SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
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, 1999
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: (952) 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. [X]
Issuer's revenues for its most recent fiscal year: $6,356,136
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of March 13, 2000 was approximately $27,804,696 based upon the
closing price of the Registrant's Common Stock on such date.
There were 6,355,359 shares of Common Stock outstanding as of March 13, 2000.
.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1999 are incorporated into Part II and portions of the
Registrant's definitive Proxy Statement for its 2000 Annual Meeting are
incorporated by reference into Part III.
Transitional Small Business Disclosure Format (check one). Yes No X
<PAGE>
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 family of 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 Studio(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
Coda's goal is to become the leading provider of music education
services and content for significant Internet sites that wish to attract and
retain active music makers. Throughout the 1990s Coda developed music
technologies and content designed to enhance the music-making experiences of
students, teachers, hobbyists and professionals. These Coda assets, which are
currently being made ready for Internet deployment, include the following:
o Music notation technology, used by the largest music
publishers in the world, expertly formats music notation on
screen and paper and can also deliver sheet music
electronically over the Internet.
o Over 5,000 music accompaniment titles in a wide range of
musical genres and skill levels ranging from beginner to
professional.
o Intelligent Accompaniment(R) technology that listens to solo
vocalists or instrumentalists and follows their spontaneous
tempo changes in a manner similar to a human accompanist.
o Pitch recognition technology that translates audio data from a
microphone into musical data in real time.
o Software synthesis technology that uses only the computer's
processing power to play music, no additional hardware or
soundcards required.
Coda is combining these technologies to create compelling online music
making and music education experiences that will be as useful and instructive as
they are fun and entertaining.
Products
SmartMusic Studio
The SmartMusic Studio (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 Studio 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 a 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
2
<PAGE>
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 usually 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, II and III. The Company made its
accompaniment selection based on a review of the most frequently performed
titles in state academic solo 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 Studio products. Further, the Company plans to
expand its library of accompaniments to cover a broad spectrum of music genres,
instruments and skill levels.
Finale
Coda is a market leader in music notation software with its Finale
family of products for use with Macintosh(R) and Windows(R) PC 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 instruments 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
3
<PAGE>
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/Theological Edition of the Finale
product that is sold exclusively to schools, schoolteachers, college students
and churches at a suggested retail price of $275. This edition 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.
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 18.2% and
15.2% of 1999 and 1998 revenues, respectively.
Finale Allegro
The Company introduced the Finale Allegro(R) 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 1998, the first update since the product was first developed. With
extensive MIDI capabilities, Allegro is targeted to an audience that may not
read music but needs to create "lead sheets" for other musicians, and is
therefore known as, "The MIDI User's choice for music notation." The Allegro
2000 upgrade was introduced in February 2000, and is capable of exchanging files
with both Finale 2000 and PrintMusic! 2000.
Finale PrintMusic!
The Company introduced the Finale PrintMusic!(TM) product for Windows
in April 1999, an entry-level powerful music notation software product. The
PrintMusic! music notation software product retails for $69.95 and contains a
subset of the notation tools contained in the Finale and Finale Allegro
products. The 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. Upgraded
to Finale PrintMusic! 2000 in November 1999, as a platform hybrid for Macintosh
and Windows, this product is targeted to a broader audience in the education and
general consumer marketplace.
Intonation Trainer
The Company introduced Intonation Trainer in February 2000 at a retail
price of $149.95. Intonation Trainer is an easy, yet powerful program that
actually teaches woodwind and brass students how to play in tune by listening
for and eliminating intonation beats within intervals and chords.
Marketing, Sales and Distribution
In late 1998 the Company hired a VP of Marketing and Sales and
realigned its sales and marketing staff to present a more cohesive approach to
the marketing of all of its products.
SmartMusic Studio 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 SmartMusic Studio products directly on the Web and through its
customer service department. Finale products are sold through distributors,
music instrument retailers, mail order software retailers, and computer dealers.
Finale upgrades were sold on the Web for the first time in 1999.
