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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period
from
to .
Commission File No.: 0-26192
MakeMusic, Inc.
(Exact name of Registrant as specified in its charter)
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Minnesota
(State or other jurisdiction of
incorporation or organization)
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41-1716250
(IRS Employer
Identification No.) |
7615 Golden Triangle Drive, Suite M, Eden Prairie, MN 55344
(Address of principal executive offices)
(952) 937-9611
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock $.01 par value
(Title of each class)
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NASDAQ Capital Market
(Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if smaller reporting company)
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Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of June
30, 2009 was approximately $15,050,653 based upon the closing price of the Registrants Common
Stock on such date.
There were 4,759,391 shares of Common Stock outstanding as of February 27, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one). Yes o No þ
PART I
Introduction
MakeMusic, Inc., a Minnesota corporation (referred to herein as we, us, the Company or
MakeMusic), is a world leader in music education technology whose mission is to enhance and
transform the experience of making, composing, teaching, and learning music. MakeMusics
predecessor corporations, which were merged to form the current entity in 1992, were incorporated
in Minnesota in 1990. We currently have approximately one hundred employees and are based in Eden
Prairie, Minnesota.
MakeMusic develops and markets two product lines that reinforce each others features and
competitiveness. The well-established Finale® family of music notation software products
provides a solid base business that serves a large customer base, and generates consistent revenue
through sales of new products, annual upgrades and trade-up campaigns. Music notation software is a
niche business with limited growth opportunity since only a small percentage of musicians ever
notate music.
Our growth potential lies with SmartMusic®, a subscription-based product directed
toward the very large and constantly renewing market of music students and their teachers.
SmartMusic combines a software application, a library of thousands of music titles and
skill-development exercises, and a web service to provide students with a compelling experience and
teachers with the realistic means to document the progress of every student.
SmartMusic
Market Need
Many students naturally desire to learn to sing or play a musical instrument. The primary
obstacle for them is practicing, which is necessary if they are to develop the skills and expertise
music performance requires. The challenge is to find ways to make practice time more engaging and
rewarding in order to encourage students to practice longer and more effectively, which leads to
positive results. There is also an increasing demand for music teachers to document individual
student achievement, something that is far easier for classroom teachers who routinely give
spelling tests, math quizzes, and science exams. It is impractical, however, for music teachers to
audition every student on a weekly basis to document their skill-development and their proficiency
with the music. The demand for measuring student performance and teacher effectiveness is readily
apparent. While the initial focus on accountability rarely included music instruction, assessment
standards are increasingly being applied to all subject areas. Administrators and music educators
seem to have a growing sense of measuring the progress of music students to validate the
effectiveness of their programs and defend program funding. Accountability within the public
schools has gained prominence as evidenced by federal legislative activity including the No Child
Left Behind Act (NCLB).
In addition, music teachers are very sensitive to how well their student ensembles perform.
Each concert, musical and marching band performance puts their teaching effectiveness on display
for all in the community to evaluate. Solutions that help them be more effective and inspiring so
that they can produce noticeably better performances are of keen interest to them.
The SmartMusic Solution
SmartMusic software is a comprehensive music teaching and learning solution for band,
orchestra, and vocal students to use at school and, more importantly, at home. SmartMusic enhances
and transforms the hours spent practicing by putting students inside a professional band or
orchestra, so that they can hear how the music is supposed to be performed and how their part fits
in. This makes practicing much more engaging, causing students to practice longer and more often.
SmartMusic also offers a rich variety of effective practice tools that make practice time more
efficient and productive. The combination of making practice time more engaging and productive
leads to rapid student skill-development, increased student confidence, higher student retention,
and stronger music programs.
Teachers use SmartMusic Gradebook, the web-based grade book that comes with each
teacher subscription, to post assignments to students, receive completed assignments from students,
assess student
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achievement, and manage student records. SmartMusic Gradebook was formerly known as SmartMusic
Impact®. This renaming of the product more clearly defines its grade book capabilities
for teachers. The grade book process works as follows:
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Teachers log in to SmartMusic Gradebook via a web browser, select a title the students
are preparing for concert, and select a pre-defined assignment for that title. Teachers
then set a due date, how many points the assignment is worth, and finally post the
assignment to all students in the band or orchestra. This process takes the teacher about
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Students log in to SmartMusic at home or at a school practice room and are immediately
greeted by a list of assignments that are due. When students click on an assignment, it is
automatically loaded for them and practice instructions are displayed. Students can then
practice the assignment with SmartMusics practice tools: slow down the tempo, hear how
their part is performed, set practice loops, use the tuner, etc. Students can even record
their performance so that they can listen to themselves and better detect problems they
need to correct. As students practice, they see notes and rhythms that were performed
incorrectly turn red and notes that were performed correctly turn green. In this manner,
SmartMusic automatically assesses student performances, giving each student a score. |
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Once a student achieves a desired score, they click the Submit button so that the
assignment and its final score are automatically sent to the teachers SmartMusic
Gradebook. Although the student needs an Internet connection to do this, no browser or
e-mail program is required. |
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Teachers can now see in their SmartMusic Gradebook which students have submitted
assessment assignments and what grades were automatically given by SmartMusic. If the
teacher required students to submit recordings of an assignment, the recordings are also in
the Gradebook. Teachers can listen to recordings with a single click which facilitates an
efficient grading process. |
SmartMusic Assignments
With SmartMusic and SmartMusic Gradebook, teachers finally have a practical way to influence
students home practice time and measure individual student achievement. They are able to use
student records in SmartMusic Gradebook to explain a semester grade to a student as well as his or
her parents. SmartMusic Gradebook also makes it easy for a teacher to e-mail parents a recording of
their child with a note, Listen to how great your child sounds! This encourages parents to be
more actively involved in their childs musical education.
Students understand that their teachers know, because of SmartMusic assignments, whether they
practice and whether they master their concert music. At the same time SmartMusic holds students
accountable, it makes their practice time more rewarding and inspiring. We believe students prefer
to work on assignments at home with SmartMusic and submit them via the Gradebook instead of
performing in front of their teacher and peers.
An administrator can audit their teachers SmartMusic Gradebook to verify that student
achievement is consistently being measured and that students are developing skills. This helps them
justify the music program which is generally acknowledged as very important to the school district.
How Does SmartMusic Develop Skills and Motivate Students?
SmartMusic provides a rich combination of features that helps students focus their practice
time and master specific skills, contributing to a more engaging and rewarding practice. These
features include the following:
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Assessment. SmartMusic assesses student performance. Wrong notes and rhythms turn red
while correct notes turn green. SmartMusic scores each attempt by the students, giving
practice time a video game-like appeal. |
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Practice with professional accompaniment. SmartMusic puts the student into an ensemble
of professionals. The music comes alive for them as they hear how professionals create the
drama, excitement, and beauty of the music. |
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Practice at slower tempos. Students need to slow music down in order to master the
technical challenges. SmartMusic allows students to set any tempo and then gradually build
up speed. |
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Hear how your part is performed. SmartMusic will play each students part so that they
can hear how a professional would perform it. |
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Record yourself. Students often cannot hear what they are doing wrong as they sing or
play. SmartMusic allows them to record themselves so that they can instantly hear what
needs to be corrected. |
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Intelligent Accompaniment®. When practicing solo literature that requires
expressive interpretation, SmartMusic listens to the students as they speed up or slow down
and the accompaniment follows their tempo changes. Students are free to experiment with
phrasing, learning to project their personalities into the music and making it their own. |
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Practice performing in tune. The SmartMusic tuner is built in and helps students hear
where the pitch should be. |
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Fingering charts. When students do not know how to finger a note, they just click on it
to see its fingering chart. SmartMusic knows for which instrument to provide the fingering.
(primarily for wind instruments) |
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Practice loops. Students can isolate difficult measures for concentrated practice. |
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Skill-development exercises in all keys. SmartMusic includes a large library of
exercises that foster skills related to scales, intervals, arpeggios, rhythms, playing by
ear, and jazz improvisation. |
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Wide range of repertoire. The SmartMusic accompaniment library includes classical, jazz,
opera, worship, musical theater, classic rock, pop, and other genres. The accompaniments,
made by professionals, are stylistic, authentic, and fun to practice with. Many of the jazz
accompaniments, for example, are created by Wynton Marsaliss musicians. |
Licensing, Publisher Relations and Content Development
Content is critical to SmartMusics success. No matter how exciting and useful the technology
may be, if the SmartMusic library does not have the titles teachers want to perform with their
student ensembles, they may not subscribe. Determining what titles teachers want is accomplished by
studying published lists of titles such as 1) state contest approved lists, 2) most often performed
lists, 3) best-selling lists, and 4) basic library lists. Additionally, publisher requests, input
from subscribers, and information from JW Pepper, the largest sheet music retailer, are also
factors considered to determine content. The repertoire is currently being extended to include
popular instrumental solos where each student is able to be the star and play the melody with
rich accompaniment.
While the SmartMusic library contains many titles and exercises that are either in the public
domain or copyrighted by MakeMusic, the vast majority of SmartMusic content is licensed. Licenses
for band, orchestra, and vocal titles typically cover three usages: 1) the right to include the
title in SmartMusic, 2) the right to display the music notation (and lyrics if applicable)
on-screen, and 3) the right to use an audio recording of the title.
These rights are licensed from a wide range of music publishers, including industry leaders
such as Hal Leonard Corporation, Alfred Publishing, and Music Sales, Ltd. MakeMusic has been
successful at licensing titles for use within SmartMusic and believes it has good relations with
the publishing community at large. However, there is no guarantee that licensing efforts will
continue to be successful in the future.
