus deductions
authorized under sub-paragraph (1) (a) - (d) of amended
paragraph 1.4 as set forth in part 5 of this Amendment #4
L - shall mean the imputed Net Sale revenue (which is subject
to Running Royalties).
L shall be calculated by multiplying C times A divided by
(A + B)
Example: Assume A=100, B=500, C=550; L=550x100/600=91.67.
(4) In the case of "Combined Hardware Sales", if Licensed Product(s)
and one or more hardware products are sold by LICENSEE in one
transaction and at a single, combined price, or if the Licensed Product
is incorporated in the design of a hardware product sold by LICENSEE,
the imputed Net Sales revenue shall be calculated according to the
following formula:
Same as for a Combined Software Sale, except -
<PAGE>
B - shall mean the maximum price charged by LICENSEE during
the previous six months for the hardware component(s)
included in the Combined Sale, or, if such a price does
not exist, the cost to LICENSEE of such component(s).
6. "Year" shall mean a calendar year during the Term of the License.
7. The "Effective Date" of this Amendment shall be December 30, 1998
B. Non-exclusive License; Term of License
1. Paragraphs 2.1 is hereby amended to read as follows:
a. Subject to the other provisions of this License, CMU hereby
grants and LICENSEE hereby accepts a nonexclusive world-wide
license to make, use and sell Licensed Products.
b. "Term" of License: This License shall remain in effect until
December 31, 2005 unless Terminated prior to that date under
the provisions of this License.
2. Paragraphs 2.2 and 2.3 are deleted.
C. Minimum Royalties
Section B and C of Amendment #3 are hereby deleted. Paragraph 4.2 of the License
remains deleted. A new Paragraph 4.3 is hereby added to the License and will
read as follows:
1. LICENSEE shall pay CMU minimum royalties ("Minimum Royalties") for each
Year during the Term in the amount of (a) thirty-thousand dollars
($30,000) per year and (b) an additional amount calculated by
multiplying thirty-thousand dollars ($30,000) by the cumulative
percentage change in the USA Bureau of Labor Statistics Consumer Price
Index for Urban Wage Earners and Clerical Workers for All Cities
(CPI-W) between September 1994 and the September preceding the start of
the Year for which the annual Minimum Royalty is to be paid. CMU will
calculate during each December (or whenever CPI-W figures for September
have become available) the total amount of Minimum Royalty due for the
following Year and will promptly notify LICENSEE of that amount
("Amount Due").
2. LICENSEE will pay CMU the Amount Due for each Year in three equal
installments which will be due and payable on January 1, April 1, and
July 1 of that Year.
Example: Calculation of Minimum Royalty for 1999:
CPI-W as of September 1994 147.3
CPI-W as of September 1998 160.7
Cumulative percentage change 9.1%
Amount due for 1999: $30,000 + ($30,000 x 9.1%) = $32,730
Amount due 1/1/1999: $32,730 / 3 = $10,910
Additional payments of $10,910 shall be due on 4/1/99 and 7/1/99)
<PAGE>
D. Running Royalties
Paragraph 4.1 is hereby amended to read as follows:
1. "Running Royalties" will be two percent (2%) of Net Sales of each Year
up to Net Sales of fifteen million dollars ($15,000,000) per year, and
will be the following percentage of incremental amounts of Net Sales
above $15 million:
Net Sales up to $15 million 2.0%
Net Sales exceeding $15 million, up to $17.5 million 1.5%
Net Sales exceeding $17.5 million, up to $20 million 1.0%
Net Sales exceeding $20 million, up to $22.5 million .75%
Net Sales exceeding $22.5 million .5%
The amount of such Running Royalties for each Year will be calculated
by LICENSEE promptly following the end of that Year. If Minimum
Royalties exceed Running Royalties for that Year, no additional
royalties will be payable; otherwise the difference between Running
Royalties and the Minimum Royalty for a Year ("Additional Amount")
shall be due and payable by LICENSEE to CMU on March 1 following the
end of that Year.
For example, if Running Royalties for 2001 should amount to
$60,000 and Minimum Royalties should amount to $40,000, the
Additional Amount of $20,000 shall be due and payable on March 1,
2002.
E. Warrant
1. Promptly following the signing of Amendment #4 by all parties, CMU will
deliver to LICENSEE an Investment Letter (attached as Exhibit A)
executed by CMU and LICENSEE will issue a Warrant to CMU for the
purchase of thirty thousand (30,000) shares of Common Stock of Coda
Music Technology Inc. at a price of one dollar and twenty-five cents
($1.25) per share ("Warrant"). Such Warrant may be exercised by its
holder at any time between the date when all parties have signed this
Amendment and December 31, 2005. Attached as Exhibit B is a sample copy
of the Warrant document to be used.
2. LICENSEE understands that CMU intends to transfer some rights to
Warrant Shares under the Warrant to one or more of the following
individuals: Roger B. Dannenberg, Joshua Bloch, Peter Capell, Annabelle
Joseph, Robert Joseph, Marta Sanchez, Ronald Saul, and John Maloney.
Prior to approval of any such transfer, CMU shall provide an Investment
Letter (a sample copy of which is attached as Exhibit C)
signed by the intended transferee.
<PAGE>
F. No Sublicensing Rights
LICENSEE shall have no rights to sublicense any of its rights under this
License. Paragraphs 2.5, 2.6, 2.7, 2.8, 2.9 and 2.10 are hereby deleted. It is
understood, though, that any individual piece of Licensed Product distributed by
LICENSEE under the License shall carry with it a continuing sublicense
permitting subsequent use, resale, or other redistribution, performance or
display of that individual piece of Licensed Product.
G. No Other Royalties
Considering the amount of $80,000 already paid, LICENSEE shall owe CMU no
additional royalty payments for calendar year 1998.
For the balance of the Term of the License, LICENSEE will have no royalty
obligations to CMU other than the Running Royalties, Minimum Royalties, and
Warrants provided for in this Amendment.
H. Infringement
As related to Article VII, LICENSEE hereby agrees to forego any rights to defend
any CMU intellectual property rights ("Rights" as defined in Paragraph 1.2).
I. Reporting
Section D of Amendment #3 is hereby deleted. Paragraph 5.2 is hereby amended to
read as follows:
During the Term of the License, within forty-five (45) days of the end of each
calendar quarter, LICENSEE shall provide CMU with a written report stating the
number of Licensed Products sold, Net Sales, and a calculation of the royalties
due to CMU for such sales during the preceding calendar quarter and cumulatively
for the Year. Such written report shall also include a breakdown of such sales,
indicating (but only to the extent LICENSEE breaks down such sales in, and with
the definitions used in, LICENSEE'S own internal reporting):
(a) Net Sales of Licensed Products sold -- by major categories
such as repertory / accompaniment, application software,
application hardware, etc., and in total;
(b) Number of Licensed Products Units sold -- by major categories
as defined in LICENSEE'S own internal reporting, such as
repertory, accompaniment, application software, application
hardware, Combined Products, etc.
(c) Number of Coda / Vivace / SmartMusic Assessment products sold
- (1) as a separate unit or module, and/or (2) as a built-in
component or function of other Vivace / Coda / SmartMusic
products.
Where classifications for such reporting should be unclear, LICENSEE may consult
with CMU as to the proper classification and/or interpretation of such written
reports.
<PAGE>
J. Other Provisions
1. Except as hereby amended in Amendment #4, the provisions of the
original License Agreement and of the first three Amendments, all as
subsequently amended, shall continue in full force and effect and
constitute this License.
2. If any provision of Amendment #4 should be in conflict with the
Original License Agreement and/or Previous Amendments, the provisions
of this Amendment #4 shall control.
3. LICENSEE shall not (a) pursue any of the following actions itself nor
(b) induce any other party to pursue such actions nor (c) knowingly
support or be a party to any such actions by any other party, unless
required to do so under a court order not obtained with the consent of
LICENSEE:
(1) to question the validity of this License and/or the Rights defined
in paragraph 1.2.
(2) to seek recovery of moneys paid by LICENSEE to CMU.
K. Notices (General)
Article XIV is amended as follows: The designated name and address for
CMU shall be --
Mark Coticchia, Director of Technology Transfer
Carnegie Mellon University, Warner Hall 407
5000 Forbes Avenue
Pittsburgh, PA 15213-3890
Fax 412-268-7395
(Balance of this page intentionally left blank)
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement, with the intention
of being legally bound, as of December 30, 1998.
The undersigned confirm that they have the authority to bind to this Agreement
the party on behalf of which they are executing below.
Accepted and agreed to:
For Coda Music Technology, Inc.
/s/ Ron Raup
Ron Raup
President and Chief Operating Officer
For Carnegie Mellon University
/s/ Susan Burkett /s/ Mark E. Coticchia
Susan Burkett Mark E. Coticchia
Associate Provost Director of Technology Transfer
<TABLE>
<CAPTION>
LOAN AGREEMENT
- ----------------- ------------- ------------ ----------- -------- ------------ ------------ -------- ----------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$500,000.00 02-14-1999 02-14-2000 90485255 01 3000 115342 GRA
- ----------------- ------------- ------------ ----------- -------- ------------ ------------ -------- ----------
References in the shaded area are for Lender's use only and do not limit the applicability of this document
to any particular loan or item.
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Borrower: CODA MUSIC TECHNOLOGY, INC. Lender: RIVERSIDE BANK
6210 BURY DRIVE MINNESOTA CENTER OFFICE
EDEN PRAIRIE, MN 55346 7760 FRANCE AVENUE SOUTH, SUITE 125
BLOOMINGTON, MN 55435
================================================================================================================
</TABLE>
THIS LOAN AGREEMENT between CODA MUSIC TECHNOLOGY, INC. ("Borrower") and
RIVERSIDE BANK ("Lender") is made and executed on the following terms and
conditions. Borrower has received prior commercial loans from Lender or has
applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of February 14, 1999, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
<PAGE>
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with
all exhibits and schedules attached to this Loan Agreement from time to
time.
Account. The word "Account" means a trade account, account receivable,
or other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).
Account Debtor. The words "Account Debtor" mean the person or entity
obligated upon an Account.