4
<PAGE>
The Company believes it can significantly build on its Finale, Finale
Allegro and Print Music! software business by continuously expanding the
installed base of users and regularly providing them with upgrades, broadening
retail distribution, producing additional international versions of the products
and establishing the products as a means for electronic transmission of music.
The Company introduced Finale upgrades on both the Windows platform and
Macintosh platform in each of the last five years. The Company also introduced
the first upgrade for Finale Allegro in 1998 and Print Music! in 1999.
A key marketing strategy of the Company is to introduce both the
SmartMusic Studio and Finale products to students as they learn so they are more
likely to continue to make music and 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, added an on-campus
direct seller network, developed product lab packs consisting of five copies of
the Finale product sold at a reduced price per copy and in 1999 introduced site
licenses, which allow schools and universities to cost-effectively bring Finale
music notation software products into their curriculum.
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 1999 and 1998, the Company incurred $1,341,166 and $1,657,213 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
In 1999, SmartMusic Studio was given a new look and feel to its user
interface. This new look was developed not only to increase the usefulness and
attractiveness of the product, but also to make SmartMusic Studio ready to be
deployed on the Internet.
SmartMusic Accompaniments
Accompaniment development in 1999 focused on 1) the development of band
method music for young students published by Warner Bros. and 2) the addition of
difficult music often used by college-level students. These advanced titles
included popular opera arias for soprano, mezzo-soprano, tenor and baritone
voices.
In the first part of 2000, development will focus on accompaniments for
basic skill development exercises. These include scales, arpeggios and other
technical exercises, all of which are much more fun to practice when played with
accompaniment.
In general, 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. SmartMusic
Accompaniment development has limited risk and short development cycles that
typically range from one month to four months. The Company has established an
expertise in accompaniment development by creating procedures 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.
Finale
To maintain its leadership position in the music notation marketplace,
over the past five years Coda has focused its continuous improvement efforts on
5
<PAGE>
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 $149.95.
In addition, the Company will continue to explore adapting its Finale
products to allow online viewing, customizing and transmission 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, customize it, 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 a beta version of such product,
which the Company is currently demonstrating to key publishers to obtain market
feedback. The Company believes the cost of developing a commercially viable
product is within its product development budget.
Finale Allegro and PrintMusic!
In 1998 the Company released the first upgrade of the Finale Allegro
product. In 1999 the Company released PrintMusic!, an entry-level notation
product. Both Allegro and PrintMusic! are based on Finale.
Intonation Trainer
In early 2000 the Company released Intonation Trainer, a product
designed to help school band directors teach their students to play better in
tune. The Company intends to continue developing music education products with
its proprietary music technologies.
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) by Cakewalk, which is an interactive product for MIDI keyboards. The
Company expects that SmartMusic products will also compete with conventional
music accompaniment products by Music Minus One by MMO Music Group, Inc. and MTS
120 by Roland Corporation. These products offer students the ability to play
along with prerecorded songs. They differ from the SmartMusic Studio 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 notation market is highly competitive and continues to have
established competitors such as Cakewalk and G-Vox and new products are
continually being announced and introduced by companies such as NoteHeads
Musical Expert Systems and Sibelius Software LTD.
Principal competitive factors in marketing the Company's SmartMusic and
Finale products include product features, quality, brand recognition, ease of
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.
6
<PAGE>
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), Finale
PrintMusic!(TM) and Intonation Trainer(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, 1999, the Company employed 45 full-time employees.
Of these, 11 served in the product and repertoire development area, 8 in product
testing and end-user support, and 23 in administrative and sales-related
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.
7
<PAGE>
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. Forward-looking
statements provide current expectations or forecasts of future events and can be
identified by the use of terminology such as "believe," "estimate," "expect,"
"intend," "may," "could," "will," and similar words or expressions. The
Company's forward-looking statements generally relate to its growth strategy,
financial results, product development and sales efforts. Forward-looking
statements cannot be guaranteed and actual results may vary materially due to
the uncertainties and risks, known and unknown, associated with such statements.
The Company undertakes no obligations to update any forward-looking statements.
Internet and Strategies. The Company is expending significant dollars on its
Internet strategies, some of which are dependent on obtaining licenses from
publishers. No assurance can be given that this strategy will be achievable and,
if achieved, profitable.