The content development process for SmartMusic includes the following: 1) editing Finale
notation files supplied by publishers or engraving the files with Finale, and modeling the result
on the published music, 2) synchronizing the audio recording file with the Finale notation file, 3)
marking the audio file as needed for use within SmartMusic, 4) defining assignments all large
ensemble titles, and 5) testing the final file. Once this process is complete, the file is added to
the library database and posted for available download to subscribers. The development costs for
each title added into SmartMusic are capitalized and when added to the library database, amortized
over a five-year period.
In 2009, developing a typical band title that did not require engraving cost approximately
$440 per title and the typical orchestra title was approximately $220. If engraving was required,
the cost was approximately $2,270 per band title and $480 per orchestra title. The average cost per
title has declined from prior years due to department efficiencies and by moving some of the
external engraving work in house. Engraving is the process of taking hand written music notation
and converting it into publishable format. We expect the costs for band titles to continue to be
more than voice and orchestra titles due to their complexity and number of parts required.
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As of December 31, 2009, SmartMusic had 1,535 titles available for band, 150 for jazz
ensemble, and 611 titles available for orchestra with capitalized investment costs totaling
approximately $570,000. These band and orchestra titles are in addition to the thousands of titles
in SmartMusic of solo literature, numerous beginning methods, and skill-development exercises.
During 2010, we plan to slightly reduce our repertoire development costs and also include fun
solo-literature to our available titles.
SmartMusic Application Development
The SmartMusic application is developed by an internal team of software programmers and
testers. Certain technologies are licensed from third parties and then adapted for use within
SmartMusic. Development priorities are set by researching how teachers and students use SmartMusic,
noting what improvements and additions are required.
The SmartMusic application coordinates a complex web of interacting technologies that include
1) playback of music, either synthesized or audio, 2) display of music notation on-screen with
Finale technology, 3) use of a microphone attachment to record a students performance, 4)
recognition of notes and rhythms and comparison of a students performance to what is notated, 5)
communication of errors and correction techniques to students, and 6) the support of a growing
selection of skill-development features that accelerate student learning. In addition, the
application has patented features such as Intelligent Accompaniment which allow students to develop
their skills of expression for solo literature.
Most importantly, the SmartMusic application communicates directly with the SmartMusic
Gradebook, making the posting and submitting of assignments automatic and problem-free. It also
manages aspects of the subscription service as well as content updates.
Licensed Technology
Certain pitch recognition software incorporated into SmartMusic for purposes of music
performance assessment is licensed from Institut de Recherche et Coordination Acoustique/Musique
(IRCAM) which is based in Paris, France. The license agreement continues in perpetuity and was
exclusive to SmartMusic through November 24, 2009. In light of the constantly changing environment
of music technology, coupled with an increase in alternative technology sources, we do not believe
the expiration of this license exclusivity will have a material impact on SmartMusic.
SmartMusic Patents
We licensed, from Carnegie Mellon University (CMU) on a worldwide basis for the life of the
patent, the use of the U.S. patent that covers the automated accompaniment developed by MakeMusic
that listens to and follows tempo changes from a live performance. Although this patent expired in
2005, we have further developed this technology and patented additional features. We have obtained
five additional patents that protect improvements to the user control of the software and that
contain certain aspects of the repertoire file which enhance the softwares algorithms,
accompaniment controls, and repertoire data file capabilities, and expand miscellaneous interface
features of the product. As a result of the additional patented features we have developed, strong
synergy with our Finale notation product, and continuing development of an extensive library of
licensed repertoire, we do not believe that SmartMusic has been or will be materially affected by
the expiration in 2005 of the CMU patent.
SmartMusic Website and Back Office Development
The SmartMusic Gradebook is the most visible aspect of the web support provided to the
SmartMusic application. We use another layer of interacting technologies, databases, and services
to support the Gradebook. This ensures that the SmartMusic solution is comprehensive and that the
SmartMusic experience is logical, efficient and enjoyable.
The website and back-office services are also developed by an internal team of programmers and
testers. Certain aspects of this development are sometimes handled by external contractors with any
development remaining the property of MakeMusic.
SmartMusic Accessories
The primary SmartMusic accessories are the instrumental microphone and the vocal microphone
headset. These microphones are inserted into the microphone input of the computer and their audio
signal is routed to the SmartMusic software for recording and assessment analysis. The instrumental
microphone has a plastic-coated tip that
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allows it to be clipped onto a musical instrument or the students clothing. We outsource the
microphone manufacturing to suppliers who can meet the specifications at competitive pricing.
During 2009, the suggested retail price of the SmartMusic microphones was $19.95. Over 70% of new
subscription purchases include a microphone. We believe accessories revenue will continue to be
consistent with this level in the future. In 2009, we also introduced a USB microphone that retails
for $29.95 and lowers the entry cost for Macintosh users.
SmartMusic Subscription Business
SmartMusic is sold as an annual subscription. Currently, teacher subscriptions, which include
the SmartMusic Gradebook, are priced at $130. Additional subscriptions for school computers and
student home subscriptions are priced at $30. Multi-year subscriptions are also available. We
evaluate our pricing on an annual basis and changes may occur in the future.
As teachers come to rely on SmartMusic to prepare concert music and develop student skills, we
believe they will post more and more SmartMusic assignments to their students. Because teachers are
able to quickly post assignments and SmartMusic assesses and grades automatically, teachers can
easily post assignments related to scales, intervals, arpeggios, rhythms, and solo repertoire as
well as their concert music. We expect that as teachers post a greater number of SmartMusic
assignments, more students will be motivated to have SmartMusic at home and our student
subscription rates will increase.
The statistics by which investors can evaluate SmartMusic growth are the following:
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Number of SmartMusic educator accounts |
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Number of SmartMusic Gradebook teachers (those having issued assignments to 50+
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Total number of SmartMusic subscriptions |
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Subscription renewal rates |
SmartMusic subscriptions are sold directly to teachers, parents, and students. Marketing
communications consist primarily of presentations, clinics, and exhibits at music educator state
conferences, e-mail, and direct mail. Direct sales efforts are typically aimed at the 17,000
schools who match our ideal demographic profile. We are focusing such efforts on twenty-four key
music education states including Texas, Florida, New York, Illinois, and Minnesota.
SmartMusic Site Licenses
SmartMusic site licenses are intended to encourage large deployments of SmartMusic student
subscriptions. The site licenses provide schools with coterminous subscriptions for all students
and teachers and discounted pricing is available. The special site license pricing reduces all
prices by 15% for 100 or more subscriptions. We offer reasonably priced teacher training to support
these larger installations and offer a training workbook and DVD as well. As of December 31, 2009,
there were 322 site licenses for SmartMusic. We expect the number of site licenses to increase in
the future due to our recently expanded direct sales force and focused marketing initiatives.
SmartMusic Sales and Marketing
The market for SmartMusic is large, with student use being the largest potential market. It is
estimated that approximately 55,000 school buildings offer instrumental programs, and over 17,000
of these schools match our ideal demographic profile. Recent independent research suggests that an
estimated 6,000,000 students participate in instrumental programs with additional students
participating in school choral programs. We believe the key to expanding the number of
subscriptions for students is producing a compelling reason for educators to make SmartMusic an
integral part of their curriculum and the basis for how they deliver and grade regular student
assignments. Further, we believe that the majority of students will prefer the convenience of
completing SmartMusic assignments at home and it is this dynamic that will drive subscription
growth.
As of December 31, 2009, MakeMusic has more than 9,200 teacher accounts with active SmartMusic
subscriptions. Since these teachers are already using SmartMusic, they will likely be the first to
adopt SmartMusic Gradebook and embrace the concept of requiring students to submit frequent
SmartMusic assignments. Therefore, this group of users represents one of our most important target
segments. We are able to track when each teacher creates a SmartMusic Gradebook account, when they
set up a class and the number of students enrolled. As a result, we have the ability to tailor our
direct marketing messages.
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For the first time, the SmartMusic solution provides administrators with the ability to easily
measure individual student achievement, create and deliver district-wide curriculum, and provide
parents with secure on-line access to student assignments and grades. Based on this solution,
MakeMusic has established a direct sales organization. The field sales representatives have an
objective of calling on district decision-makers and selling a higher number of subscriptions for
each installation.
Prospecting efforts are largely based on ranking school districts in target states based on
student population, average household income, and geography. Priorities are established by
identifying current users in target districts and requesting their assistance in setting up a
meeting and presentation with district decision-makers and other music educators within the
district.
Our SmartMusic marketing efforts are exclusively focused on the U.S. market and directed
primarily at public and private school music administrators, instrumental music educators, and
their students. In addition to aggressive direct marketing programs, MakeMusic participates in more
than 40 annual music educator conventions and presents SmartMusic clinics in a variety of settings.
The primary distribution for SmartMusic subscriptions is via the www.smartmusic.com
website (linked with www.makemusic.com and www.finalemusic.com). School orders are normally
processed directly through the MakeMusic customer support department.
SmartMusic Competition
SmartMusic is a revolutionary concept that created a new product category for teaching and
learning music. As such, it entered the market with no direct competitors and no major competitors
exist today.
At this time, no competitor has a library of content comparable to SmartMusic. Nor does any
competitor have SmartMusic Gradebook functionality, Intelligent Accompaniment®, or the
ability to utilize Finale files for user-created content. We believe these features, as well as our
long-standing relationships with major industry partners, comprehensive repertoire, and our
competitive pricing strategies, represent significant competitive barriers, but we can make no
assurances that SmartMusic will not face challenging competition in the future.