Advance. The word "Advance" means a disbursement of Loan funds under
this Agreement.
Borrower. The word "Borrower" means CODA MUSIC TECHNOLOGY, INC.. The
word "Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
Borrowing Base. The words "Borrowing Base" mean, as determined by
Lender from time to time, the lesser of (a) $500,000.00; or (b) the sum
of (i) 75.000% of the aggregate amount of Eligible Accounts, plus (ii)
25.000% of the aggregate amount of Eligible Inventory.
Business Day. The words "Business Day" mean a day on which commercial
banks are open for business in the State of Minnesota.
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
<PAGE>
Cash Flow. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
Collateral. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan,
whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted
in the form of a security interest, mortgage, deed of trust,
assignment, pledge, chattel mortgage, chattel trust, factor's lien,
equipment trust, conditional sale, trust receipt, lien, charge, lien or
title retention contract, lease or consignment intended as a security
device, or any other security or lien interest whatsoever, whether
created by law, contract, or otherwise. The word "Collateral" includes
without limitation all collateral described below in the section titled
"COLLATERAL."
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
Eligible Accounts. The words "Eligible Accounts" mean, at any time, all
of Borrower's Accounts which contain selling terms and conditions
acceptable to Lender. The net amount of any Eligible Account against
which Borrower may borrow shall exclude all returns, discounts,
credits, and offsets of any nature. Unless otherwise agreed to by
Lender in writing, Eligible Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an
officer, an employee or agent of Borrower.
b) Accounts with respect to which the Account Debtor is a
subsidiary of, or affiliated with or related to Borrower or
its shareholders, officers, or directors.
(c) Accounts with respect to which goods are placed on
consignment, guaranteed sale, or other terms by reason of
which the payment by the Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a
resident of the United States, except to the extent such
Accounts are supported by insurance, bonds or other assurances
satisfactory to Lender. Applies to accounts greater than
$35,000.
(e) Accounts with respect to which Borrower is or may become
liable to the Account Debtor for goods sold or services
rendered by the Account Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or
setoff.
(g) Accounts with respect to which the goods have not been
shipped or delivered, or the services have not been rendered,
to the Account Debtor.
(h) Accounts with respect to which Lender, in its sole
discretion, deems the creditworthiness or financial condition
of the Account Debtor to be unsatisfactory.
(i) Accounts of any Account Debtor who has filed or has had
filed against it a petition in bankruptcy or an application
for relief under any provision of any state or federal
bankruptcy, insolvency, or debtor-in-relief acts; or who has
had appointed a trustee, custodian, or receiver for the assets
of such Account Debtor; or who has made an assignment for the
benefit of creditors or has become insolvent or fails
generally to pay its debts (including its payrolls) as such
debts become due.
j) Accounts with respect to which the Account Debtor is the
United States government or any department or agency of the
United States.
(k) Accounts which have not been paid in full within 90 DAYS
from the invoice date.
<PAGE>
(1) Accounts which have not been paid in full within INVOICE
TERMS from the invoice date. The entire balance of any Account
of any single Account Debtor will be ineligible whenever the
portion of the Account which has not been paid within INVOICE
TERMS from the invoice date is in excess of 10.000% of the
total amount outstanding on the Account. (m) That portion of
the Accounts of any single Account Debtor which exceeds
25.000% of all of Borrower's Accounts.
Eligible Inventory. The words "Eligible Inventory" mean, at any time,
all of Borrower's Inventory as defined below except:
(a) Inventory which is not owned by Borrower free and clear of
all security interests, liens, encumbrances, and claims of
third parties.
b) Inventory which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or unfit for further
processing.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
Expiration Date. The words "Expiration Date" mean the date of
termination of Lender's commitment to lend under this Agreement.
Grantor. The word "Grantor" means and includes without limitation each
and all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all
Borrowers granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well
as all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter existing, voluntary or involuntary, due or not
due, absolute or contingent, liquidated or unliquidated, whether
Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise; whether
recovery upon such Indebtedness may be or hereafter may become barred
by any statute of limitations; and whether such Indebtedness may be or
hereafter may become otherwise unenforceable.
Inventory. The word "Inventory" means all of Borrower's raw materials,
work in process, finished goods, merchandise, parts and supplies, of
every kind and description, and goods held for sale or lease or
furnished under contracts of service in which Borrower now has or
hereafter acquires any right, whether held by Borrower or others, and
all documents of title, warehouse receipts, bills of lading, and all
other documents of every type covering all or any part of the
foregoing. Inventory includes inventory temporarily out of Borrower's
custody or possession and all returns on Accounts.
Lender. The word "Lender" means RIVERSIDE BANK, its successors and
assigns.
Line of Credit. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand
plus Borrower's readily marketable securities.
<PAGE>
Loan. The word "Loan" or "Loans" means and includes without limitation
any and all commercial loans and financial accommodations from Lender
to Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to
this Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan
obligations in favor of Lender, as well as any substitute, replacement
or refinancing note or notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and
security interests securing Indebtedness owed by Borrower to Lender;
(b) liens for taxes, assessments, or similar charges either not yet due
or being contested in good faith; (c) liens of materialmen, mechanics,
warehousemen, or carriers, or other like liens arising in the ordinary
course of business and securing obligations which are not yet
delinquent; (d) purchase money liens or purchase money security
interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the
date of this Agreement or permitted to be incurred under the paragraph
of this Agreement titled "Indebtedness and Liens"; (e) liens and
security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those liens
and security interests which in the aggregate constitute an immaterial
and insignificant monetary amount with respect to the net value of
Borrower's assets.
Related Documents. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract,
or otherwise, evidencing, governing, representing, or creating a
Security Interest.
Security Interest. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the form
of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional
sale, trust receipt, lien or title retention contract, lease or
consignment intended as a security device, or any other security or
lien interest whatsoever, whether created by law, contract, or
otherwise.
SARA. The word "SARA" means the Superfund Amendments and
Reauthorization Act of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written
agreement to indebtedness owed by Borrower to Lender in form and
substance acceptable to Lender.
Tangible Net Worth. The term "Tangible Net Worth" shall mean Borrower's
total assets excluding all intangible assets (i.e., goodwill,
trademarks, patents, copyrights, organizational expenses, and similar
intangible items, but including leaseholds and leasehold improvements)
and Related Party Notes less total debt. The term "Related Party Notes"
shall mean all notes due from companies affiliated by common ownership,
officers, directors, stockholders, or employees. The term "Debt" shall
mean all of Borrower's liabilities excluding subordinated debt. The
term "Subordinated Debt" shall mean indebtedness and liabilities of
Borrower which have been subordinated by written agreement to
indebtedness owed by Borrower to Lender in form and substance
acceptable to Lender.
<PAGE>
Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current
liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.
Conditions Precedent to Each Advance. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is
subject to the following conditions precedent, with all documents,
instruments, opinions, reports, and other items required under this
Agreement to be in form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement
and all Related Documents have been duly authorized, executed,
and delivered by Borrower to Lender.
(b) Lender shall have received such opinions of counsel,
supplemental opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been
duly authorized, created, and perfected with first lien
priority and shall be in full force and effect.
(d) All guaranties required by Lender for the Line of Credit
shall have been executed by each Guarantor, delivered to
Lender, and be in full force and effect.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, Inventory, books,
records, and operations, and Lender shall be satisfied as to
their condition.
(f) Borrower shall have paid to Lender all fees, costs, and
expenses specified in this Agreement and the Related Documents
as are then due and payable.
(g) There shall not exist at the time of any Advance a
condition which would constitute an Event of Default under
this Agreement.
Making Loan Advances. Advances under the credit facility, as well as
directions for payment from Borrower's accounts, may be requested
orally or in writing by authorized persons. Lender may, but need not,
require that all oral requests be confirmed in writing. Each Advance
shall be conclusively deemed to have been made at the request of and
for the benefit of Borrower (a) when credited to any deposit account of
Borrower maintained with Lender or (b) when advanced in accordance with
the instructions of an authorized person. Lender, at its option, may
set a cutoff time, after which all requests for Advances will be
treated as having been requested on the next succeeding Business Day.
Mandatory Loan Repayments. If at any time the aggregate principal
amount of the outstanding Advances shall exceed the applicable
Borrowing Base, Borrower, immediately upon written or oral notice from
Lender, shall pay to Lender an amount equal to the difference between
the outstanding principal balance of the Advances and the Borrowing
Base. On the Expiration Date, Borrower shall pay to Lender in full the
aggregate unpaid principal amount of all Advances then outstanding and
all accrued unpaid interest, together with all other applicable fees,
costs and charges, if any, not yet paid.
Loan Account. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits
<PAGE>
and credits as shall be appropriate in connection with the credit
facility. Lender shall provide Borrower with periodic statements of
Borrower's account, which statements shall be considered to be correct
and conclusively binding on Borrower unless Borrower notifies Lender to
the contrary within thirty (30) days after Borrower's receipt of any
such statement which Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all other
Loans, obligations and duties owed by Borrower to Lender, Borrower (and others,
if required) shall grant to Lender Security Interests in such property and
assets as Lender may require (the "Collateral"), including without limitation
Borrower's present and future Accounts, general intangibles, and Inventory.
Lender's Security Interests in the Collateral shall be continuing liens and
shall include the proceeds and products of the Collateral, including without
limitation the proceeds of any insurance. With respect to the Collateral,
Borrower agrees and represents and warrants to Lender:
Perfection of Security Interests. Borrower agrees to execute such
financing statements and to take whatever other actions are requested
by Lender to perfect and continue Lender's Security Interests in the
Collateral. Upon request of Lender, Borrower will deliver to Lender any
and all of the documents evidencing or constituting the Collateral, and
Borrower will note Lender's interest upon any and all chattel paper if
not delivered to Lender for possession by Lender. Contemporaneous with
the execution of this Agreement, Borrower will execute one or more UCC
financing statements and any similar statements as may be required by
applicable law, and will file such financing statements and all such
similar statements in the appropriate location or locations. Borrower
hereby appoints Lender as its irrevocable attorney-in-fact for the
purpose of executing any documents necessary to perfect or to continue
any Security Interest. Lender may at any time, and without further
authorization from Borrower, file a carbon, photograph, facsimile, or
other reproduction of any financing statement for use as a financing
statement. Borrower will reimburse Lender for all expenses for the
perfection, termination, and the continuation of the perfection of
Lender's security interest in the Collateral. Borrower promptly will
notify Lender of any change in Borrower's name including any change to
the assumed business names of Borrower. Borrower also promptly will
notify Lender of any change in Borrower's Social Security Number or
Employer Identification Number. Borrower further agrees to notify
Lender in writing prior to any change in address or location of
Borrower's principal governance office or should Borrower merge or
consolidate with any other entity.