Distribution and Sales Level Issues. The Company's initial Vivace product was
introduced in 1994, and new Vivace products (renamed SmartMusic Studio) were
introduced in 1997 and 1998 but the Company has achieved only limited sales of
these 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. No
assurance can be given that sales of SmartMusic Studio 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 2000. 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 Studio products. The Company
plans to develop new training and assessment products using technologies
developed while producing Finale and SmartMusic Studio. 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. The Company is also exploring the possibilities of using
SmartMusic Studio to develop the ability to provide music education options via
the Internet. 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 certain 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.
8
<PAGE>
Operating Losses. For the year ended December 31, 1999, the Company incurred a
net loss of $455,612 and since inception has an accumulated deficit of
$11,208,281.
Dependence on Key Personnel. The Company is highly dependent on a limited number
of key management and technical personnel, including software programmers who
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 Studio 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 Studio 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.
The Company notes these factors as permitted by the Private Securities
Litigation Reform Act of 1995. It is not possible to foresee or identify all
factors that could cause actual results to differ from expected or historic
results. As such, investors should not consider any list of such factors to be
an exhaustive statement of all risks, uncertainties or potentially inaccurate
assumptions.
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 $110,000. This lease expires in November 2000.
9
<PAGE>
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.
10
<PAGE>
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 1999 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 Company's 1999 Annual
Report to Shareholders.
ITEM 7. FINANCIAL STATEMENTS
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 Company's 1999 Annual Report to
Shareholders.
11
<PAGE>
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 52 Chief Executive Officer and Chairman of the
Board of Directors
Barbara S. Remley 48 Chief Financial Officer, Treasurer and
Secretary
Mark E. Dunn 50 Senior Vice President of Product Development
Glenna A. Dibrell 49 Vice President of Marketing and Sales
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.
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, which filed a Chapter 11 in
1997 and was subsequently converted to a Chapter 7. 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.
Glenna A. Dibrell has been Vice President of Marketing and Sales 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 Company's definitive Proxy
Statement for its 2000 Annual Meeting of Shareholders.
12
<PAGE>
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 Company's
definitive Proxy Statement for its 2000 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 Company's definitive Proxy Statement for its 2000 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 Company's definitive
Proxy Statement for its 2000 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.
13
<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 24, 2000 By: s/John W. Paulson
John W. Paulson, Chief Executive Officer
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 BARBARA S. REMLEY 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 24, 2000
John W. Paulson, Chairman of the Board
and Chief Executive Officer
(principal executive officer)
s/ Barbara S. Remley March 24, 2000
Barbara S. Remley, Chief Financial Officer
(principal financial and accounting officer)
s/ Timothy M. Heaney March 24, 2000
Timothy M. Heaney, Director
s/ Gordon F. Stofer March 24, 2000
Gordon F. Stofer, Director
s/ Larry A. Pape March 24, 2000
Larry A. Pape, Director
s/ Benson K. Whitney March 24, 2000
Benson K. Whitney, Director
14
<PAGE>
CODA MUSIC TECHNOLOGY, INC.
EXHIBIT INDEX FOR
FORM 10-KSB FOR 1999 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
10.8 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--incorporated by
reference to Exhibit 10.10 to the Registrant's Form 10-KSB for the year
ended December 31, 1998
15
<PAGE>
10.11 Loan Agreement dated February 14, 1999 between the Registrant and
Riverside Bank--incorporated by reference to Exhibit 10.11 to the
Registrant's Form 10-KSB for the year ended December 31, 1998
10.12 Amendment dated February 14, 2000 to 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, 1999 incorporated herein by reference
23.1 Consent of McGladrey & Pullen 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.
16
EXHIBIT 10.12
CHANGE IN TERMS AGREEMENT
<TABLE>
<CAPTION>
- ----------------- ------------ ---------------- --------------- -------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$500,000.00 02-14-2001 90485255 41 3000 115342 GRA
- ----------------- ------------ ---------------- --------------- -------- ------------ ----------- ---------- ---------
</TABLE>
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.