Finale family of notation products
We are a market leader in music notation software with our Finale family of products for use
with Macintosh® and Windows® PC operating systems. Music notation software
enables a musician to enter musical data into a computer using either the computer keyboard, a
MIDI- (Musical Instrument Digital Interface) 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 software programs like Finale
have made such software the dominant method for composers, arrangers, publishers, and music
teachers to create printed music.
The Finale product is a powerful and comprehensive notation software product which is sold
worldwide. Finale music notation software has a suggested retail price of $600. Finale software is
differentiated from other music notation software by its breadth and depth of features, including
capabilities such as its hyperscribe feature. HyperScribe® 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.
We also produce an Academic/Theological Edition of the Finale product that is sold exclusively
to schools, teachers, college students, and religious organizations at a suggested retail price of
$350. This edition has been a key source of revenue and registered user-base growth. In addition,
it reaches a market that is continuously replenished with new student users.
The Finale product is currently translated into German, French, Italian, and Japanese. We
believe the international market is a key growth opportunity as computer penetration increases
worldwide. All transactions with our international customers are completed in US currency.
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The Finale Allegro® product, a value-priced version of the powerful Finale music
notation software product, was introduced in 1993. The Allegro music notation software product
currently retails for $199 and contains a subset of the notation tools contained in the Finale
product.
Finale PrintMusic® and Finale SongWriter® are entry-level music notation
software products, retailing for $99.95 and $49.95, respectively. Each contains a subset of the
notation tools contained in the Finale and Finale Allegro products. These products allow us to
offer entry-level products to the retail customer, thereby expanding the base of registered users
and increasing the potential for sales of notation software upgrades. These products are targeted
to a broad audience in the education and general consumer marketplace.
Finale NotePad® is sold as an introduction to the Finale notation family and
provides a quick and easy method to transform musical ideas into printed music. Finale NotePad is
available via download for $9.99. Finale Reader was introduced in 2008 and is a free
download to view, play and print Finale files.
Finale Sales and Marketing
As of December 31, 2009, Finale notation products were sold through 50 distributors serving
countries world-wide. In the United States and Canada, the Finale family of notation products is
sold by channel-specific distributors and retailers in the musical instrument, educational, and
consumer electronic channels. Our products are merchandised through a combination of websites,
catalogs, and in-store displays. We support these efforts with a modest co-op advertising program.
We have a domestic distribution agreement with Hal Leonard Corporation, the largest music publisher
in the world, to provide our products to U.S. musical instrument and print music retailers.
Upgrades and trade-ups are marketed and sold exclusively by MakeMusic in North America.
MakeMusic requires all notation products sold in North America to be registered, and we regularly
market upgrades and trade-ups to the registered user database. Each campaign is evaluated based on
the return on investment and against original projections. Finale upgrades were introduced on both
the Windows platform and Macintosh platform in each of the last several years and we intend to
continue this annual upgrade cycle. All Finale products operate on both the Windows and Macintosh
platforms.
Internationally, Finale notation products are represented by key distributors in many overseas
territories. Finale is translated into German, French, Japanese, and Italian. MakeMusic markets a
variety of Finale notation education offerings to schools, students, and other qualified
institutions including the Finale Academic edition, the Finale lab pack, and the Finale site
license. The Finale lab pack and Finale site license provide educational discounts for volume
purchases. Education sales have steadily increased, although the mix is shifting towards site
licenses indicating wider acceptance and use of Finale notation software. We believe that this
trend will increase based on the synergistic relationship between Finale and SmartMusic along with
the formation of a direct sales team focused on the education market.
Customers can also utilize Finale software to create accompaniments for use with SmartMusic. A
Finale file is saved as a SmartMusic accompaniment and becomes part of the SmartMusic solution.
This interplay provides MakeMusic with cross-marketing opportunities between Finale and SmartMusic
users and products, and also provides a unique differentiator in the marketplace.
We believe that economic conditions will result in relatively stable Finale notation software
revenue in 2010 and potentially beyond. We anticipate holding our notation development spending
generally comparable to historical levels as a result and have developed company-wide contingency
plans that will be implemented if certain revenue and cash flow objectives are not met. We intend
to steadily build on our notation business by continually expanding the installed base of users,
regularly providing them with upgrades, expanding our educational offerings, increasing the synergy
with SmartMusic, and establishing the products as a means for electronic transmission of music.
Finale Competition
The notation market is highly competitive and includes competitors such as Steinberg Media
Technologies GmbH, Sibelius Software, NOTION Music, Inc.,Voyeur Turtle Beach, Inc., and
Gvox/Encore. Competitive factors in marketing Finale products include product features, quality,
brand recognition, ease of use, merchandising, access
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to distribution channels, retail shelf space, and price. We believe we compete effectively
through regular upgrades and marketing initiatives and continue to maintain dominant market share.
Synergies between SmartMusic and Finale products
From a technology perspective, there are considerable synergies between the SmartMusic
business and the Finale notation business because the products benefit from shared technologies.
The Finale notation technology, for example, is used within SmartMusic to display, among other
things, sheet music, exercises, and beginning band method songs. It is this technology that puts
red and green notes on the screen to show SmartMusic students what they played incorrectly and how
to correct their mistakes. The synergistic integration between SmartMusic and Finale notation
products represents a differentiator for our notation products and provides a barrier to entry into
the marketplace. Likewise, the ability to create SmartMusic repertoire using the Finale product is
a major benefit for SmartMusic customers.
General Information
Customer Support
As of December 31, 2009, customer support for all products is handled by 19 employees and as
of December 31, 2008, our customer support staff totaled 21. They are supported by knowledge-based
software that allows customers to ask questions on-line at
www.finalemusic.com and
www.smartmusic.com and then presents them with answers. As new questions are asked by customers,
the database of questions and answers is expanded. This software reduces the number of contacts
reaching customer support employees and thus enhances efficiency, reduces cost, and provides a
better experience for customers.
Principal Sources and Suppliers
Printing of user manuals, packaging, and the manufacture of related materials are performed to
our specifications by outside subcontractors. We currently use one subcontractor to perform
standard copying and assembling services, including copying software DVD and CD-ROM discs, and
assembling the product manuals, discs, and other product literature into packages. If this
subcontractor is unable to perform, there are alternative vendors that we could use for this
service. Our instrumental and vocal microphones are each currently provided by two separate vendors
that are sole source suppliers. We believe there are alternative vendors available if our
subcontractors are unable to supply microphones.
Dependence on Major Customers
As of December 31, 2009, no distributor or direct customer for either our SmartMusic or Finale
products represented more than 10% of total revenue.
Product Development
At December 31, 2009 and 2008, there were 54 and 53 employees, respectively involved in
product development for SmartMusic and Finale products at MakeMusic. This staff engages in research
and development of new products, enhancements to existing products, business systems support,
repertoire development, and quality assurance testing.
MakeMusics non-capitalized expenditures for product development were $5,081,000 and
$4,633,000 in 2009 and 2008, representing 30.9% and 30.6% of gross revenues, respectively. These
expenses include the costs for our annual notation upgrades, product maintenance releases and
support for our business systems. We expect these costs to moderately increase in 2010 due to
enhancements in our technology infrastructure requirements to support our expanding customer base.
Trademarks
We own the registered trademarks in the United States for Allegro®,
Coda®, Finale®, Finale Allegro®, Finale NotePad®,
Finale Performance Assessment®, Finale PrintMusic®, Finale
SongWriter®, Finale Viewer ®, FinaleScript®, FPA®,
HumanPlayback®, HyperScribe®, Intelligent Accompaniment®,
Intonation Trainer®, M!®, MakeMusic®, MicNotator®,
SmartMusic®, SmartMusic Impact®, StudioView®, SmartFind and
Paint®, and TempoTap®. In addition, the names Finale®, Finale
NotePad®, Finale PrintMusic®, Finale SongWriter®, Finale
Viewer ®, Intelligent Accompaniment®, MakeMusic®,
SmartMusic®, and The Art of Music Notation® have been
9
protected in some foreign countries. We have applied for trademark registration in the United
States for SmartSheets, and Finale Reader. In addition to our own
registered trademarks listed above, this report also contains references to trademarks owned by
third parties.
Technology Infrastructure
The MakeMusic data center is operated internally, offering extensive uptime and connectivity
to the Internet backbone via fiber-optic connections. For maximum reliability, all our servers
utilize redundant arrays of independent discs for information backup as well as redundant power. A
Storage Area Network is in place to provide simplified storage administration and allow for server
consolidation and virtualization. Websites and services are run on Microsoft IIS® and
Apache® servers. A combination of Microsoft SQL Server® and
Oracle® are used for database applications. MakeMusic utilizes a VoIP phone system that
provides unified messaging and is deeply integrated with Microsoft Active Directory and Microsoft
Exchange. Our network is monitored twenty-four hours a day, seven days a week, and is scalable and
upgradeable for future growth.
In 2008, we migrated a large portion of our business-critical servers to an offsite data
center. This provides greater environmental controls in addition to helping to eliminate single
points of failure in our network infrastructure. Server consolidation, fast recovery, redundancy,
and increased scalability are just a few of the areas that the migration addressed.
MakeMusic Websites:
www.smartmusic.com. The SmartMusic website promotes our SmartMusic subscriptions and
SmartMusic accessories.
www.smartmusic.com/impact. The SmartMusic Gradebook website is where teachers set up
their classes, post assignments to students, receive completed assignments from students, and
manage student records.
www.finalemusic.com. The Finale website promotes notation products and e-commerce with
mail-order fulfillment, as well as downloads of Finale NotePad.
www.makemusic.com. The MakeMusic website includes information on the Company and our
products. It also provides links to www.smartmusic.com and www.finalemusic.com for
people wanting to make purchases of our products.