Collateral Records. Borrower does now, and at all times hereafter
shall, keep correct and accurate records of the Collateral, all of
which records shall be available to Lender or Lender's representative
upon demand for inspection and copying at any reasonable time. With
respect to the Accounts, Borrower agrees to keep and maintain such
records as Lender may require, including without limitation information
concerning Eligible Accounts and Account balances and agings. With
respect to the Inventory, Borrower agrees to keep and maintain such
records as Lender may require, including without limitation information
concerning Eligible Inventory and records itemizing and describing the
kind, type, quality, and quantity of Inventory, Borrower's Inventory
costs and selling prices, and the daily withdrawals and additions to
Inventory.
Collateral Schedules. Concurrently with the execution and delivery of
this Agreement, Borrower shall execute and deliver to Lender schedules
of Accounts and Inventory and Eligible Accounts and Eligible Inventory,
in form and substance satisfactory to the Lender. Thereafter and at
such frequency as Lender shall require, Borrower shall execute and
deliver to Lender such supplemental schedules of Eligible Accounts and
Eligible Inventory and such other matters and information relating to
the Accounts and Inventory as Lender may request.
Representations and Warranties Concerning Accounts. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; (b) All Account information listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; and
(c) Lender, its assigns, or agents shall have the right at any time and
at Borrower's expense to inspect, examine, and audit Borrower's records
and to confirm with Account Debtors the accuracy of such Accounts.
<PAGE>
Representations and Warranties Concerning Inventory. With respect to
the Inventory, Borrower represents and warrants to Lender: (a) All
Inventory represented by Borrower to be Eligible Inventory for purposes
of this Agreement conforms to the requirements of the definition of
Eligible Inventory; (b) All Inventory values listed on schedules
delivered to Lender will be true and correct, subject to immaterial
variance; (c) The value of the Inventory will be determined on a
consistent accounting basis; (d) Except as agreed to the contrary by
Lender in writing, all Eligible Inventory is now and at all times
hereafter will be in Borrower's physical possession and shall not be
held by others on consignment, sale on approval, or sale or return; (e)
Except as reflected in the Inventory schedules delivered to Lender, all
Eligible Inventory is now and at all times hereafter will be of good
and merchantable quality, free from defects; (f) Eligible Inventory is
not now and will not at any time hereafter be stored with a bailee,
warehouseman, or similar party without Lender's prior written consent,
and, in such event, Borrower will concurrently at the time of bailment
cause any such bailee, warehouseman, or similar party to issue and
deliver to Lender, in form acceptable to Lender, warehouse receipts in
Lender's name evidencing the storage of Inventory; and (g) Lender, its
assigns, or agents shall have the right at any time and at Borrower's
expense to inspect and examine the Inventory and to check and test the
same as to quality, quantity, value, and condition.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the state of
Borrower's incorporation and is validly existing and in good standing
in all states in which Borrower is doing business. Borrower has the
full power and authority to own its properties and to transact the
businesses in which it is presently engaged or presently proposes to
engage. Borrower also is duly qualified as a foreign corporation and is
in good standing in all states in which the failure to so qualify would
have a material adverse effect on its businesses or financial
condition.
Authorization. The execution, delivery, and performance of this
Agreement and all Related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly authorized
by all necessary action by Borrower; do not require the consent or
approval of any other person, regulatory authority or governmental
body; and do not conflict with, result in a violation of, or constitute
a default under (a) any provision of its articles of incorporation or
organization, or bylaws, or any agreement or other instrument binding
upon Borrower or (b) any law, governmental regulation, court decree, or
order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as
of the date of the statement, and there has been no material adverse
change in Borrower's financial condition subsequent to the date of the
most recent financial statement supplied to Lender. Borrower has no
material contingent obligations except as disclosed in such financial
statements.
Legal Effect. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered
will constitute, legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective terms.
Properties. Except for Permitted Liens, Borrower owns and has good
title to all of Borrower's properties free and clear of all Security
Interests, and has not executed any security documents or financing
statements relating to such properties. All of Borrower's properties
are titled in Borrower's legal name, and Borrower has not used, or
filed a financing statement under, any other name for at least the last
five (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used in
this Agreement, shall have the same meanings as set forth in the
<PAGE>
"CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq., the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901, et seq., or other applicable state or Federal
laws, rules, or regulations adopted pursuant to any of the foregoing.
Except as disclosed to and acknowledged by Lender in writing, Borrower
represents and warrants that: (a) During the period of Borrower's
ownership of the properties, there has been no use, generation,
manufacture, storage, treatment, disposal, release or threatened
release of any hazardous waste or substance by any person on, under,
about or from any of the properties. (b) Borrower has no knowledge of,
or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened
release of any hazardous waste or substance on, under, about or from
the properties by any prior owners or occupants of any of the
properties, or (ii) any actual or threatened litigation or claims of
any kind by any person relating to such matters. (c) Neither Borrower
nor any tenant, contractor, agent or other authorized user of any of
the properties shall use, generate, manufacture, store, treat, dispose
of, or release any hazardous waste or substance on, under, about or
from any of the properties; and any such activity shall be conducted in
compliance with all applicable federal, state, and local laws,
regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Borrower authorizes Lender
and its agents to enter upon the properties to make such inspections
and tests as Lender may deem appropriate to determine compliance of the
properties with this section of the Agreement. Any inspections or tests
made by Lender shall be at Borrower's expense and for Lender's purposes
only and shall not be construed to create any responsibility or
liability on the part of Lender to Borrower or to any other person. The
representations and warranties contained herein are based on Borrower's
due diligence in investigating the properties for hazardous waste and
hazardous substances. Borrower hereby (a) releases and waives any
future claims against Lender for indemnity or contribution in the event
Borrower becomes liable for cleanup or other costs under any such laws,
and (b) agrees to indemnify and hold harmless Lender against any and
all claims, losses, liabilities, damages, penalties, and expenses which
Lender may directly or indirectly sustain or suffer resulting from a
breach of this section of the Agreement or as a consequence of any use,
generation, manufacture, storage, disposal, release or threatened
release of a hazardous waste or substance on the properties. The
provisions of this section of the Agreement, including the obligation
to indemnify, shall survive the payment of the Indebtedness and the
termination or expiration of this Agreement and shall not be affected
by Lender's acquisition of any interest in any of the properties,
whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid
taxes) against Borrower is pending or threatened, and no other event
has occurred which may materially adversely affect Borrower's financial
condition or properties, other than litigation, claims, or other
events, if any, that have been disclosed to and acknowledged by Lender
in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports
of Borrower that are or were required to be filed, have been filed, and
all taxes, assessments and other governmental charges have been paid in
full, except those presently being or to be contested by Borrower in
good faith in the ordinary course of business and for which adequate
reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
Interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrower's Loan and Note, that would be prior or
that may in any way be superior to Lender's Security Interests and
rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note
and all of the Related Documents are binding upon Borrower as well as
upon Borrower's successors, representatives and assigns, and are
legally enforceable in accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
<PAGE>
Employee Benefit Plans. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable
Event nor Prohibited Transaction (as defined in ERISA) has occurred
with respect to any such plan, (ii) Borrower has not withdrawn from any
such plan or initiated steps to do so, (iii) no steps have been taken
to terminate any such plan, and (iv) there are no unfunded liabilities
other than those previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of
business, or Borrower's Chief executive office, if Borrower has more
than one place of business, is located at 6210 BURY DRIVE, EDEN
PRAIRIE, MN 55346. Unless Borrower has designated otherwise in writing
this location is also the office or offices where Borrower keeps its
records concerning the Collateral.
Year 2000. Borrower warrants and represents that all software utilized
in the conduct of Borrower's business will have appropriate
capabilities and compatiblity for operation to handle calendar dates
falling on or after January 1, 2000, and all information pertaining to
such calendar dates, in the same manner and with the same functionality
as the software does respecting calendar dates falling on or before
December 31, 1999. Further, Borrower warrants and represents that the
data-related user interface functions, data-fields, and data-related
program instructions and functions of the software include the
indication of the century.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be, true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.
Survival of Representations and Warranties. Borrower understands and
agrees that Lender, without independent investigation, is relying upon
the above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations
and warranties shall be continuing in nature and shall remain in full
force and effect until such time as Borrower's Indebtedness shall be
paid in full, or until this Agreement shall be terminated in the manner
provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that,
while this Agreement is in effect Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all existing
and all threatened litigation, claims, investigations, administrative
proceedings or similar actions affecting Borrower or any Guarantor
which could materially affect the financial condition of Borrower or
the financial condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent
basis, and permit Lender to examine and audit Borrower's books and
records at all reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but in
no event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended,
audited by a certified public accountant satisfactory to Lender, and,
as soon as available, but in no event later than thirty (30) days after
the end of each month, Borrower's balance sheet and profit and loss
statement for the period ended, prepared and certified as correct to
the best knowledge and belief by Borrower's chief financial officer or
other officer or person acceptable to Lender. All financial reports
required to be provided under this Agreement shall be prepared in
accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.
<PAGE>
Additional Information. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and
other reports with respect to Borrower's financial condition and
business operations as Lender may request from time to time. Additional
information shall be delivered according to the following schedule:
ACCOUNTS RECEIVABLES LISTING DUE MONTHLY WITHIN 30 DAYS OF MONTH END.