- --------------------------------------------------------------------------------
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
================================================================================
Principal Amount: $500,000.00 Date of Agreement: February 14, 2000
DESCRIPTION OF EXISTING INDEBTEDNESS. PROMISSORY NOTE #90485255 DATED FEBRUARY
14, 1997 IN THE ORIGINAL AMOUNT OF $500,000.00. A CHANGE IN TERMS AGREEMENT
DATED FEBRUARY 14, 1998. A CHANGE IN TERMS AGREEMENT DATED FEBRUARY 14, 1999.
DESCRIPTION OF COLLATERAL. ALL CORPORATE ASSETS PER COMMERCIAL SECURITY
AGREEMENT DATED FEBRUARY 14, 1997.
DESCRIPTION OF CHANGE IN TERMS. TO EXTEND MATURITY DATE.
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, 2001. In addition, Borrower
will pay regular monthly payments of accrued unpaid interest beginning March 14,
2000, 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 8.750% 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 9.750% per annum. NOTICE:
Under no circumstances will the interest rate on this Agreement be more than the
maximum rate allowed by applicable law.
<PAGE>
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
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 falls 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 creditor, 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, 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
<PAGE>
by an authorized person. Lender may, but need not, require that all oral
requests be confirmed in writing. All communications, instructions, or
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 any 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, then 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" DATED FEBRUARY 14, 1999, 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.
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.
<PAGE>
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED
COPY OF THE AGREEMENT.
BORROWER:
CODA MUSIC TECHNOLOGY, INC.
By: /s/ John W. Paulson By: /s/ Barbara S. Remley
JOHN W. PAULSON, EXECUTIVE OFFICER BARBARA REMLEY, CFO
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
<TABLE>
<CAPTION>
- ----------------- ------------ ---------------- --------------- -------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$500,000.00 02-14-2001 90485255 41 3000 115342 GRA
- ----------------- ------------ ---------------- --------------- -------- ------------ ----------- ---------- ---------
</TABLE>
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.
- --------------------------------------------------------------------------------
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
================================================================================
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 9.750%), Revolving Line of Credit Loan to a
Corporation for $500,000.00 due on February 14, 2001.
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: TO EXTEND MATURITY.
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, 2000.
BORROWER:
CODA MUSIC TECHNOLOGY, INC.
By: /s/ John W. Paulson By: /s/ Barbara S. Remley
JOHN W. PAULSON, EXECUTIVE OFFICER BARBARA REMLEY, CFO
EXHIBIT 13
Management's Discussion and Analysis of
Financial Condition and Results of Operation
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; Print Music!, an
entry-level notation product; SmartMusic Studio (previously called Vivace(R)),
an Intelligent Accompaniment product used by musicians and vocalists to make
practice more fun and productive; and an extensive catalog of SmartMusic
Accompaniments(TM).
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. Technology advancements
enabled the Company over several stages to reduce, then eliminate expensive
hardware components. Early in 1998, the software-based product was renamed
SmartMusic Studio. Late in 1999, SmartMusic Studio was further upgraded to
SmartMusic Studio 6.0, with an updated look, and suggested retail prices of
$79.95 and $119.95, depending on features included.
The Company has historically released annual upgrades of the Finale notation
product. Finale 2000, Finale Allegro 98 and Print Music! were released in 1999.
RESULTS OF OPERATIONS
For the year ended December 31, 1999 compared to the year ended December 31,
1998
Net Sales. Net sales for 1999 were $6,356,136 or 1% lower than revenues for
1998. This total decrease reflects a 10% increase in Finale, Finale Allegro and
Print Music! sales, offset by a 45% decrease in SmartMusic Accompaniments and
SmartMusic Studio product and miscellaneous accessories sales. Finale 2000 sales
since product release are 20% higher than Finale 98 for the same time period.
The decrease in SmartMusic Applications and accompaniments is attributable to
smaller promotion efforts while waiting for the release of SmartMusic Studio
6.0, and difficulties in transitioning to new channels to market that include
both distributors and a direct to general consumer market. Comparative
SmartMusic Studio unit sales information for the year is represented in the
table below:
12/31/99 12/31/98
Applications 2,352 4,613
Accompaniments (Repertoires) 19,123 24,752
Gross Profit. The 6% increase in gross profit dollars between years reflects
improved gross margins and product mix changes due to Finale sale increases and
SmartMusic sale decreases. The 1999 gross profit percentage of 88% compares
favorably to the 1998 gross profit percentage of 82%.