Available Information
All reports filed electronically by MakeMusic with the Securities and Exchange Commission
(SEC), including its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, proxy and information statements, other information and amendments to those reports
filed (if applicable), are accessible at no cost by contacting the Investor Relations department at
MakeMusic. These filings are also accessible on the SECs website at www.sec.gov. The
public may read and copy any materials filed by MakeMusic with the SEC at the SECs Public
Reference Room at 100 F Street, NE, Washington, DC 20549. The public may also obtain information
from the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Cautionary Statements
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a safe harbor
for forward-looking statements made by us or on our behalf. We have made, and may continue to make,
various written or verbal forward-looking statements with respect to business and financial
matters, including statements contained in this document, other filings with the SEC and reports to
shareholders. 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. Forward-looking statements speak only as
of the date on which they are made.
Our forward-looking statements generally relate to the following: our relations with the
publishing community and strength of our licensing efforts; expectations relating to development,
production and marketing and
10
other expenses; intentions relating to product development, product upgrade cycles, market
introduction, sales and marketing efforts, and pricing strategies; beliefs about the impact of
intellectual property and licensing rights; expectations relating to our business model and
strategy; beliefs about the international market for our product; our intended growth strategy
(particularly related to SmartMusic); expectations relating to results of operations, subscription
rates, site licenses, cash flows and financial results; intentions relating to our business
activity during the economic downturn; beliefs about our ability to compete in the music software
industry; expectations and beliefs relating to our vendors, contractors and suppliers; perceived
benefits from changes to our technology infrastructure, beliefs with respect to realization of
deferred tax assets, our intent to retain earning for use in operations, and our intent to report
subscription renewals on a quarterly basis. 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. We undertake no obligation to update any forward-looking
statements. We wish to caution investors that the following important factors, among others, in
some cases have affected and in the future could affect our 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 us or on our behalf. 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.
We currently believe that we have sufficient capital, but we may have other future capital
needs. We again achieved positive operating cash flow in 2009 and expect it to continue to be
positive in the future, provided we continue to increase revenue and manage expenses. We believe
our cash reserves are sufficient to execute our strategies. If we do not maintain positive cash
flow, we may need additional capital in the form of debt or equity financing to continue to operate
the business. Additional capital may be needed if there is a significant change in our business
plan or operating results. There is no assurance that additional debt or equity financing will be
available to us on favorable terms or at all.
We are dependent upon our new product development efforts. Additional development work is
required to increase the breadth of and provide periodic upgrades to our SmartMusic and Finale
products and expand the accompaniment repertoire for SmartMusic. There can be no assurance that our
timetable for any of our development plans will be achieved, that sufficient development resources
will be available, or that development efforts will be successful.
We are dependent upon the Internet in our business. We are dependent on the Internet to
activate our SmartMusic subscriptions and secure our licensed content. We also utilize the Internet
as one of our order-processing channels. Critical issues concerning the commercial use of the
Internet, including security, cost, ease of use and access, intellectual property ownership, and
other legal liability issues, remain unresolved and could materially and adversely affect both the
growth of Internet usage generally and our business in particular. If we experience problems
developing and maintaining our Internet operations, our sales, operating results, and financial
condition could be adversely affected.
We are dependent upon obtaining and maintaining license agreements with music publishers, of
which there are a limited number. The world market for music license rights is highly concentrated
among a limited number of publishers. We have entered into license agreements with leading music
publishers that provide access to certain musical titles for accompaniment development. Many of our
contracts with major publishers are not exclusive, which means that similar agreements may be made
with competitors or that the publishers themselves may sell the same titles. While we believe that
our relationships with these publishers are good, there can be no assurance that we will be able to
maintain or expand these relationships. The lack of a sufficient number and variety of musical
arrangements would greatly limit the ability to market our products and services.
Certain of our products have limited and fluctuating sales. Sales of our SmartMusic
subscription products have not achieved, and may not achieve, significant levels. Further, Internet
sales have fluctuated, as have sales of Finale products, which are historically higher following
the release of product upgrades. We believe that results of operations may fluctuate as a result
of, among other things, the purchasing cycle of the education market and the timing of releases of
new products and product upgrades. Certain states have had significant budget deficits and
education funding cuts, which could negatively impact sales of products to the education market.
11
The uncertainty in worldwide economic conditions may divert consumer spending from our
products. The spending habits of our target group of students and their families are often impacted
by general economic conditions. If the improvement of economic conditions remains uncertain in the
United States or internationally, our target customers discretionary income and purchasing
decisions may change. This could negatively impact Notation sales, SmartMusic subscription rates
and accessory sales.
We have incurred operating losses in the past and may incur losses in the future. While we
have been profitable for the past four years, we have incurred losses from operations in the past
and may incur such losses in the future. In order to continue to develop our business and planned
product and service offerings, we will be required to continue to devote capital to development and
marketing efforts, among other things. There can be no assurance that we will operate profitably or
provide an economic return to investors.
We face intense competition. While competition for SmartMusic is relatively limited, there can
be no assurance, in spite of significant barriers to entry, that others, such as large electronic
and musical instrument manufacturers, will not enter this market. Competition for our notation
products could potentially adversely impact future sales levels. Our ability to continue to compete
effectively will be substantially dependent upon our ability to continue to improve our product
offerings, Internet resources along with our sales and marketing initiatives. If such improvements
and development efforts do not materialize as intended, we may lose our ability to differentiate
our products from those of our competitors. In addition, increasing competition in the music
software market could cause prices to fall and the volume of transactions to decline, either of
which could adversely affect our business, operating results, and financial condition.
Rapid technological changes and obsolescence may adversely affect our business. We operate in
an industry greatly affected by technological changes. While we are not currently aware of any
significant technological changes that may affect our current technology base, continued
advancements in computer software, hardware, and network designs and formats may impact our ability
to effectively maintain our Internet-based sales efforts in a workable and user-friendly format.
The proprietary technology we use to protect access to our licensed files may be effective for only
a limited period by reason of technological change. We must, therefore, devote new resources to
improve or modify this security system, which is a critical aspect of our ability to establish and
maintain relationships with music publishers. While we currently believe that we have sufficient
resources to address technological changes that may affect our business, there can be no assurance
that any such technological changes will not prove too much for us to overcome in a cost-effective
manner.
The success of our web-based products and services is dependent upon our ability to protect
user information and comply with data protection laws and regulations. In connection with the use
of our web-based products, users provide us with certain personal information. The collection, use,
disclosure or security of personal information or other privacy-related matters are regulated by
applicable data protection laws. While we strive to comply with all applicable data protection laws
and regulations, as well as our own posted privacy policies, any failure or perceived failure to
comply may result in proceedings or actions against us by government entities, individuals or
others, which could potentially have an adverse effect on our business. Further, federal, state,
and international regulations regarding privacy and data protection may become more stringent in
the future, which could increase our cost of compliance,
In addition, as our SmartMusic Gradebook product is web based, the amount of data we store for
our users on our servers (including personal information) has been increasing. Any systems failure
or compromise of our security that results in the release of our users data could seriously limit
the adoption of our products as well as harm our reputation and brand and, therefore, our business.
We may also need to expend significant resources to protect against system failure or security
breaches. The risk that these types of events could seriously harm our business is likely to
increase as we expand the number of subscribers to our products.
We are dependent upon certain key personnel. We are highly dependent on a limited number of
key management, including our executive management team as well as key technical personnel. The
loss of key personnel, or our inability to hire and retain qualified personnel, could have an
adverse effect on our business, financial condition, and results of operations.
12
We are dependent upon proprietary technology and cannot assure protection of such technology.
There can be no assurance that our proprietary technology will provide us with significant
competitive advantages, that other companies will not develop substantially equivalent technology,
or that we will be able to protect our technologies. We could incur substantial costs in seeking
enforcement of our patents or in defending ourselves against patent infringement claims by others.
Further, there can be no assurance that we will be able to obtain or maintain patent protection in
the markets in which we intend to offer products.
International development plans are subject to numerous risks. There can be no guarantee that
our international expansion efforts will be successful or that we will be able to offset the cost
of the resources allocated to such efforts. Moreover, we could be faced with the risks inherent in
any international development, such as unpredictable changes in export restrictions, barriers, and
customs rates; currency risks; the difficulty of managing foreign operations; the differences in
technological standards, payment terms and labor laws and practices among countries; collection
problems; political instabilities; seasonal reductions in business; and unforeseen taxes. Such risk
factors could harm our international operations and, therefore, our business, operating results,
and financial condition.
The market price of our stock may experience volatility. We cannot speculate as to the future
market price of our common stock. Our common stock has experienced, and may continue to experience,
significant price volatility due to a number of factors, including fluctuations in operating
results, changes in market perspectives for our products, developments in our industry, and general
market conditions that may be unrelated to our performance.