THE BORROWERS PROJECTIONS WILL BE SUBSTANTIALLY CORRECT. FINANCIAL
STATEMENTS PROVIDED BY THE BORROWER WILL BE GIVEN TO THE LENDER NO
LATER THAN 20 DAYS FROM AN ADVANCE ON THE NOTE. COLLATERAL SCHEDULE IS
DUE MONTHLY WITHIN 30 DAYS OF MONTH END ONLY WHEN THE BORROWER HAS A
BALANCE ON THE NOTE. COMPANY IS TO BE SUBSTANTIALLY ON BUDGET AS
PROVIDED ON NOVEMBER 19,1998.
Financial Covenants and Ratios. Comply with the following covenants and
ratios:
Tangible Net Worth. Maintain a minimum Tangible Net Worth
of not less than $1,200,000.00 at
February 15, 1999 and monthly thereafter.
For purposes of this Agreement and to the extent the following terms
are utilized in this Agreement, the term "Tangible Net Worth" shall
mean Borrower's total assets excluding all intangible assets (i.e.,
goodwill, trademarks, patents, copyrights, organizational expenses, and
similar intangible items, but including leaseholds and leasehold
improvements) and Related Party Notes less total debt. The term
"Related Party Notes" shall mean all notes due from companies
affiliated by common ownership, officers, directors, stockholders, or
employees. The term "Debt" shall mean all of Borrower's liabilities
excluding subordinated debt. The term "Subordinated Debt" shall mean
indebtedness and liabilities of Borrower which have been subordinated
by written agreement to indebtedness owed by Borrower to Lender in form
and substance acceptable to Lender. The term "Working Capital" shall
mean Borrower's current assets, excluding prepaid expenses, less
Borrower's current liabilities. The term "Liquid Assets" shall mean
Borrower's cash on hand plus Borrower's receivables. The term "Cash
Flow" shall mean net income after taxes, and exclusive of extraordinary
gains and income, plus depreciation and amortization. Except as
provided above, all computations made to determine compliance with the
requirements contained in this paragraph shall be made in accordance
with generally accepted accounting principles, applied on a consistent
basis, and certified by Borrower as being true and correct.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect
to Borrower's properties and operations, in form, amounts, coverages
and with insurance companies reasonably acceptable to Lender. Borrower,
upon request of Lender, will deliver to Lender from time to time the
policies or certificates of insurance in form satisfactory to Lender,
including stipulations that coverages will not be cancelled or
diminished without at least ten (10) days' prior written notice to
Lender. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any
way by any act, omission or default of Borrower or any other person. In
connection with all policies covering assets in which Lender holds or
is offered a security interest for the Loans, Borrower will provide
Lender with such loss payable or other endorsements as Lender may
require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports
on each existing insurance policy showing such information as Lender
may reasonably request, including without limitation the following: (a)
the name of the insurer; (b) the risks insured; (c) the amount of the
policy; (d) the properties insured; (e) the then current property
values on the basis of which insurance has been obtained, and the
manner of determining those values; and (f) the expiration date of the
policy. In addition, upon request of Lender (however not more often
than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value
or replacement cost of any Collateral. The cost of such appraisal shall
be paid by Borrower.
<PAGE>
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
Loan Fees and Charges. In addition to all other agreed upon fees and
charges, pay the following: $5,000.00.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
Indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every
kind and nature, imposed upon Borrower or its properties, income, or
profits, prior to the date on which penalties would attach, and all
lawful claims that, if unpaid, might become a lien or charge upon any
of Borrower's properties, income, or profits. Provided however,
Borrower will not be required to pay and discharge any such assessment,
tax, charge, levy, lien or claim so long as (a) the legality of the
same shall be contested in good faith by appropriate proceedings, and
(b) Borrower shall have established on its books adequate reserves with
respect to such contested assessment, tax, charge, levy, lien, or claim
in accordance with generally accepted accounting practices. Borrower,
upon demand of Lender, will furnish to Lender evidence of payment of
the assessments, taxes, charges, levies, liens and claims and will
authorize the appropriate governmental official to deliver to Lender at
any time a written statement of any assessments, taxes, charges,
levies, liens and claims against Borrowers properties, income, or
profits.
Performance. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related Documents in
a timely manner, and promptly notify Lender if Borrower learns of the
occurrence of any event which constitutes an Event of Default under
this Agreement or under any of the Related Documents.
Operations. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender of
any change in executive and management personnel; conduct its business
affairs in a reasonable and prudent manner and in compliance with all
applicable federal, state and municipal laws, ordinances, rules and
regulations respecting its properties, charters, businesses and
operations, including without limitation, compliance with the Americans
With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee
benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable time
to inspect any and all Collateral for the Loan or Loans and Borrower's
other properties and to examine or audit Borrower's books, accounts,
and records and to make copies and memoranda of Borrower's books,
accounts, and records. If Borrower now or at any time hereafter
maintains any records (including without limitation computer generated
records and computer software programs for the generation of such
records) in the possession of a third party, Borrower, upon request of
Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of
any records it may request, all at Borrower's expense.
Environmental Compliance and Reports. Borrower shall comply in all
respects with all environmental protection federal, state and local
laws, statutes, regulations and ordinances; not cause or permit to
exist, as a result of an intentional or unintentional action or
omission on its part or on the part of any third party, on property
owned and/or occupied by Borrower, any environmental activity where
damage may result to the environment, unless such environmental
activity is pursuant to and in compliance with the conditions of a
<PAGE>
permit issued by the appropriate federal, state or local governmental
authorities; shall furnish to Lender promptly and in any event within
thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with
any environmental activity whether or not there is damage to the
environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements,
financing statements, instruments, documents and other agreements as
Lender or its attorneys may reasonably request to evidence and secure
the Loans and to perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the
normal course of business and indebtedness to Lender contemplated by
this Agreement, create, incur or assume indebtedness for borrowed
money, including capital leases, (b) except as allowed as a Permitted
Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security
interest in, or encumber any of Borrower's assets, or (c) sell with
recourse any of Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, (c) pay any dividends on Borrower's stock (other than
dividends payable in its stock), provided, however that notwithstanding
the foregoing, but only so long as no Event of Default has occurred and
is continuing or would result from the payment of dividends, if
Borrower is a "Subchapter S Corporation" (as defined in the Internal
Revenue Code of 1986, as amended), Borrower may pay cash dividends on
its stock to its shareholders from time to time in amounts necessary to
enable the shareholders to pay income taxes and make estimated income
tax payments to satisfy their liabilities under federal and state law
which arise solely from their status as Shareholders of a Subchapter S
Corporation because of their ownership of shares of stock of Borrower,
or (d) purchase or retire any of Borrower's outstanding shares or alter
or amend Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or (c) incur any obligation as surety or
guarantor other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the Indebtedness against any and all such accounts.
<PAGE>
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when
due on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or
failure of Borrower to comply with or to perform any other term,
obligation, covenant or condition contained in any other agreement
between Lender and Borrower.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under
this Agreement or the Related Documents is false or misleading in any
material respect at the time made or furnished, or becomes false or
misleading at any time thereafter.
Defective Collateralization. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any Security Agreement to create a valid and perfected Security
Interest) at any time and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a
receiver for any part of Borrower's property, any assignment for the
benefit of creditors, any type of creditor workout, or the commencement
of any proceeding under any bankruptcy or insolvency laws by or against
Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the
Indebtedness, or by any governmental agency. This includes a
garnishment, attachment, or levy on or of any of Borrower's deposit
accounts with Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Borrower or Grantor, as the case may
be, as to the validity or reasonableness of the claim which is the
basis of the creditor or forfeiture proceeding, and if Borrower or
Grantor gives Lender written notice of the creditor or forfeiture
proceeding and furnishes reserves or a surety bond for the creditor or
forfeiture proceeding satisfactory to Lender.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor
dies or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the Indebtedness. Lender, at its
option, may, but shall not be required to, permit the Guarantor's
estate to assume unconditionally the obligations arising under the
guaranty in a manner satisfactory to Lender, and, in doing so, cure the
Event of Default.
Change In Ownership. Any change in ownership of twenty-five percent
(25%) or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or
performance of the Indebtedness is impaired.
Year 2000 Compliance Failure. Failure to meet the deadlines required in
the Year 2000 Compliance Agreement to be Year 2000 Compliant or a
reasonable likelihood that Borrower cannot be Year 2000 Compliant on or
before December 31, 1999.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been
given a notice of a similar default within the preceding twelve (12)
<PAGE>
months, it may be cured (and no Event of Default will have occurred) if
Borrower or Grantor, as the case may be, after receiving written notice
from Lender demanding cure of such default: (a) cures the default
within fifteen (15) days; or (b) if the cure requires more than fifteen
(15) days, immediately initiates steps which Lender deems in Lender's
sole discretion to be sufficient to cure the default and thereafter
continues and completes all reasonable and necessary steps sufficient
to produce compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur,
except where otherwise provided in this Agreement or the Related
Documents, all commitments and obligations of Lender under this
Agreement or the Related Documents or any other agreement immediately
will terminate (including any obligation to make Loan Advances or
disbursements), and, at Lender's option, all Indebtedness immediately
will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type
described in the "Insolvency" subsection above, such acceleration shall
be automatic and not optional. In addition, Lender shall have all the
rights and remedies provided in the Related Documents or available at
law, in equity, or otherwise. Except as may be prohibited by applicable
law, all of Lender's rights and remedies shall be cumulative and may be
exercised singularly or concurrently. Election by Lender to pursue any
remedy shall not exclude pursuit of any other remedy, and an election
to make expenditures or to take action to perform an obligation of
Borrower or of any Grantor shall not affect Lender's right to declare a
default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment
to this Agreement shall be effective unless given in writing and signed
by the party or parties sought to be charged or bound by the alteration
or amendment.
Applicable Law. This Agreement has been delivered to Lender and
accepted by Lender in the State of Minnesota. If there is a lawsuit,
Borrower agrees upon Lender's request to submit to the jurisdiction of
the courts of HENNEPIN County, the State of Minnesota. This Agreement
shall be governed by and construed in accordance with the laws of the
State of Minnesota.