Sales and Marketing Expenses. Sales and marketing expenses of $2,040,615
increased $342,900 or 20% compared to 1998. The principal components of this
increase include approximately $113,076 related to increased material design and
<PAGE>
duplication costs for the development of new box designs and promotional
materials for existing and new products; $39,322 related to increased travel and
attendance at trade shows; and $179,613 related to higher personnel costs
partially due to the addition of a Vice President of Marketing and Sales late in
1998.
Product Development Expenses. The Company expensed product development costs of
$1,341,166 in 1999, a decrease of $316,047 or 19% over 1998 expenses. The
decrease is related to reductions in personnel costs as a result of lower
repertoire development efforts for SmartMusic Accompaniments.
General and Administrative Expenses. General and administrative expenses of
$2,729,191 in 1999 were $794,015 or 41% greater than the amount incurred in
1998. The increase relates to $989,491 from the investment in Internet
activities, primarily consulting, offset by reductions in other general and
administrative areas including personnel, legal, director fees and travel.
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 in 1998 relating to this product repositioning.
Interest Income, Net. The Company had net interest income of $71,645 in 1999
compared to $88,670 in 1998. The $17,025, or 19%, decrease related primarily to
lower cash balances and funds available for investment.
Net Loss. The net loss of $455,612 for 1999 is favorable compared to the loss of
$804,455 incurred in 1998, This decrease in the loss is attributable to the
changes in revenues and costs described above. The Company would have produced
net income of $533,879 without the $989,491 Internet investment costs.
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
$10 million, which is currently available to offset the Company's future taxable
income as of December 31, 1999. These carryforwards begin to expire in 2005. A
valuation allowance equal to the full amount of the related deferred tax assets
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
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,
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
<PAGE>
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, 1999, 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 $498,567 in 1999 and net cash
provided by operating activities totaled $296,705 in 1998. In addition, the
Company made capital expenditures for furniture, equipment and fixtures of
$342,526 in 1999 and $136,988 in 1998. The increase in such expenditures was due
to the payment of $200,000 in 1999 in connection with a new financial and
operation software system to be installed in 2000, the total cost of which is
estimated at $450,000. The Company anticipates that capital expenditures for
2000 will be approximately $375,000. 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 2000.
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. Forward-looking statements provide current expectations or forecasts of
future events and can be identified by the use of terminology such as "believe,"
"estimate," "expect," "intend," "may," "could," "will" and similar words or
expressions. The Company's forward-looking statements generally relate to its
growth strategy, financial results, product development and sales efforts.
Forward-looking statements cannot be guaranteed and actual results may vary
materially due to the uncertainties and risks, known and unknown, associated
with such statements. The Company undertakes no obligation to update any
forward-looking statements. The Company has a limited operating history from
which investors might judge its ability to market at a profit its SmartMusic
Studio products. Investors should also consider: expenditures for the Company's
Internet strategy; 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; 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, 1999. The Company notes these factors as
permitted by the Private Securities Litigation Reform Act of 1995. It is not
possible to foresee or identify all factors that could cause actual results to
differ from expected or historic results. As such, investors should not consider
any list of such factors to be an exhaustive statement of all risks,
uncertainties or potentially inaccurate assumptions.
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.
<PAGE>
The following table sets forth the quarterly high and low trade prices for the
years ending December 31, 1999 and 1998:
COMMON 1999 1998
STOCK HIGH LOW HIGH LOW
First quarter $2.13 $1.31 $1.58 $.50
Second quarter 2.50 1.19 2.00 1.00
Third quarter 6.00 2.41 1.37 .56
Fourth quarter 3.88 2.19 1.50 .62
As of December 31, 1999, 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>
CODA MUSIC TECHNOLOGY, INC.