We will be exposed to risks relating to evaluations of controls required by Section 404 of the
Sarbanes-Oxley Act. Changing laws, regulations, and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act and related regulations implemented by the SEC,
are creating uncertainty for public companies, increasing legal and financial compliance costs, and
making some activities more time consuming. We will continue to evaluate our internal controls
systems to allow management to report on, and our independent auditors to attest to, our internal
controls. While we have performed the system and process evaluation and testing (and any necessary
remediation) required to comply with the management certification requirements of Section 404 of
the Sarbanes-Oxley Act, auditor attestation will be required in 2010. While we anticipate being
able to fully comply with the requirements relating to internal controls and all other aspects of
Section 404, we cannot be certain as to the timing of completion of the auditors attestation or the
impact of the same on our operations. If we are not able to maintain the requirements of
Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or
investigation by regulatory authorities, including the SEC. This type of action could adversely
affect our financial results or investors confidence in our Company and our ability to access
capital markets and could cause our stock price to decline. In addition, the controls and
procedures that we will implement may not comply with all of the relevant rules and regulations of
the SEC. If we fail to develop and maintain effective controls and procedures, we may be unable to
provide the required financial information in a timely and reliable manner. Further, if we acquire
any business in the future, we may incur substantial additional costs to bring the acquired
business systems into compliance with Section 404.
Significant management judgment is required for certain financial statement entries. As
explained in more detail in Item 6 below under the heading Critical Accounting Policies, the
preparation of our financial statements requires management to make significant estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods presented. For
example, during 2009, based upon our operating results in recent years and through December 31,
2009 as well as an assessment of our expected future results of operations, we determined that it
had become more likely than not that we would realize a portion of our net deferred tax assets. As
a result, during the fourth quarter of 2009, we released $2,564,000 of our valuation allowance. If
managements assumptions were inaccurate or managements judgment was otherwise erroneous, we may
be required to adjust the valuation allowance in subsequent financial reporting periods. In
addition, future utilization of NOL carry-forwards is subject to certain limitations under
Section 382 of the Internal Revenue Code, and our ability to use NOLs in the future may be
limited.
13
Our corporate facility is leased under an operating lease arrangement and consists of
approximately 22,000 square feet of office and warehouse space at 7615 Golden Triangle Drive, Suite
M, Eden Prairie, Minnesota, 55344. Rent and maintenance over the remaining lease term are
approximately $250,000 on an annual basis and the lease expires March 31, 2011. We believe this
space is adequate through 2010 and future requirements will be dependent upon the rate of growth we
experience.
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ITEM 3. |
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LEGAL PROCEEDINGS |
In the ordinary course of business, we may be party to legal actions, proceedings, or claims.
Corresponding costs are accrued when it is more likely than not that loss will be incurred and the
amount can be precisely or reasonably estimated. We are not aware of any actual or threatened
litigation that would have a material adverse effect on its financial condition or results of
operations.
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ITEM 4. |
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(REMOVED AND RESERVED) |
14
PART II
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ITEM 5. |
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
Market Information
Our common stock trades on The NASDAQ Capital Market under the symbol MMUS. The following
table sets forth the high and low sales prices of our common stock for the periods set forth:
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2009 |
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2008 |
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High |
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Low |
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High |
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Low |
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First Quarter |
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$ |
4.50 |
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$ |
1.86 |
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$ |
10.39 |
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$ |
8.53 |
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Common
Stock |
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Second Quarter |
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3.90 |
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2.31 |
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9.50 |
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|
7.34 |
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Third Quarter |
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|
4.05 |
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|
|
2.61 |
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8.00 |
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|
|
6.10 |
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Fourth Quarter |
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|
5.00 |
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|
|
3.06 |
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|
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6.95 |
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|
2.02 |
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As of December 31, 2009, there were 116 registered shareholders.
Dividends
We have never paid cash dividends on any of our securities. We currently intend to retain any
earnings for use in operations and do not anticipate paying cash dividends in the foreseeable
future.
Recent Sales of Unregistered Equity Securities
There were no sales of unregistered securities during the quarter or year ended December 31,
2009 that have not been previously reported.
For information on our equity compensation plans, refer to Item 12, Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters.
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ITEM 6. |
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SELECTED FINANCIAL DATA |
A smaller reporting company is not required to provide the information required
by this Item.
15
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ITEM 7. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |
Executive Overview
MakeMusics mission is to develop and market solutions that transform how music is composed,
taught, learned and performed. This is accomplished by:
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Providing integrated technology, content and web services to enhance and expand how
music is taught, learned and prepared for performance. |
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Providing music education content developers with a technology-enriched publishing
platform that leverages their copyrighted assets while simultaneously increasing the
content and value of the SmartMusic library. |
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Offering software solutions for engraving and electronically distributing sheet
music. |
MakeMusic develops and markets two product lines, SmartMusic® learning software for
band, jazz ensemble, orchestra and voice and Finale® music notation software. We believe
these innovative products reinforce each others features and competitiveness and will allow us to
continue to achieve positive operating results. The well-established Finale family of music
notation software products provides a solid base business that serves a large customer base and
generates consistent revenue through sales of new products, annual upgrades and trade-up campaigns.
Music notation software is a niche business with limited growth opportunity since only a small
percentage of musicians ever notate music.
Our fiscal year 2009 resulted in continued sales growth for MakeMusic and overall, an 8%
increase over 2008 net revenue was achieved. SmartMusic revenue grew 23% due to our subscription
growth from 106,584 on December 31, 2008 to 133,782 on December 31, 2009 and a price increase
implemented in July 2008. Notation revenue increased 3% overall, which we attribute primarily to
sales of our Finale NotePad® product that we began charging for in October 2008, and
stronger direct sales of Finale. Gross margin percentages were comparable at 84% in both 2009 and
2008. Operating expenses increased in 2009, primarily due to increased business systems expenses as
a result of increased staffing and expansion of our systems infrastructure to support our
anticipated SmartMusic growth, and prior years sales tax expense from customers in certain states.
Our net income before taxes in 2009 was $959,000 compared to $499,000 in 2008. Additionally, we
reported a significant tax benefit provision in 2009. This tax benefit resulted primarily from an
adjustment reducing the valuation allowance against our deferred tax assets by $2,564,000 that
represented managements revised estimate of the realizability of our deferred tax assets. As a
result of the factors mentioned, we reported net income of approximately $3,453,000 in 2009
compared to net income of $491,000 in 2008.
We believe our greatest growth potential lies with SmartMusic, a subscription-based product
directed toward the very large and constantly renewing market of music students and their teachers.
SmartMusic combines a software application, a library of thousands of music titles and
skill-development exercises and a web service to provide students with a compelling experience and
teachers with the realistic means to document the progress of every student.
SmartMusic software enhances and transforms the hours spent practicing by putting students
inside a professional band or orchestra so that they can hear how the music is supposed to be
performed and how their part fits in. This makes practicing much more engaging, causing students to
practice longer and more often. SmartMusic provides access to an ever-increasing library of band,
jazz ensemble and orchestra literature. Each title includes individual part assignments authored by
respected educators, thereby providing music teachers with a time-saving solution for preparing
selections for their next performance. SmartMusic also offers a rich variety of effective
practice tools that make practice time more efficient and productive. The combination of making
practice time more engaging and productive leads to rapid student skill-development, increased
student confidence, higher student retention, and stronger music programs.
SmartMusic Gradebook (formerly SmartMusic Impact) is a web-based grade book that is included
with each teacher subscription designed to manage student assignments, grades, and recordings while
documenting the progress
16
of each student and assessing student achievement. This provides music educators (and
students) with exciting new possibilities to assist in developing strong music programs and
complying with accountability requirements. SmartMusic Gradebook enables teachers to easily send
assignments to each of their students. Students complete the assignment on their home computer
provided that they have a SmartMusic subscription, or on a school computer equipped with
SmartMusic. Submitted assignments are automatically graded and posted in the teachers SmartMusic
Gradebook thereby providing teachers with the visible means for measuring student achievement.
Our sales organization focuses on direct school district sales aimed at the 17,000 schools who
match our ideal demographic profile. Site licenses are sold that provide discounts for volume
purchases. In June 2009, we slightly modified the definition of our SmartMusic site licenses. In
order to continue to qualify for the volume purchase discount, a purchasing entity must have
purchased 100 or more subscriptions upon the one-year anniversary of the site license agreement
date. If the entity did not achieve the 100 subscription level, it no longer qualifies for the
discount and we do not include the site license in our reported totals. The effect of these changes
was a slight reduction, but more accurate count of the monthly total site license numbers. The
updated SmartMusic monthly site license totals are shown in the SmartMusic metrics table below.
In addition to tracking the total number of subscriptions, we track the number of teachers who
use SmartMusic Gradebook and the number of those teachers who are using SmartMusic Gradebook to
deliver and manage student assignments to fifty students or more (formerly known as Impact
teachers, now Gradebook teachers). As of December 31, 2009, we reported 886 Gradebook teachers
compared to 601 Gradebook teachers as of December 31, 2008.
The following table illustrates our quarterly SmartMusic metrics:
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Dec-08 |
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Mar-09 |
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Jun-09 |
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Sep-09 |
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Dec-09 |
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Total Subscriptions |
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106,584 |
|
|
|
110,318 |
|
|
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111,059 |
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|
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122,577 |
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|
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133,782 |
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Educator Accounts |
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|
9,185 |
|
|
|
9,091 |
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|
|
8,616 |
|
|
|
9,003 |
|
|
|
9,269 |
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Educators who have issued assignments* |
|
|
1,436 |
|
|
|
1,874 |
|
|
|
1,994 |
|
|
|
1,178 |
|
|
|
1,857 |
|
Gradebook Teachers* |
|
|
601 |
|
|
|
829 |
|
|
|
874 |
|
|
|
453 |
|
|
|
886 |
|
Site Licenses |
|
|
203 |
|
|
|
208 |
|
|
|
203 |
|
|
|
236 |
|
|
|
322 |
|
Site License Educator Subscriptions |
|
|
1,341 |
|
|
|
1,461 |
|
|
|
1,417 |
|
|
|
1,762 |
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|
|
2,181 |
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* |
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Annual statistics that restart on July 1 of each year reflecting the start of the
school-year cycle |
The SmartMusic target business model is to have music educators increase their use of
SmartMusic Gradebook to set up their classes, enroll students and issue assignments, which we
believe would result in an increase in student subscriptions. As stated above, 1,857, or 20%, of
the teachers who have purchased SmartMusic have utilized SmartMusic Gradebook, and those teachers
have 114,911 students receiving SmartMusic assignments.