Caption Headings. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or define
the provisions of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower
under this Agreement shall be joint and several, and all references to
Borrower shall mean each and every Borrower. This means that each of
the persons signing below is responsible for all obligations in this
Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any
other matter relating to the Loan, and Borrower hereby waives any
rights to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation
interests, as well as all notices of any repurchase of such
participation interests. Borrower also agrees that the purchasers of
any such participation interests will be considered as the absolute
owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the
sale of such participation interests. Borrower further waives all
rights of offset or counterclaim that it may have now or later against
Lender or against any purchaser of such a participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
Insolvency of any holder of any Interest in the Loans. Borrower further
agrees that the purchaser of any such participation Interests may
enforce its Interests irrespective of any personal claims or defenses
that Borrower may have against Lender.
<PAGE>
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification
and collection of this Agreement or in connection with the Loans made
pursuant to this Agreement. Lender may pay someone else to help collect
the Loans and to enforce this Agreement, and Borrower will pay that
amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses, whether or not
there is a lawsuit, including attorneys' fees for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all
other sums provided by law.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise
required by law), and shall be effective when actually delivered or
when deposited with a nationally recognized overnight courier or
deposited in the United States mail, first class, postage prepaid,
addressed to the party to whom the notice is to be given at the address
shown above. Any party may change its address for notices under this
Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's
address. To the extent permitted by applicable law, if there is more
than one Borrower, notice to any Borrower will constitute notice to all
Borrowers. For notice purposes, Borrower will keep Lender informed at
all times of Borrower's current addresse(es).
Severability. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible,
any such offending provision shall be deemed to be modified to be
within the limits of enforceability or validity; however, if the
offending provision cannot be so modified, it shall be stricken and all
other provisions of this Agreement in all other respects shall remain
valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of
any provisions of this Agreement makes it appropriate, including
without limitation any representation, warranty or covenant, the word
"Borrower" as used herein shall include all subsidiaries and affiliates
of Borrower. Notwithstanding the foregoing however, under no
circumstances shall this Agreement be construed to require Lender to
make any Loan or other financial accommodation to any subsidiary or
affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall
inure to the benefit of Lender, its successors and assigns. Borrower
shall not, however, have the right to assign its rights under this
Agreement or any interest therein, without the prior written consent of
Lender.
Survival. All warranties, representations, and covenants made by
Borrower in this Agreement or in any certificate or other instrument
delivered by Borrower to Lender under this Agreement shall be
considered to have been relied upon by Lender and will survive the
making of the Loan and delivery to Lender of the Related Documents,
regardless of any investigation made by Lender or on Lender's behalf.
Time Is of the Essence. Time is of the essence in the performance of
this Agreement.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right
shall operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not prejudice or
constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing between
<PAGE>
Lender and Borrower, or between Lender and any Grantor, shall
constitute a waiver of any of Lender's rights or of any obligations of
Borrower or of any Grantor as to any future transactions. Whenever the
consent of Lender is required under this Agreement, the granting of
such consent by Lender in any instance shall not constitute continuing
consent in subsequent instances where such consent is required, and in
all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND
BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF FEBRUARY 14, 1999.
BORROWER:
CODA MUSIC TECHNOLOGY, INC.
By: ______________________________ By: _____________________________
RON RAUP, PRESIDENT BARBARA REMLEY, CFO
LENDER:
RIVERSIDE BANK
By: ______________________________
Authorized Officer
<PAGE>
<TABLE>
<CAPTION>
CHANGE IN TERMS AGREEMENT
- ----------------- -------------- ------------- ----------- --------- ------------ ------------ --------- ----------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$500,000.00 02-14-2000 90485255 01 3000 115342 GRA
- -------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of
this document to any particular loan or item.
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Borrower: CODA MUSIC TECHNOLOGY, INC. Lender: RIVERSIDE BANK
6210 BURY DRIVE MINNESOTA CENTER OFFICE
EDEN PRAIRIE, MN 55346 7760 FRANCE AVENUE SOUTH, SUITE 125
BLOOMINGTON, MN 55435
====================================================================================================================
</TABLE>
Principal Amount: $500,000.00 Date of Agreement: February 14, 1999
DESCRIPTION OF EXISTING INDEBTEDNESS. A PROMISSORY NOTE# 90485255 DATED FEBRUARY
14, 1997 IN THE ORIGINAL AMOUNT OF $500,000.00. CHANGE IN TERMS AGREEMENT
#90485255 DATED FEBRUARY 14, 1998.
DESCRIPTION OF COLLATERAL. ALL CORPORATE ASSETS PER COMMERCIAL SECURITY
AGREEMENT DATED FEBRUARY 14, 1997.
DESCRIPTION OF CHANGE IN TERMS. RENEW WORKING CAPITAL LINE OF CREDIT.
PROMISE TO PAY. CODA MUSIC TECHNOLOGY, INC. ("Borrower") promises to pay to
RIVERSIDE BANK ("Lender"), or order, in lawful money of the United States of
America, the principal amount of Five Hundred Thousand & 00/100 Dollars
($500,000.00) or so much as may be outstanding, together with interest on the
unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on February 14, 2000. In addition, Borrower
will pay regular monthly payments of accrued unpaid interest beginning March 14,
1999, and all subsequent interest payments are due on the same day of each month
after that. The annual interest rate for this Agreement is computed on a 365/360
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change
from time to time based on changes in an independent index which is the PRIME
RATE OF INTEREST AS PUBLISHED EACH BUSINESS DAY IN THE MONEY RATES SECTION OF
THE WALL STREET JOURNAL (the "Index"). The Index is not necessarily the lowest
rate charged by Lender on its loans. If the Index becomes unavailable during the
term of this loan, Lender may designate a substitute index after notice to
Borrower. Lender will tell Borrower the current Index rate upon Borrower's
request. Borrower understands that Lender may make loans based on other rates as
well. The interest rate change will not occur more often than each DAY. The
Index currently is 7.750% per annum. The interest rate to be applied to the
unpaid principal balance of this Agreement will be at a rate of 1.000 percentage
point over the Index, resulting in an initial rate of 8.750% per annum. NOTICE:
Under no circumstances will the interest rate on this Agreement be more than the
maximum rate allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges
are earned fully as of the date of the loan and will not be subject to refund
upon early payment (whether voluntary or as a result of default), except as
<PAGE>
otherwise required by law. Except for the foregoing, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments of accrued unpaid interest.
Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the unpaid portion of the regularly scheduled payment.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this
Agreement or any agreement related to this Agreement, or in any other agreement
or loan Borrower has with Lender. (c) Any representation or statement made or
furnished to Lender by Borrower or on Borrower's behalf is false or misleading
in any material respect either now or at the time made or furnished. (d)
Borrower becomes insolvent, a receiver is appointed for any part of Borrower's
property, Borrower makes an assignment for the benefit of creditors, or any
proceeding is commenced either by Borrower or against Borrower under any
bankruptcy or insolvency laws. (e) Any creditor tries to take any of Borrower's
property on or in which Lender has a lien or security interest. This includes a
garnishment of any of Borrower's accounts with Lender. (f) Any guarantor dies or
any of the other events described in this default section occurs with respect to
any guarantor of this Agreement. (g) A material adverse change occurs in
Borrower's financial condition, or Lender believes the prospect of payment or
performance of the Indebtedness is impaired. (h) Lender in good faith deems
itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Agreement
within the preceding twelve (12) months, it may be cured (and no event of
default will have occurred) if Borrower, after receiving written notice from
Lender demanding cure of such default: (a) cures the default within fifteen (15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be sufficient
to cure the default and thereafter continues and completes all reasonable and
necessary steps sufficient to produce compliance as soon as reasonably
practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Agreement and all accrued unpaid interest immediately due,
without notice, and then Borrower will pay that amount. Lender may hire or pay
someone else to help collect this Agreement if Borrower does not pay. Borrower
also will pay Lender that amount. This includes, subject to any limits under
applicable law, Lender's attorneys' fees and Lender's legal expenses whether or
not there is a lawsuit, including attorneys' fees and legal expenses for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection services.
If not prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. This Agreement has been delivered to
Lender and accepted by Lender in the State of Minnesota. If there is a lawsuit,
Borrower agrees upon Lender's request to submit to the jurisdiction of the
courts of HENNEPIN County, the State of Minnesota. This Agreement shall be
governed by and construed in accordance with the laws of the State of Minnesota.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on this Agreement against any and all such accounts.
LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances
under this Agreement may be requested either orally or in writing by Borrower or
by an authorized person. Lender may, but need not, require that all oral
requests be confirmed in writing. All communications, instructions, or
<PAGE>
directions by telephone or otherwise to Lender are to be directed to Lender's
office shown above. Borrower agrees to be liable for all sums either: (a)
advanced in accordance with the instructions of an authorized person or (b)
credited to any of Borrower's accounts with Lender. The unpaid principal balance
owing on this Agreement at any time may be evidenced by endorsements on this
Agreement or by Lender's internal records, including daily computer print-outs.
Lender will have no obligation to advance funds under this Agreement if: (a)
Borrower or any guarantor is in default under the terms of this Agreement or any
agreement that Borrower or any guarantor has with Lender, including any
agreement made in connection with the signing of this Agreement; (b) Borrower or
any guarantor ceases doing business or is insolvent; (c) any guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such guarantor's
guarantee of this Agreement or any other loan with Lender; (d) Borrower has
applied funds provided pursuant to this Agreement for purposes other than those
authorized by Lender; or (e) Lender in good faith deems itself insecure under
this Agreement or any other agreement between Lender and Borrower.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of
the original obligation or obligations, including all agreements evidenced or
securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a satisfaction
of the obligation(s). It is the intention of Lender to retain as liable parties
all makers and endorsers of the original obligation(s), including accommodation
parties, unless a party is expressly released by Lender in writing. Any maker or
endorser, including accommodation makers, will not be released by virtue of this
Agreement. If any person who signed the original obligation does not sign this
Agreement below, than all persons signing below acknowledge that this Agreement
is given conditionally, based on the representation to Lender that the
non-signing party consents to the changes and provisions of this Agreement or
otherwise will not be released by it. This waiver applies not only to any
initial extension, modification or release, but also to all such subsequent
actions.