Consolidated Balance Sheets As of December 3l
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,345,599 $ 563,685
Short-term investments 608,600 1,411,420
Accounts receivable, less allowance of $25,000 484,515 432,604
Inventories 200,242 274,163
Other current assets 119,480 93,825
Total current assets 2,758,436 2,775,697
----------- ----------
Equipment, Furniture and Fixtures, at cost, less
accumulated depreciation of $841,348 and $1,018,108 249,660 273,425
Software Deposit 200,000 -
Repertoire Development Costs, net of accumulated
amortization of $869,548 and $548,553 486,891 643,248
Prepaid Royalties 192,490 185,144
Other Assets 99,527 87,881
----------- ----------
$ 3,987,004 $3,965,395
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 619,944 $ 228,677
Reserve for Product Returns 210,858 156,787
Accrued expenses:
Compensation 373,761 405,804
Royalties 56,474 47,026
Postcontract support 80,000 103,000
Other 38,209 8,494
Deferred revenue 89,548 61,017
----------- ----------
Total current liabilities 1,468,794 1,010,805
Commitments and Contingencies (Note 7)
Shareholders' Equity (Notes 3 and 4):
Common Stock, without par value, 15,000,000 shares
authorized; 6,216,319 and 6,194,732 issued and
outstanding 13,726,491 13,707,259
Accumulated deficit (11,208,281) (10,752,669)
----------- ----------
Total shareholders' equity 2,518,210 2,954,590
----------- ----------
$ 3,987,004 $3,965,395
=========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
Consolidated Statements of Operations For the Years Ended December 31
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net Sales $ 6,356,136 $ 6,413,045
Cost of Sales 772,421 1,160,066
----------- -----------
Gross Profit 5,583,715 5,252,979
Operating Expenses:
Sales and marketing 2,040,615 1,697,715
Product development 1,341,166 1,657,213
General and administrative 2,729,191 1,935,176
Product repositioning (Note 2) - 856,000
----------- -----------
Total current expenses 6,110,972 6,146,104
----------- -----------
Loss From Operations (527,257) (893,125)
Interest Income 71,645 88,670
----------- -----------
Net loss $ (455,612) $ (804,455)
=========== ===========
Weighted Average Common Shares Outstanding (Note 2) 6,202,036 6,198,965
=========== ===========
Basic and Diluted Net Loss Per Common Share (Note 2) $ (0.7) $ (.13)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31
<TABLE>
<CAPTION>
Common Stock Common Stock Accumulated
Shares Amount Deficit Total
<S> <C> <C> <C> <C>
Balance at 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 at December 31, 1998 6,194,732 13,707,259 (10,752,669) 2,954,590
Exercise of warrants 21,587 19,232 - 19,232
Net loss - - (455,612) (455,612)
--------- ------------ ------------ -----------
Balance at December 31, 1999 6,216,319 $13,726,491 $(11,208,281) $ 2,518,210
========= ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Consolidated States of Cash Flows
For the Years Ended December 31
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (455,612) $ (804,455)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 507,181 574,016
Licensing expense from issuance of warrants - 20,000
Change in current assets and liabilities:
Accounts receivable (51,911) 202,236
Inventories 73,921 342,533
Prepaid royalties (7,346) (4,039)
Other current assets (25,655) (625)
Accounts payable 391,267 (65,721)
Reserve for product returns 54,071 (93)
Accrued expenses (15,880) 174,439
Deferred revenue 28,531 (141,586)
---------- ----------
Net cash provided by operating activities 498,567 296,705
---------- ----------
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures (342,526) (136,988)
Capitalized repertoire development cost (164,638) (373,745)
Purchase of short-term investments (1,135,180) (5,837,453)
Sale of short-term investments 1,938,000 5,405,033
Patent expenditures (31,541) (18,008)
---------- ----------
Net cash provided by (used in) investing activities 264,115 (961,161)
---------- ----------
FINANCING ACTIVITIES
Purchase of Common Stock - (5,313)
Proceeds from exercise of warrants 19,232 -
---------- ----------
Net cash provided by (used in) financing activities 19,232 (5,313)
---------- ----------
CASH & CASH EQUIVALENTS:
Net increase (decrease) in cash and cash equivalents 781,914 (669,769)
Cash and cash equivalents, beginning of year 563,685 1,233,454
---------- ----------
Cash and cash equivalents, end of year $1,345,599 $ 563,685
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Note 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. The Company operates in one
business segment.