We are focusing on high-level strategic sales and marketing initiatives to provide enhanced
SmartMusic subscriptions sales momentum. During the third quarter of 2009, we partnered with web
marketing consultants to expand our social media and general web presence and in September 2009, we
hired a Senior Vice President of Marketing to enhance our marketing efforts.
To accelerate the adoption of this target business model and address the lower-than-expected
subscription rates in 2008, in the first quarter of 2009, we hired a sales director and increased
the focus of our direct sales force on existing SmartMusic teachers that have not yet utilized
Gradebook in their curriculum. In addition, our development efforts are focused on improving and
simplifying the SmartMusic purchase processes, Gradebook class set-up, student enrollment and
SmartMusic assignments. The overall objective is to make these processes easy and intuitive for
both teachers and students. These product enhancements were included in SmartMusic 2010, which was
released on July 28, 2009. As a result of the increased focus of our direct sales force and the
product enhancements, site license educator subscriptions increased 63% from 1,341 at December 31,
2008 to 2,181 at December 31, 2009.
During the third quarter of 2009, we engaged a third-party user interface design firm to
assist in making the SmartMusic and Gradebook experience more intuitive, engaging, rewarding and
social. We believe this will result in faster growth of new subscribers and improved retention
rates and the enhancements will be included in our next
17
product release scheduled in 2010. Additionally, we anticipate releasing popular
solo-literature in our SmartMusic repertoire that will be focused on student fun and making
practice more enjoyable. We believe this will contribute to improving student subscription renewals
and creating a more provocative value proposition for students and parents.
During the second quarter of 2009, we completed research that identified the universe of
schools matching the ideal SmartMusic profile. The profile was determined by evaluating our
existing customer base and determining the demographic profile of the schools that have fully
adopted SmartMusic in their music programs. The total number of schools which matched the profile
was approximately 17,000 (representing 31% of schools with instrumental music programs). To allow
for targeted marketing and sales efforts to these profile schools, we have integrated this data
into our Customer Relationship Management system (CRM) and are utilizing information associated
with the current federal stimulus program in our marketing and sales initiatives.
In the third quarter of 2008, we began tracking new versus renewed SmartMusic subscriptions.
The following table illustrates the net new SmartMusic subscription data for the quarters ended
September 30, 2008, December 31, 2008, March 31, 2009, June 30, 2009, September 30, 2009 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly |
|
|
Beginning |
|
|
|
|
|
Renewed |
|
|
|
|
|
|
|
|
|
Quarter End |
|
Net New |
Quarter End Date |
|
Subscriptions |
|
New Subscriptions |
|
Subscriptions |
|
Renewal Rate |
|
Subscriptions Ended |
|
Subscriptions |
|
Subscriptions |
9/30/2008 |
|
|
95,632 |
|
|
|
20,347 |
|
|
|
20,017 |
|
|
|
53 |
% |
|
|
37,877 |
|
|
|
98,119 |
|
|
|
2,487 |
|
12/31/2008 |
|
|
98,119 |
|
|
|
17,907 |
|
|
|
17,942 |
|
|
|
66 |
% |
|
|
27,384 |
|
|
|
106,584 |
|
|
|
8,465 |
|
3/31/2009 |
|
|
106,584 |
|
|
|
10,609 |
|
|
|
12,241 |
|
|
|
64 |
% |
|
|
19,116 |
|
|
|
110,318 |
|
|
|
3,734 |
|
6/30/2009 |
|
|
110,318 |
|
|
|
5,256 |
|
|
|
11,350 |
|
|
|
72 |
% |
|
|
15,865 |
|
|
|
111,059 |
|
|
|
741 |
|
9/30/2009 |
|
|
111,059 |
|
|
|
24,456 |
|
|
|
29,585 |
|
|
|
70 |
% |
|
|
42,523 |
|
|
|
122,577 |
|
|
|
11,518 |
|
12/31/2009 |
|
|
122,577 |
|
|
|
20,122 |
|
|
|
26,402 |
|
|
|
75 |
% |
|
|
35,319 |
|
|
|
133,782 |
|
|
|
11,205 |
|
We define renewed subscriptions as those subscriptions that customers purchase within the
two-month period after their prior subscription ended. Because of changes to the start of school
from year to year as well as fluctuations in the date that music teachers implement their
curriculum, we commonly see subscribers that have a delay of up to two months in renewing their
subscription. As a result, we believe that using the above definition of a renewal more accurately
reflects the renewal rate for SmartMusic subscriptions.
We have achieved positive cash flow from operations for the last five years, including the
most recent year ended December 31, 2009. Our quarterly results will fluctuate as a result of the
cyclicality of the education market. Due to current economic conditions and concerns over school
budgets, we remain cautious regarding our future financial projections. However, with increased
revenues and, in particular, the growth in SmartMusic subscriptions, plus improvements in
operational efficiency over the last few years and the establishment of contingency plans to be
implemented if our revenue and cash flow objectives are not met, we feel that we can continue to
achieve positive operating cash flow for the next twelve months.
In 2009, we began reporting results of operations by two unique reportable segments, Notation
and SmartMusic. This change was made to provide enhanced decision making capabilities relating to
investments in our products. Historically, net revenue has been reported separately for these two
product lines. However, direct and operating costs had not been previously assessed or reported by
segment. Therefore, prior year comparative costs are not available and operating costs by segment
are not discussed in this Managements Discussion and Analysis of Financial Condition and Results
of Operations. For further information on segment reporting, refer to Note 10 to the financial
statements of this report.
Critical Accounting Estimates
Our financial statements are prepared in conformity with U.S. generally accepted accounting
principles. The preparation of these financial statements requires management to make significant
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the periods
presented. We believe that the following are some of the more critical
18
judgment areas in the application of our accounting policies that currently affect our
financial position and results of operations.
Allowance for doubtful accounts. Our distribution in domestic and international markets
through independent dealers and distributors concentrates relatively large amounts of receivables
in relatively few customer accounts; however, none are greater than 10% of the total revenue. Some
international customers pay for the product prior to shipment; domestic dealers and distributors
who do not prepay are granted payment terms and credit limits based on credit checks and account
history. We have successfully done business with most of our dealers and distributors for many
years. During fiscal year ended December 31, 2008, we had one distributor that ceased operations
and closed its business resulting in a write-off of their uncollectible accounts receivable of
$16,300. There were no significant uncollectible accounts in 2009.
Any sales directly to home users are prepaid and schools submit purchase orders for purchases.
MakeMusic records a monthly accrual for potential non-payments, which has historically been
sufficient to cover uncollected accounts. Financial conditions in international markets and
economic conditions can change quickly and our allowance for doubtful accounts cannot anticipate
all potential changes.
Sales returns and allowance reserves. SmartMusic teacher subscriptions automatically renew at
the end of their subscription period. Notices of renewal are sent to the teacher in advance and an
invoice is sent upon the renewal date. A reserve is booked for those subscriptions that
automatically renew and are subsequently cancelled due to teacher relocation, teacher cancellation,
or non-payment of accounts. The reserve represents the revenue recognized on unpaid invoices for
SmartMusic subscriptions which are more than 120 days overdue and which have had no activity in the
preceding three months. The reserve is then evaluated quarterly to determine if any adjustments are
necessary.
When a new version of Finale is released, dealers and distributors retain the right to return
any unsold versions of the prior release (normally 10% of total prior year sales) in exchange for
an equal number of units of the updated version of the product that is returned. The history of
these returns is tracked and revenue is deferred based on the expected return rate until the new
product is released, at which time the product may be returned for credit provided the customer
places an equivalent (number of units) order for the new version.
Inventory valuation. Inventories are stated at the lower of cost or market, with cost being
determined on a weighted average cost method. We record a provision to adjust slow-moving and
obsolete inventories to the lower of cost or market based on historical experience and current
product demand. The carrying value of inventory is evaluated at least quarterly and adjusted as
needed. Inventory is reviewed for obsolescence when the inventory is no longer used in products in
their most current released version.
Stock based compensation. Accounting Standards Codification (ASC) 718, Compensation Stock
Compensation, (formerly known as SFAS 123R) requires us to measure and recognize in our Statements
of Income the expense associated with all share-based payment awards made to employees and
directors based on estimated fair values. We utilize the Black-Scholes option valuation model to
measure the amount of compensation expense we recognize for each option award. There are several
assumptions that we must make when using the Black-Scholes model such as the expected term of each
option, the expected volatility of the stock price during the expected term of the option, the
expected dividends payable, and the risk free interest rate expected during the option term. Of
these assumptions, the expected term of the options and expected volatility of our common stock are
the most difficult to estimate since they are based on the exercise behavior of employees and the
expected future performance of our stock.