LOAN AGREEMENT. AN EXHIBIT, TITLED "LOAN AGREEMENT," IS ATTACHED TO THIS NOTE
AND BY THIS REFERENCE IS MADE A PART OF THIS NOTE JUST AS IF ALL THE PROVISIONS,
TERMS AND CONDITIONS OF THE LOAN AGREEMENT HAD BEEN FULLY SET FORTH IN THIS
NOTE.
SPECIAL PROVISION. NO ADVANCES SHALL BE MADE PRIOR TO THE RECEIPT OF THE 1998
AUDITED FINANCIAL STATEMENTS, WHICH SHALL HAVE NO MATERIAL ADVERSE CHANGE FROM
THE INTERNAL YEAR END FINANCIAL STATEMENTS PROVIDED.
MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights
or remedies under this Agreement without losing them. Borrower and any other
person who signs, guarantees or endorses this Agreement, to the extent allowed
by law, waive presentment, demand for payment, protest and notice of dishonor.
Upon any change in the terms of this Agreement, and unless otherwise expressly
stated in writing, no party who signs this Agreement, whether as maker,
guarantor, accommodation maker or endorser, shall be released from liability.
All such parties agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made.
SECTION DISCLOSURE. This loan is made under Minnesota Statutes, Section 47.59.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS.
<PAGE>
BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A
COMPLETED COPY OF THE AGREEMENT.
BORROWER:
CODA MUSIC TECHNOLOGY, INC.
By: _______________________________ By: _____________________________
RON RAUP, PRESIDENT BARBARA REMLEY, CFO
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
<TABLE>
<CAPTION>
- ----------------- -------------- -------------- ------------ --------- ------------ ------------ -------- ----------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$500,000.00 02-14-2000 90485255 01 3000 115342 GRA
- --------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document
to any particular loan or item.
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Borrower: CODA MUSIC TECHNOLOGY, INC. Lender: RIVERSIDE BANK
6210 BURY DRIVE MINNESOTA CENTER OFFICE
EDEN PRAIRIE, MN 55346 7760 FRANCE AVENUE SOUTH, SUITE 125
BLOOMINGTON, MN 55435
====================================================================================================================================
</TABLE>
LOAN TYPE. This is a Variable Rate (1.000% over PRIME RATE OF INTEREST AS
PUBLISHED EACH BUSINESS DAY IN THE MONEY RATES SECTION OF THE WALL STREET
JOURNAL, making an initial rate of 8.750%), Revolving Line of Credit Loan to a
Corporation for $500,000.00 due on February 14, 2000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:
[ ] Maintenance of Borrower's Primary Residence.
[ ] Personal, Family or Household Purposes or Personal Investment.
[ ] Agricultural Purposes.
[x] Business Purposes.
SPECIFIC PURPOSE. The specific purpose of this loan is:
RENEW WORKING CAPITAL LINE OF CREDIT.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Lender's conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $500,000.00 as follows:
Undisbursed Funds: $500,000.00
Note Principal: $500,000.00
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid in Cash: $5,000.00
$5,000.00 Loan Fees
----------
Total Charges Paid in Cash: $5,000.00
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION
AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS
AUTHORIZATION IS DATED FEBRUARY 14, 1999.
BORROWER:
CODA MUSIC TECHNOLOGY, INC.
By: ___________________________ By: ___________________________
RON RAUP, PRESIDENT BARBARA REMLEY, CFO
Variable Rate, Line of Credit LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver.
3.26(c) 1999 CFI ProServices, Inc. All rights reserved. [MN-120 90485255.LN
C1.OVL]
<PAGE>
COLLATERAL SCHEDULE
<TABLE>
<CAPTION>
- ----------------- --------------- -------------- ------------ --------- ------------- ------------ ---------- ----------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$500,000.00 02-14-1999 02-14-2000 90485255 01 3000 115342 GRA
- ------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the availability of this document
to any particular loan or item.
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Borrower: CODA MUSIC TECHNOLOGY, INC. Lender: RIVERSIDE BANK
6210 BURY DRIVE MINNESOTA CENTER OFFICE
EDEN PRAIRIE, MN 55346 7760 FRANCE AVENUE SOUTH, SUITE 125
BLOOMINGTON, MN 55435
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of __________ $
----------------------------------------
2. Additions (please explain on reverse) $
----------------------------------------
3. TOTAL ACCOUNTS RECEIVABLE $
----------------------------------------
DEDUCTIONS
4. Accounts 90 DAYS or more from the invoice date $
----------------------------------------
5. Accounts with offsetting claims $
----------------------------------------
6. Other Deductions (PER LOAN AGREEMENT DATED 2/14/99) $
----------------------------------------
7. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
----------------------------------------
8. Eligible Accounts (No. 3 - No. 7) $
----------------------------------------
9. LOAN VALUE OF ACCOUNTS (75.000% of No. 8) $
----------------------------------------
INVENTORY
10. Inventory Book Value as of ___________ $
----------------------------------------
11. Additions (please explain on reverse) $
----------------------------------------
12. TOTAL INVENTORY $
----------------------------------------
DEDUCTIONS
<PAGE>
13. Obsolete Inventory $
----------------------------------------
14. Inventory with offsetting claims $
----------------------------------------
15. Other Deductions (please explain on reverse) $
----------------------------------------
16. TOTAL INVENTORY DEDUCTIONS $
----------------------------------------
17. Eligible Inventory (No. 12 - No. 16) $
----------------------------------------
18. LOAN VALUE OF INVENTORY (25.000% of No. 17) $
----------------------------------------
BALANCES
19. Maximum Loan Amount $ $500,000.00
20. Present balance owing Lender $
----------------------------------------
21. Amount due
(larger of No. 20 minus No. 19 or No. 20 minus Nos. 9 + 18) $
----------------------------------------
22. Available unused loan value
(lesser of $500,000.00 minus No. 20 or Nos. 9 + 18 minus No. 20) $
----------------------------------------
AMOUNT OF REQUESTED LOAN ADVANCE $
----------------------------------------
------------------------------------------------------------------------------------------------------------------------------
COMMENTS: A maximum of 50% of the balance owing on this line of credit can
be advanced against inventory. The accounts receivable borrowing base must
cover at least 50% of the outstanding line of credit balance.
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
COLLATERAL SCHEDULE
(Continued)
===============================================================================
The undersigned represents and warrants that the foregoing is true,
complete and correct, and that the information reflected in this Collateral
Schedule complies with the representations and warranties set forth in the
Security Agreement and in the Loan Agreement between the undersigned and
RIVERSIDE BANK dated February 14, 1999.
CODA MUSIC TECHNOLOGY, INC.
By: ______________________________________
Authorized Signer
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.26(c) 1999 CFI ProServices, Inc.
All rights reserved. [MN-E401 LOANY2K.LN C15.OVL]
<PAGE>
CORPORATE RESOLUTION TO BORROW
<TABLE>
<CAPTION>
- ----------------- -------------- -------------- ------------ --------- ------------- ------------- --------- ----------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$500,000.00 02-14-2000 90485255 01 3000 115342 GRA
- -----------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability
of this document to any particular loan or item.
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Borrower: CODA MUSIC TECHNOLOGY, INC. Lender: RIVERSIDE BANK
6210 BURY DRIVE MINNESOTA CENTER OFFICE
EDEN PRAIRIE, MN 55346 7760 FRANCE AVENUE SOUTH, SUITE 125
BLOOMINGTON, MN 55435
=======================================================================================================================
</TABLE>
I, the undersigned Secretary or Assistant Secretary of CODA MUSIC TECHNOLOGY,
INC. (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and
existing under and by virtue of the laws of the State of Minnesota as a
corporation for profit, with its principal office at 6210 BURY DRIVE, EDEN
PRAIRIE, MN 55346, and is duly authorized to transact business in the State of
Minnesota..
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly
called and held on ______________, at which a quorum was present and voting, or
by other duly authorized corporate action in lieu of a meeting, the following
resolutions were adopted:
BE IT RESOLVED, that any one (1) of the following named officers, employees, or
agents of this Corporation, whose actual signatures are shown below:
NAMES POSITIONS ACTUAL SIGNATURES
RON RAUP PRESIDENT X_________________
BARBARA REMLEY CFO X_________________
acting for and on behalf of the Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
<PAGE>
Borrow Money. To borrow from time to time from RIVERSIDE BANK
("Lender"), on such terms as may be agreed upon between the Corporation
and Lender, such sum or sums of money as in their judgment should be
borrowed, without limitation.
Execute Notes. To execute and deliver to Lender the promissory note or
notes, or other evidence of credit accommodations and/or revision
agreement or other evidence of obligation of the Corporation, on
Lender's forms, at such rates of interest and on such terms as may be
agreed upon, evidencing the sums of money so borrowed or any
indebtedness of the Corporation to Lender, and also to execute and
deliver to Lender one or more renewals, extensions, modifications,
refinancings, consolidations, or substitutions for one or more of the
notes, any portion of the notes, or any other evidence of credit
accommodations.
Grant Security. To mortgage, pledge, transfer, endorse, hypothecate, or
otherwise encumber and deliver to Lender, as security for the payment
of any loans or credit accommodations so obtained, any promissory notes
so executed (including any amendments to or modifications, renewals,
and extensions of such promissory notes), or any other or further
indebtedness of the Corporation to Lender at any time owing, however
the same may be evidenced, any property now or hereafter belonging to
the Corporation or in which the Corporation now or hereafter may have
an interest, including without limitation all real property and all
personal property (tangible or intangible) of the Corporation. Such
property may be mortgaged, pledged, transferred, endorsed,
hypothecated, or encumbered at the time such loans are obtained or such
indebtedness is incurred, or at any other time or times, and may be
either in addition to or in lieu of any property theretofore mortgaged,
pledged, transferred, endorsed, hypothecated, or encumbered.