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 2000.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of Consolidation
The consolidated financial statements include the accounts of Coda Music
Technology, Inc. and its wholly owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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,
1999 and 1998. The Company maintains its cash in bank deposit accounts, which,
at times, may exceed federally insured limits. The Company has insured balances
in excess of 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 three to five
years. Repairs and maintenance are charged to expense as incurred. In 2000, the
<PAGE>
Company is implementing a new financial and operation software system at an
estimated cost of $450,000, of which $200,000 was paid as of December 31, 1999.
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
Otherwise Marketed." The Company has capitalized $1,356,439 and $1,191,801 as of
December 31, 1999 and 1998 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, trademarks
and Internet domain names. These costs are being amortized over the estimated
useful lives of the assets, which range from three to 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
postcontract telephone support, are accrued.
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 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 of $856,000 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.
<PAGE>
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.
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.
Reclassifications
Certain amounts in the 1998 consolidated balance sheet and consolidated
statement of operations have been reclassified to conform with the 1999
presentation.
Note 3 - DEBT
Line of Credit
The Company has a $500,000 line-of-credit agreement that expires on February 14,
2001. There were no borrowings outstanding as of December 31, 1999 and 1998.
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 (8.50% as of December 31, 1999) 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.
Note 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, 1999.
Stock Options
The Company has a stock option plan pursuant to which incentive and nonqualified
options for up to 1,325,000 shares of its Common Stock may be issued to key
employees, directors and officers of the Company. The incentive stock options
vest over periods of up to six 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.
<PAGE>
The Company has also granted nonqualified stock options under the Plan to
directors and advisors 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, the Company repriced
certain stock options previously granted to the fair market value at the date of
repricing.
The following summarizes stock issued under the Company's stock option plans:
Weighted
Average Exercise
Outstanding Price
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
Granted 287,500 2.05
Canceled (122,001) 1.71
-------- -----
Balance at December 31,1999 794,999 $1.59
======== =====
Exercisable at December 31, 1999 554,178 $1.62
======== =====
Exercisable at December 31,1998 401,197 $1.53
======== =====
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:
1999 1998
NET LOSS
As reported $(455,612) $(804,455)
Pro forma (653,433) (825,146)
BASIC AND DILUTED NET LOSS PER SHARE
As reported (.07) (.13)
Pro forma (.11) (.13)
All options outstanding at December 31, 1999 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 1999 and 1998, respectively: risk-free interest
rates of 5.13% and 4.94%, no expected dividend yield, expected lives of seven
years and expected volatility of 64% and 57%.
The weighted average fair value of options granted during 1999 and 1998 was
$1.42 and $.76, respectively. Options issued, which remain outstanding at
December 31, 1999, have an exercise price between $1.00 and $4.50, and a
weighted average remaining contractual life of 4.4 years.
Warrants
In 1999, 34,616 warrants were exercised resulting in a $19,232 addition to
Common Stock. In connection with certain financing and other transactions, the
Company has issued warrants to purchase shares of Common Stock at prices between
<PAGE>
$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, 1999 total 1,151,741,
have a weighted average exercise price of $2.69 and expire as follows:
2000-1,001,741, 2001-50,000, 2002-70,000 and 2005-30,000.
Note 5 - INCOME TAXES
There has been no tax expense recorded due to losses incurred in both 1999 and
1998. At December 31, 1999, the Company has approximately $10,000,000 in
operating loss carryforwards and $488,000 in research and development credits
which may be used to offset otherwise future taxable income.