Capitalized software costs. Costs incurred in the development of software products are
capitalized in accordance with ASC 985-20, Software Costs of Software to be Sold, Leased or
Marketed, (formerly known as FAS 86) which requires the capitalization of certain software
development costs incurred after technological feasibility is established. Technological
feasibility is established when the detailed program design and all planning and testing activities
are completed. Capitalization of computer software costs shall cease when a product is available
for general release to customers. We capitalize the costs of producing any new software product,
which includes individual song titles to be included as repertoire with the SmartMusic product. The
estimated economic life of SmartMusic Gradebook, whose capitalization and market introduction was
completed in 2007, has been established
19
as five years. This five-year amortization period is consistent with the initial licensing
term for the large ensemble titles available in SmartMusic that have pre-authored assignments for
use by teachers within SmartMusic Gradebook. Similarly, upon release of a large ensemble song title
into SmartMusic, we amortize the related capitalized software costs over the estimated life of the
song, not to exceed the five-year licensing period. A reserve is recorded for an estimate of song
titles that will not be released. Annual development of notation products consists of maintenance
costs that are expensed as incurred. We will continue to review our amortization period for
capitalized software costs as considered necessary based upon any new information and information
gained in our review of the net realizable value of unamortized costs.
Post contract support. We account for software maintenance in accordance with ASC 985-605,
Software Software Revenue Recognition, (formerly AICPA SOP 97-2) which states that revenue for
post-contract support (PCS) may be recognized upon the initial sale when PCS is included with the
initial license and the cost of providing PCS during the arrangement is insignificant. However, the
estimated related costs are accrued in the same period that the sales price is recognized. We
provide unlimited, free telephone, e-mail, and on-line technical support to our customers and,
therefore, accrue an estimated cost of future support for our notation products in the period of
sale.
Impairment of goodwill. We review goodwill for potential impairment in accordance with ASC
350, Intangibles Goodwill and other, (formerly FAS 142). Our impairment review is conducted at
least annually or when events or changes in circumstances indicate the carrying value of goodwill
may be impaired. We have assigned all of our goodwill to the Notation reporting unit and compare
the fair value of this reporting unit (effective January 2009), as computed primarily by applying a
combination of income or market valuation approaches, to its book carrying value, including
goodwill (step 1). If the fair value exceeds the carrying value, no further work is required and no
impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the
reporting unit is potentially impaired and we would then complete step 2 to arrive at an implied
fair value of the goodwill, by deducting the fair value of all tangible and intangible net assets
(including unrecognized intangible assets) and liabilities of the reporting unit from the fair
value of the reporting unit. If the implied fair value of the goodwill is less than the reported
value of goodwill, we would recognize an impairment loss equal to the difference. The assessment of
potential impairment requires certain judgments and estimates by us, including the determination of
an event indicating impairment, the future cash flows to be generated by reporting units, the risks
associated with those cash flows, and the discount rate to be utilized.
Income taxes. We account for income taxes using the asset and liability method provided by
ASC 740, Income taxes (formerly FAS 109). We estimate our income taxes in each of the jurisdictions
in which we operate and account for income taxes payable as part of the preparation of our
financial statements. This process involves estimating our actual current tax expense as well as
assessing temporary differences resulting from differing treatment of items, such as depreciation
and amortization, for financial and tax reporting purposes. These differences result in deferred
tax assets and liabilities, which are included in our balance sheet to the extent deemed
realizable. We assess the likelihood that, and the extent to which, our deferred tax assets will be
realized and establish a valuation allowance to reduce deferred tax assets to an amount for which
realization is more likely than not. If we increase or decrease a valuation allowance in a given
period, then we must increase or decrease the tax provision in our statements of income.
As of December 31, 2009, we had U.S. net operating loss carry-forwards of approximately
$17,824,000, Minnesota net operating loss carry-forwards of $6,392,000, and research and
development tax credits of $1,069,000. The losses and tax credits are carried forward for federal
and state corporate income taxes and may be used to reduce future taxes.
Significant management judgment is required in determining any valuation allowance
recorded against our net deferred tax assets. Prior to the fourth quarter of 2009, we remained
uncertain on how economic conditions would impact our back to school selling cycle and annual
financial results. Based upon our strong performance in the fourth quarter of 2009, our operating
results in recent years and an assessment of our expected future results of operations, we
determined in 2009 that it had become more likely than not that we would realize a portion of our
net deferred tax assets. As a result, during the fourth quarter of 2009, we reduced our valuation
allowance by $2,564,000, representing the approximate estimated tax on three years of forecasted
net income. Due to uncertainties related to our ability to utilize the balance of our deferred tax
assets, as of December 31, 2009 we have maintained a valuation
20
allowance of $5,690,000. As of December 31, 2008, we had established a valuation allowance
offsetting all of our deferred tax assets. Should the remaining $5,690,000 valuation allowance be
reversed in the future, a liability of $3,133,000 would have to be established for uncertain tax
positions.
As required by ASC 740, Income taxes, we recognize the financial statement benefit of a tax
position only after determining that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the more-likely-than-not threshold, the
amount recognized in the financial statements is the largest benefit that has a greater than 50
percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
In addition, future utilization of NOL carry-forwards is subject to certain limitations under
Section 382 of the Internal Revenue Code. This section generally relates to a 50 percent change in
ownership of a company over a three-year period. The acquisition of additional shares by a greater
than 5% shareholder in January 2007 resulted in an ownership change under Section 382.
Accordingly, our ability to use NOLs in the future may be limited.
Results of Operations
The following table summarizes key operating information for the years ended December 31, 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Increase (Decrease) |
|
|
% |
|
|
|
(In $ thousands) |
|
Notation revenue |
|
$ |
10,617 |
|
|
$ |
10,289 |
|
|
$ |
328 |
|
|
|
3 |
% |
SmartMusic revenue |
|
|
5,014 |
|
|
|
4,070 |
|
|
|
944 |
|
|
|
23 |
% |
Other revenue |
|
|
811 |
|
|
|
797 |
|
|
|
14 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
|
16,442 |
|
|
|
15,156 |
|
|
|
1,286 |
|
|
|
8 |
% |
Cost of revenues |
|
|
2,598 |
|
|
|
2,380 |
|
|
|
218 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
13,844 |
|
|
|
12,776 |
|
|
|
1,068 |
|
|
|
8 |
% |
Percentage of net sales |
|
|
84 |
% |
|
|
84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development |
|
|
5,081 |
|
|
|
4,633 |
|
|
|
448 |
|
|
|
10 |
% |
Selling and marketing |
|
|
4,139 |
|
|
|
4,318 |
|
|
|
(179 |
) |
|
|
-4 |
% |
General administrative |
|
|
3,736 |
|
|
|
3,385 |
|
|
|
351 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
12,956 |
|
|
|
12,336 |
|
|
|
620 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
888 |
|
|
|
440 |
|
|
|
448 |
|
|
|
102 |
% |
Other income |
|
|
71 |
|
|
|
59 |
|
|
|
12 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before taxes |
|
$ |
959 |
|
|
$ |
499 |
|
|
$ |
460 |
|
|
|
92 |
% |
Income tax expense (benefit) |
|
|
(2,494 |
) |
|
|
8 |
|
|
|
2,502 |
|
|
|
31275 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,453 |
|
|
$ |
491 |
|
|
$ |
2,962 |
|
|
|
603 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Year ended December 31, 2009 compared to the year ended December 31, 2008
Net revenue. Net revenue increased 8% from $15,156,000 in 2008 to $16,442,000 in 2009.
Notation revenue increased $328,000 from $10,289,000 for the year ended December 31, 2008 to
$10,617,000 for the year ended December 31, 2009. Notation revenue increased in 2009 due to sales
of Finale NotePad®, which we began charging for in October 2008, and stronger direct
sales of our Finale Academic products and downloads offset by reductions in our channel sales. In
addition, 2008 included revenue from a $133,000 Finale site license, whereas there was no
comparable sale in 2009.
SmartMusic revenue increased by $944,000 from $4,070,000 for the year ended December 31, 2008
to $5,014,000 for the year ended December 31, 2009. The increase in revenue reflects the continued
growth of the SmartMusic product that was originally launched in 2001 and the SmartMusic Gradebook
product that was released in 2007. It also reflects the expansion of our SmartMusic site license
program which encourages school district deployment of SmartMusic student subscriptions and our
direct sales force which focuses on district level sales. As of December 31, 2009, there were 322
site licenses for SmartMusic with average subscriptions per license of 151.
SmartMusic is sold to schools, students and music organization members on a subscription
basis. Revenue for these subscriptions is recognized over the life of the subscription which is
typically 12 months. Total earned SmartMusic subscription revenue for the year ended December 31,
2009 was $3,945,000, an increase of $841,000, or 27%, over the year ended December 31, 2008. This
increase is due to the increase in the total number of subscriptions as well as a price increase in
July 2008 when teacher subscriptions increased from $100 to $130 and student subscriptions
increased from $25 to $30. Total unearned SmartMusic subscription revenue (deferred revenue) was
$2,833,000 as of December 31, 2009, an increase of $603,000, or 27%, over the balance at December
31, 2008. Deferred SmartMusic revenue represents the future revenue to be recorded on current
subscriptions.
SmartMusic has shown sustained growth since its launch. As of December 31, 2009, 9,269 schools
have purchased SmartMusic, an increase of 1% over the 9,185 schools that had purchased it as of
December 31, 2008. Total SmartMusic subscriptions as of December 31, 2009 numbered 133,782,
representing a net gain of 27,198, or 26%, over the December 31, 2008 subscription count of
106,584.