<PAGE>
Execute Security Documents. To execute and deliver to Lender the forms
of mortgage, deed of trust, pledge agreement, hypothecation agreement,
and other security agreements and financing statements which may be
submitted by Lender, and which shall evidence the terms and conditions
under and pursuant to which such liens and encumbrances, or any of
them, are given; and also to execute and deliver to Lender any other
written instruments, any chattel paper, or any other collateral, of any
kind or nature, which they may in their discretion deem reasonably
necessary or proper in connection with or pertaining to the giving of
the liens and encumbrances.
Negotiate Items. To draw, endorse, and discount with Lender all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to the Corporation in which the Corporation may
have an interest, and either to receive cash for the same or to cause
such proceeds to be credited to the account of the Corporation with
Lender, or to cause such other disposition of the proceeds derived
therefrom as they may deem advisable.
Further Acts. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances
thereunder, and in all cases, to do and perform such other acts and
things, to pay any and all fees and costs, and to execute and deliver
such other documents and agreements as they may in their discretion
deem reasonably necessary or proper in order to carry into effect the
provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these Resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Lender may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Lender. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
BE IT FURTHER RESOLVED, that the Corporation will notify Lender in writing at
Lender's address shown above (or such other addresses as Lender may designate
from time to time) prior to any (a) change in the name of the Corporation, (b)
change in the assumed business name(s) of the Corporation, (c) change in the
management of the Corporation, (d) change in the authorized signer(s), (e)
conversion of the Corporation to a new or different type of business entity, or
(f) change in any other aspect of the Corporation that directly or indirectly
relates to any agreements between the Corporation and Lender. No change in the
name of the Corporation will take effect until after Lender has been notified.
I FURTHER CERTIFY that the officers, employees, and agents named above are duly
elected, appointed, or employed by or for the Corporation, as the case may be,
and occupy the positions set opposite their respective names; that the foregoing
Resolutions now stand of record on the books of the Corporation; and that the
Resolutions are in full force and effect and have not been modified or revoked
in any manner whatsoever. The Corporation has no corporate seal, and therefore,
no seal is affixed to this certificate.
IN TESTIMONY WHEREOF, I have hereunto set my hand on February 14, 1999 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X____________________________________
X____________________________________
NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, it is advisable to have
this certificate signed by a second Officer or Director of the Corporation.
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. These products include Finale, a music
notation product used by professional and amateur composers alike; Finale
Allegro, a less fully featured, value priced version of Finale; SmartMusic
Studio (previously called Vivace), an Intelligent Accompaniment product used by
musicians and vocalists to make practice more fun and productive; and an
extensive catalog of SmartMusic Accompaniments.
The Company acquired the Finale 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 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 and began shipping in the fourth
quarter of 1997 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). Early in 1998 further technology advancements enabled the
Company to eliminate expensive hardware components. Simultaneously the strategic
decisions were made to change the name of the application to SmartMusic Studio
and lower the suggested retail price to $99.95 with a primary goal of expanding
the base of users and increasing the amount and frequency of SmartMusic
Accompaniment sales.
Previously, the Company's marketing efforts of Vivace products were directed
primarily toward music educators and the products were distributed exclusively
through music instrument retailers. As a result of new price points and the
addition of popular titles to the Company's accompaniment catalog the Company is
now poised to also target the home and student market segments. The Company has
also expanded its distribution channels to include a limited number of mail
order retailers and direct sales.
The Company has historically released annual upgrades of the Finale notation
product. In addition, Finale Allegro was upgraded in 1998 for the first time
since its original release in 1994.
Results of Operations
For the year ended December 31, 1998 compared to the year ended December 31,
1997
<PAGE>
Net sales. Net sales for 1998 were $6,413,045 or 15% higher than revenues for
1997. This total increase reflects a 19% increase in Finale, a 47% increase in
Finale Allegro, a 27% increase in SmartMusic Accompaniments, offset by an 18%
decrease in revenues from the SmartMusic Studio (and its predecessor Vivace
Practice Studio) product and miscellaneous accessories. Finale and Finale
Allegro net sales totaled $5,185,014 in 1998 as compared to $4,312,378 in 1997.
The increase in Finale and Finale Allegro revenue results from a change in the
timing of the release of the Finale product upgrades between years, the new
Finale Allegro upgrade and a general increase in product sales. As the Company
transitioned the Vivace Intelligent Accompaniment product to its new software
version, SmartMusic revenues decreased 27% to $1,228,031 in 1998 from $1,250,727
in 1997 due to lower retail prices. The Company sold 4,613 applications (a
combination of Vivace and SmartMusic) in 1998, a 77% increase over the number of
units sold during 1997. In addition, approximately 58,000 SmartMusic software
CD-ROMs were distributed since the introduction of SmartMusic Studio. The number
of accompaniments increased 30% to 24,752 units in 1998 from 19,000 units in
1997. This increase is primarily related to the transition to a lower priced
application product necessary to run the accompaniments. Accompaniment units
sold in 1998 were net of cartridge returns from the product repositioning
undertaken early in 1998.
Gross profit. The 37% increase in gross profit dollars between years reflects
the sales increases described above, reduction in product costs for all product
lines and a reduction of licensing fees as a result of a contract
re-negotiation. The 1998 gross profit percentage of 82% compares favorably to
the 1997 gross profit percentage of 69%.
Sales and marketing expenses. Sales and marketing expenses of $1,790,331
decreased $539,910 or 23% compared to 1997. The principal components of this
decrease include approximately $225,000 related to decreased material design and
duplication costs incurred last year with the introduction of the Vivace
Practice Studio product; $113,000 related to decreased travel and attendance at
trade shows; $78,000 related to lower personnel costs; and $66,000 related to
reduced professional fees for product studies and analysis. The remainder of the
decrease relates to general expense decreases across most of the other sales and
marketing categories with the exception of direct mail and promotion.
Product development expenses. The Company expensed product development costs of
$1,657,213 in 1998, an increase of $101,553 or 6.5% over 1997 expenses. The
increase includes approximately $190,000 of increased personnel costs as a
result of competitive hiring; $63,000 related to increased amortization of
capitalized repertoire development costs offset by $121,000 related to the
elimination of amortization of software translation costs incurred in 1997.
<PAGE>
General and administrative expenses. General and administrative expenses of
$1,866,549 in 1998 were $276,581 or 17% greater than the amount incurred in
1997. The increase includes approximately $109,000 from the reinstatement of
bonus payments forgone in 1997; $69,000 from professional fees related to
various studies; $62,000 of increased personnel costs as a result of various
personnel transitions; and $47,000 increased legal fees related to an
acquisition effort (which was not consummated) and various contract
negotiations.
Product repositioning. In 1998 the Company developed SmartMusic Studio, a new
and renamed version of the Vivace Practice Studio(TM) product. In connection
with this introduction, the Company no longer needed to utilize some component
parts. Expenses totaling $856,000 for product returns and inventory write-offs
were incurred relating to this product repositioning.
Interest income, net. The Company had net interest income of $88,670 in 1998
compared to $98,438 in 1997. The $9,768, or 10%, decrease related primarily to
lower cash balances and funds available for investment.
Net loss. The net loss of $804,455 for 1998 is favorable compared to the loss of
$1,512,237 incurred in 1997. This decrease in the loss is attributable to the
changes in revenues and costs described above. The Company would have produced
net income of $51,545 without the $856,000 repositioning cost described above.
Income Taxes
Because of net operating losses the Company has not incurred income tax expense.
For income tax reporting purposes, net operating loss carryforwards approximated
$9,560,000, of which $9,300,000 million is currently available to offset the
Company's future taxable income as of December 31, 1998. 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. The valuation allowance will be removed when the Company believes
profits are such that the deferred tax assets will be realized.
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.
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,
<PAGE>
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, 1998, 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 provided by operating activities totaled $296,705 in 1998 and net cash
used by operating activities totaled $742,604 in 1997. In addition, the Company
made capital expenditures for furniture, equipment and fixtures of $136,988 in
1998 and $158,792 in 1997.
The Company anticipates that capital expenditures for 1999 will approximate
$75,000. 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 through 1999.
Year 2000 Issue
The Company's overall goal is to be Year 2000 ready by September 1999, which
means that critical systems, devices, applications or 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 plans to
evaluate any 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 applications do not use any date calculations in their
operations. The Company's current SmartMusic Studio, Vivace 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 and Windows operating systems.
<PAGE>
The next step will be to initiate formal communications 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 believe
that this scenario will occur, if it does, 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.
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. 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: 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.
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, 1998 and
1997:
1998 1997
Quarter High Low High Low
First $1.58 $ .50 $2.38 $1.63
Second 2.00 1.00 2.50 1.13
Third 1.37 .56 1.81 1.13
Fourth 1.50 .62 1.25 .75
<PAGE>
As of December 31, 1998, 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 bank line of credit prohibits the payment of
dividends without prior approval of the lender.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Coda Music Technology, Inc.
We have audited the accompanying balance sheet of Coda Music Technology, Inc. (a
Minnesota corporation) as of December 31, 1998, and the related statement of
operations, shareholders' equity and cash flows for the year 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 audit. The financial statements of Coda Music Technology, Inc. for the year
ended December 31, 1997 were audited by other auditors whose report, dated
February 20, 1998 expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present fairly,
in all material respects, the financial position of Coda Music Technology, Inc.
as of December 31, 1998, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
Minneapolis, Minnesota,
March 1, 1999
<PAGE>
CODA MUSIC TECHNOLOGY, INC.