Loss carryforwards and credits as of December 31, 1999, have the following
expiration dates:
Net Operating Research and
Loss Development
Credits
2005 $ 2,000 $ 0
2006 38,000 0
2007 243,000 16,000
2008 825,000 90,000
2009 1,586,000 113,000
2010 2,128,000 71,000
2011 2,192,000 63,000
2012 1,736,000 47,000
2018 770,000 63,000
2019 480,000 25,000
The tax effects of principle temporary differences at an assumed effective
annual rate of 40 percent are shown in the following table:
1999 1998
Loss carryforwards $4,000,000 $3,711,000
Research and development credits 488,000 463,000
Allowance for doubtful accounts 10,000 10,000
Inventory 91,000 154,000
Depreciation 0 158,000
Compensation expense 79,000 59,000
Other accruals 179,000 112,000
---------- ----------
Gross deferred tax assets 4,847,000 4,667,000
Valuation allowance for deferred tax assets (4,748,000) (4,667,000)
---------- ----------
Net deferred tax assets 99,000 0
Deferred tax liability:
Depreciation 99,000 0
---------- ----------
Net deferred taxes $ 0 $ 0
========== ==========
Realization of deferred tax assets is dependent upon the generation of
sufficient future taxable income. Management has determined that sufficient
uncertainty exists regarding the realizability of the net deferred tax assets
and, accordingly, has reserved the net deferred tax assets of the Company.
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the years ended
December 31, 1999 and 1998, due to the valuation allowance recorded against
deferred tax assets.
<PAGE>
Note 6 - MAJOR CUSTOMERS AND FOREIGN SALES
During 1999, the Company had sales of approximately $732,000 to a major
customer. Accounts receivable from this customer were approximately $81,000 at
December 31, 1999. There were no major customers in 1998.
The Company had foreign export sales amounting to 18.2% and 15.2% of total net
sales for the years ended December 31, 1999 and 1998 respectively.
The sales were made principally to the following locations:
1999 1998
FOREIGN SALES
Japan 4.7% 2.9%
Germany 2.5 2.9
United Kingdom 1.4 1.4
Canada 2.0 1.3
Elsewhere 7.6 6.7
18.2% 15.2%
Note 7 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office and warehouse space and certain equipment under
operating leases through 2003. The approximate future minimum lease payments as
of December 31, 1999 under these leases are $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, 1999 and 1998 was $140,827 and $141,569 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 licensors are as follows:
2000 $53,300
2001 40,800
2002 36,300
2003 36,300
2004 and thereafter 72,600
Royalty expense, including amounts related to the agreements referred to above,
totaled approximately $152,000 and $225,000 in the years ended December 31, 1999
and 1998, respectively, and are reflected as a component of cost of sales in the
accompanying statements of operations.
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 20% 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 1999 or 1998.
<PAGE>
Note 8 - MANAGEMENT FEE
The Company paid management fees totaling $41,075 and $30,300 during the years
ended December 31, 1999 and 1998, respectively, to affiliates of directors for
management services provided to the Company. $22,500 was owed to these
affiliates at December 31, 1999.
Independent Auditor's Report
To the Stockholders
Coda Music Technology, Inc.
We have audited the accompanying consolidated balance sheets of Coda Music
Technology, Inc. and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Coda Music
Technology, Inc. and subsidiary as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Minneapolis, Minnesota
February 11, 2000
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to incorporation by reference of our report dated February 11,
2000, relating to the 1999 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/ MccGladrey & Pullen LLP
Minneapolis, Minnesota
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,954,199
<SECURITIES> 0
<RECEIVABLES> 509,515
<ALLOWANCES> (25,000)
<INVENTORY> 200,242
<CURRENT-ASSETS> 2,758,436
<PP&E> 1,091,008
<DEPRECIATION> (841,348)
<TOTAL-ASSETS> 3,987,004
<CURRENT-LIABILITIES> 1,468,794
<BONDS> 0
0
0
<COMMON> 13,726,491
<OTHER-SE> (11,208,281)
<TOTAL-LIABILITY-AND-EQUITY> 3,987,004
<SALES> 6,356,136
<TOTAL-REVENUES> 6,356,136
<CGS> 772,421
<TOTAL-COSTS> 772,421
<OTHER-EXPENSES> 6,110,972
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (71,645)
<INCOME-PRETAX> (455,612)
<INCOME-TAX> 0
<INCOME-CONTINUING> (455,612)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (455,612)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