Balance Sheets
As of December 31
<TABLE>
<CAPTION>
1998 1997
ASSETS ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 563,685 $ 1,233,454
Short-term investments 1,411,420 979,000
Accounts receivable, less allowance of $25,000 275,817 477,960
Inventories 274,163 616,696
Other current assets 93,825 93,200
----------- -----------
Total current assets 2,618,910 3,400,310
EQUIPMENT, FURNITURE AND FIXTURES, less accumulated depreciation of
$1,018,108 and $891,209 273,425 370,105
REPERTOIRE DEVELOPMENT COSTS, net of
amortization of $548,553 and $226,611 643,248 591,445
PREPAID ROYALTIES 185,144 181,105
OTHER ASSETS 87,881 88,279
----------- -----------
$ 3,808,608 $ 4,631,244
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 228,677 $ 294,398
Accrued expenses:
Compensation 405,804 185,734
Royalties 47,026 32,753
Postcontract support 103,000 98,000
Other 8,494 73,398
Deferred revenue 61,017 202,603
----------- -----------
Total current liabilities 854,018 886,886
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY (Notes 3 and 4):
Common Stock, without par value, 15,000,000 shares
authorized; 6,194,732 and 6,199,732 issued and
outstanding 13,707,259 13,712,572
Accumulated deficit (10,752,669) (9,968,214)
----------- -----------
Total shareholders' equity 2,954,590 3,744,358
----------- -----------
$ 3,808,608 $ 4,631,244
=========== ===========
</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>
1998 1997
----------------------------------------
<S> <C> <C>
NET SALES $ 6,413,045 $ 5,563,105
COST OF SALES 1,136,077 1,697,911
----------- -----------
GROSS PROFIT 5,276,968 3,865,194
----------- -----------
OPERATING EXPENSES:
Sales and marketing 1,790,331 2,330,241
Product development 1,657,213 1,555,660
General and administrative 1,866,549 1,589,968
Product repositioning (Note 2) 856,000 -
----------- -----------
Total operating expenses 6,170,093 5,475,869
----------- -----------
LOSS FROM OPERATIONS (893,125) (1,610,675)
INTEREST INCOME, net 88,670 98,438
----------- -----------
Net loss $ (804,455) $(1,512,237)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note 2) 6,198,965 5,435,261
=========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE (Note 2) $ (.13) $ (.28)
=========== ===========
</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, 1996 4,327,035 $11,453,467 $ (8,455,977) $2,997,490
Sale of Common Stock, net of offering costs (Note 4) 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
Purchase of Common Stock (Note 4) (5,000) (5,313) - (5,313)
Licensing expense from the issuance of warrants - - 20,000 20,000
Net loss - - (804,455) (804,455)
--------- ----------- ------------ ----------
BALANCE, December 31, 1998 6,194,732 $13,707,259 $(10,752,669) $2,954,590
========= =========== ============ ==========
</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>
1998 1997
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (804,455) $(1,512,237)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 574,016 584,159
Licensing expense from issuance of warrants 20,000 -
Change in current assets and liabilities:
Accounts receivable 202,143 118,986
Inventories 342,533 366,679
Prepaid royalties (4,039) (62,635)
Other current assets (625) (40,098)
Accounts payable (65,721) (71,873)
Accrued expenses 174,439 (126,261)
Deferred revenue (141,586) 676
---------- -----------
Net cash provided by (used in) operating activities 296,705 (742,604)
---------- -----------
INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures (136,988) (158,792)
Capitalized repertoire development cost (373,745) (292,837)
Purchase of short-term investments (5,837,453) (4,133,123)
Sale of short-term investments 5,405,033 3,154,123
Patent expenditures (18,008) (26,711)
---------- -----------
Net cash used in investing activities (961,161) (1,457,340)
---------- -----------
FINANCING ACTIVITIES:
Purchase of Common Stock (5,313) -
Proceeds from private placement of Common Stock, net of offering costs
- 2,259,105
---------- -----------
Net cash provided by (used in) financing activities (5,313) 2,259,105
---------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (669,769) 59,161
CASH AND CASH EQUIVALENTS, beginning of year 1,233,454 1,174,293
---------- -----------
CASH AND CASH EQUIVALENTS, end of year 563,685 1,233,454
SHORT-TERM INVESTMENTS, end of year 1,411,420 979,000
---------- -----------
Total cash equivalents and short-term investments, end of year $1,975,105 $ 2,212,454
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CODA MUSIC TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998 and 1997
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.
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 1999.
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,
1998 and 1997. The Company maintains its cash in bank deposit accounts, which,
at times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
short-term investments, trade accounts receivable, accounts payable and a line
of credit for which current carrying amounts approximate fair market value.
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
<PAGE>
Otherwise Marketed." The Company has capitalized $1,191,801 and $818,056 as of
December 31, 1998 and 1997, 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.
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 are
accrued for estimated returns relating to stock balancing arrangements with
resellers. Costs related to insignificant obligations, which include telephone
support, are accrued.
Product Repositioning
The Company has developed SmartMusic Studio, 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. The Company
recorded the cost of returns, exchanges and inventory obsolescence resulting
from this product repositioning and classified the net charge as an operating
expense in 1998.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss or tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
amounts of assets and liabilities recorded for income tax and financial
reporting purposes. Deferred tax assets are reduced by a valuation allowance
when management determines that it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
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, common stock
equivalents have been excluded from the calculation, as their inclusion would be
antidilutive.
<PAGE>
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.
Actual 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,
2000. There were no borrowings outstanding as of December 31, 1998 and 1997.
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 (7.75% as of December 31, 1998) 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.
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, 1998.
Purchase/Sale of Common Stock
On November 2, 1998 the Company purchased 5,000 shares of Common Stock for
retirement at $1.0625 for a total cost of $5,313. 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 1998 and 1997, the Company
repriced certain stock options previously granted to the fair market value at
the date of repricing.
<PAGE>
The following summarizes stock issued under the Company's stock option plans.
Weighted
Average
Exercise
Outstanding Price
----------- --------
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
Granted 89,000 1.22
Canceled (209,120) 1.68
--------- -----
Balance at December 31, 1998 629,500 $1.42
========= =====
Exercisable at December 31, 1998 401,197 $1.53
========= =====
Exercisable at December 31, 1997 395,957 $1.76
========= =====
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:
1998 1997
--------- -----------
Net loss As reported $(804,455) $(1,512,237)
Pro forma (825,146) (1,764,810)
Basic and diluted net loss
per share As reported (.13) (.28)
Pro forma (.13) (.32)
All options outstanding at December 31, 1998 were granted with exercise prices
greater than or equal to the fair market value of the Common Stock at the date
of grant. 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
assumptions used for grants in 1998 and 1997, respectively: risk-free interest
rates of 4.94 and 5.78, no expected dividend yield, expected lives of seven
years and expected volatility of 57% and 34%.
The weighted average fair value of options granted during 1998 and 1997 was $.76
and $.42, respectively. Options issued, which remain outstanding at December 31,
1998, have an exercise price between $1.00 and $4.50, and a weighted average
remaining contractual life of 4.4 years.
Warrants
In connection with certain financing and other transactions, the Company has
issued warrants to purchase shares of Common Stock at prices between $1.25 and
$7.20 per share, exercisable over periods of five to seven years from the date
of grant. Warrants outstanding at December 31, 1998 total 1,227,191, have a
weighted average exercise price of $2.68 and expire as follows: 1999-40,834,
2000-1,036,357, 2001-50,000, 2002-70,000 and 2005-30,000.
<PAGE>
5. Income Taxes:
Because of net operating losses the Company has not incurred income tax expense.
For income tax reporting purposes, net operating loss carryforwards approximated
$9,560,000, of which $9,300,000 is currently available to offset the Company's
future taxable income as of December 31, 1998. 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. The valuation allowance will be removed when the Company believes
profits are such that the deferred tax assets will be realized.
6. Foreign Sales:
The Company had foreign export sales amounting to 15.2% and 18.0% of total net
sales for the years ended December 31, 1998 and 1997 respectively. The sales
were made principally to the following locations:
1998 1997
------ ------
Germany 2.9% 3.8%
Japan 2.9 2.4
United Kingdom 1.4 1.9
Canada 1.3 2.5
Elsewhere 6.7 7.4
------ ------
15.2% 18.0%
7. Commitments and Contingencies:
Operating Leases
The Company leases office and warehouse space and certain equipment under
operating leases through 2003. The future minimum lease payments as of December
31, 1998 under these leases are $134,000 in 1999, $127,000 in 2000, $13,000 in
2001, $13,000 in 2002 and $10,000 in 2003. Rent expense for the years ended
December 31, 1998 and 1997 was $141,569 and $139,930 respectively.
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:
1999 $ 64,730
2000 52,230
2001 37,230
2002 32,730
2003 and thereafter 98,190
Royalty expense, including amounts related to the agreement referred to above,
totaled $205,431 and $190,649 in the years ended December 31, 1998 and 1997,
respectively, and are reflected as a component of cost of sales in the
accompanying statements of operations.
<PAGE>
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 $163,000 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 1998 or 1997.
8. Management Fee:
The Company paid management fees totaling $30,300 and $24,000 during the years
ended December 31, 1998 and 1997 respectively to affiliates of directors for
management services provided to the Company. There were no amounts owed to these
affiliates at December 31, 1998.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to incorporation of our report, dated March 1, 1999, relating
to the 1998 financial statements of Coda Music Technology, Inc., into this Form
10-KSB and into the Company's previously filed Registration Statements File No.
33-96624, File No. 333-48597, File No. 333-52927 and File No. 333-31287.
/s/ McGladrey & Pullen LLP
McGladrey & Pullen LLP
Minneapolis, Minnesota,
March 24, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report for the year ended December 31, 1997 incorporated by reference in this
Form 10-KSB, into the Company's previously filed Registration Statements File
No. 33-96624, File No. 333-31287, File No. 333-48597 and File No. 333-52927.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,975,105
<SECURITIES> 0
<RECEIVABLES> 300,817
<ALLOWANCES> 25,000
<INVENTORY> 274,163
<CURRENT-ASSETS> 2,618,910
<PP&E> 1,291,533
<DEPRECIATION> 1,018,108
<TOTAL-ASSETS> 3,808,608
<CURRENT-LIABILITIES> 854,018
<BONDS> 0
0
0
<COMMON> 13,707,259
<OTHER-SE> (10,752,669)
<TOTAL-LIABILITY-AND-EQUITY> 3,808,608
<SALES> 6,413,045
<TOTAL-REVENUES> 6,413,045
<CGS> 1,136,077
<TOTAL-COSTS> 1,136,077
<OTHER-EXPENSES> 6,170,093
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (88,670)
<INCOME-PRETAX> (804,455)
<INCOME-TAX> 0
<INCOME-CONTINUING> (804,455)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (804,455)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