SmartMusic Gradebook is a web-based service that is designed to manage student assignments,
recordings and grades while documenting the progress of each student and assessing student
achievement. We track the number of teachers who use SmartMusic Gradebook and the number of those
teachers who are using SmartMusic Gradebook to deliver and manage student assignments to 50 or more
students (formerly known as Impact teachers, now Gradebook teachers). As of December 31, 2009,
we had 886 Gradebook teachers compared to 601 Gradebook teachers as of December 31, 2008. This is
an annual statistic, counting only teachers who have issued assignments to 50 or more students
during a school fiscal year. The number of Gradebook teachers restarts at zero on July 1 of each
year to correspond with the start of the school year.
Many SmartMusic customers, especially new customers, also purchase accessories (primarily
microphones and foot pedals) that are used with the software. Revenue for the sales of accessories,
included in the SmartMusic revenue category, for the year ended December 31, 2009 was $953,000,
which was comparable to revenue of $955,000 for SmartMusic accessories for the year ended December
31, 2008.
Gross profit. Gross profit increased by $1,068,000 from $12,776,000 for the year ended
December 31, 2008, to $13,844,000 for the year ended December 31, 2009, due to the increase in
revenue. Cost of revenue includes product costs, royalties paid to publishers, amortization of
capitalized software development costs for repertoire and SmartMusic Gradebook software development
costs, shipping, and credit card fees. Gross margin as a percentage of revenue was 84% for each of
the years ended December 31, 2009 and 2008.
Development expense. Development expenses increased $448,000 from $4,633,000 in 2008 to
$5,081,000 in 2009. Development expenses consist primarily of internal payroll, payments to
independent contractors and related expenses for the development and maintenance of our Finale
notation, SmartMusic and SmartMusic Gradebook products, as well as non-capitalized SmartMusic
repertoire development, business systems, and quality
22
assurance costs. Personnel and contract labor costs increased in 2009 compared to 2008 due to
staff increases that management believes were necessary in order to achieve numerous product
development goals related to the simplification of SmartMusic user interface, enrollment, and
purchase processes. Additionally, we engaged a user interface design firm to make the SmartMusic
and Gradebook experience more intuitive, engaging, rewarding, and social and incurred
ongoing expenses related to our infrastructure expansion that we completed in June, 2008. We
anticipate generally comparable development expenses in the future.
We released 759 new SmartMusic large ensemble band, jazz ensemble, and orchestra titles with
pre-authored assignments in 2009, compared to 929 new titles in 2008. Additionally, we released 22
fun titles and 71 other solo titles in 2009. There were no new solo titles added in 2008. Net
content development expenditures of $570,000 in 2009 and $1,660,000 in 2008 related to this
additional SmartMusic repertoire have been capitalized and are being amortized over their estimated
useful life of 5 years.
Selling and marketing expense. Selling and marketing expenses primarily consist of marketing,
advertising and promotion expenses, business development and customer service activities, and
payroll. Selling and marketing expenses decreased from $4,318,000 in 2008 to $4,139,000 in 2009.
This decrease of $179,000, or 4%, is primarily due to less spending on direct marketing initiatives
and tradeshow activities offset by cost relating to the departure of our Chief Marketing Officer in
the second quarter of 2009 and hiring of our Education Sales Director in the first quarter of 2009.
We are focusing on a higher level of strategic marketing initiatives to ensure continued SmartMusic
subscriptions sales momentum and expect our sales and marketing expenses to increase in the future
as a result. We partnered with web marketing consultants to expand our social media and general web
presence and in the third quarter of 2009, we hired a Senior Vice President of Marketing.
General and administrative expense. General and administrative expenses consist primarily of
payroll and related expenses for executive and administrative personnel, professional services,
facility costs, amortization of certain intangible assets with finite lives, bad debt, and other
general corporate expenses. General and administrative expenses increased by $351,000, or 10%, from
$3,385,000 in 2008 to $3,736,000 in 2009. General and administrative costs increased primarily as a
result of sales tax expense and standard annual increases in health insurance premiums, partially
offset by decreases in payroll and personnel expenses as a result of the departure of our founder
and former co-Chief Executive Officer in the fourth quarter of 2008. Sales tax expense of $503,000
relates to prior periods taxes that had not been collected from our customers in certain states. We
expect general and administrative expenses to moderately decrease in the future due to the one-time
expenses relating to past sales tax.
Interest income and expense, net. Net interest income was $56,000 for the year ended December
31, 2009, compared to $96,000 in net interest income for the year ended December 31, 2008. The
decrease in net interest income was due to lower interest rates during the year.
Income tax. We recorded a net income tax benefit of $2,494,000 for the year ended December
31, 2009, compared to income tax expense of $8,000 for the year ended December 31, 2008.
In evaluating our ability to utilize our deferred tax assets, we consider all available
positive and negative evidence, including our past operating results in the most recent fiscal
years and our assessment of expected future profitability and the overall prospects for our
business. As of December 31, 2008, a full valuation allowance was recorded against our net deferred
tax assets. Based on all the available evidence, in the fourth quarter of 2009, we determined that
it had become more likely than not that we would realize a portion of our net deferred tax assets.
As a result, we reduced our valuation allowance by approximately $2,564,000. As of December 31,
2009 we have a remaining valuation allowance of approximately $5,690,000 against net deferred tax
assets. In the event the valuation allowance on the net operating losses expiring in 2023 is
reversed we will need to recognize a reserve for uncertain tax positions of $3,133,000. Significant
management judgment is required to determine when, in the future, the realization of our net
deferred tax assets will become more likely than not. We will continue to assess the realizability
of the tax benefit available based on actual and forecasted operating results.
Liquidity and capital resources. Cash flow from operating activities was $3,233,000 in the
year ended December 31, 2009 compared to $2,351,000 in the year ended December 31, 2008, an
increase of $882,000. The improvements in cash provided by operating activities are primarily a
result of the increase in net income, reduction
23
in inventory levels, and changes in accounts payable and deferred revenue. Actual cash used in
operations is typically highest in the first and second quarter, with the third and fourth quarters
normally producing positive operating cash flow. These quarterly fluctuations are created by the
notation product release cycle and the cyclical impact of sales to schools related to the school
year fiscal calendar. Management expects to achieve positive annual cash flow in the foreseeable
future but not necessarily in each quarter. If we do not meet our anticipated revenue levels due to
economic conditions, a significantly later-than-anticipated product release, or a decrease in
demand for our products, management has identified contingency plans and is committed to expense
reductions as necessary to ensure adequate cash levels.
Our primary liquidity and capital requirements have been for investment in product
development. Cash used in investing activities was $788,000 in the year ended December 31, 2009,
compared to $2,043,000 in the year ended December 31, 2008. This $1,255,000 reduction was due to
our decrease in repertoire development spending. Our investment in 2008 was significant as we
developed our SmartMusic large ensemble library of titles and we reduced spending in 2009 through
department efficiencies and a reduction in titles released. Current year expenditures were $227,000
for purchases of property and equipment and $570,000 for capitalization of repertoire development.
We expect our investment activity to be generally comparable in the future.
Cash used in financing activities was $94,000 in the year ended December 31, 2009, compared to
cash provided of $243,000 in the year ended December 31, 2008. This change is primarily due to
stock option and warrant exercise activity. During 2009, $86,000 was received for the exercise of
stock options and warrants, versus $300,000 received in 2008. The majority of our outstanding
warrants expired on February 28, 2008. In addition, during 2009, one individual exercised stock
options under multiple cashless exercises and, as a result, cash proceeds of $121,000 from the
redemption were used to pay taxes withheld. There were no cashless stock option exercises in 2008.
We do not expect any significant cash to be provided by the exercise of stock options or warrants
in 2010 due to our current stock price and options outstanding.
As of December 31, 2009, we had cash and cash equivalents of $8,943,000 and as of December 31,
2008, the balance was $6,592,000.
Contractual Obligations and Commitments
As of December 31, 2009, our contractual cash obligations consist of future minimum lease
payments due under non-cancelable capital and operating leases as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Lease |
|
|
Operating Lease |
|
|
Total Lease |
|
|
|
Obligations |
|
|
Obligations |
|
|
Obligations |
|
|
|
(in thousands) |
|
2010 |
|
$ |
67 |
|
|
$ |
192 |
|
|
$ |
259 |
|
2011 |
|
|
27 |
|
|
|
48 |
|
|
|
75 |
|
2012 |
|
|
5 |
|
|
|
0 |
|
|
|
5 |
|
Thereafter |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
99 |
|
|
$ |
240 |
|
|
$ |
339 |
|
|
|
|
|
|
|
|
|
|
|
From time to time we enter into purchase commitments with our suppliers under customary
purchase order terms. Any significant losses implicit in these contracts would be recognized in
accordance with generally accepted accounting principles. At December 31, 2009 no such losses
existed.
Off-Balance Sheet Arrangements
None.
New accounting pronouncements. Refer to Note 3 in our financial statements.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
MakeMusic, Inc.
We have audited the accompanying balance sheets of MakeMusic, Inc. as of December 31, 2009,
and 2008 and the related statements of income, shareholders equity and cash flows for the years
then ended. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company
Accounting Oversight Board (United States). 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 audits provide 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 MakeMusic, Inc. as of December 31, 2009, and 2008 and the
results of its operations and cash flows for the years then ended, in conformity with U.S.
generally accepted accounting principles.
We were not engaged to examine managements assertion about the effectiveness of MakeMusic,
Inc.s internal control over financial reporting as of December 31, 2009 included in the Companys
Annual Report on Form 10-K under the caption Managements Report on Internal Controls over
Financial Reporting and, accordingly, we do not express an opinion thereon.
|
|
|
|
|
|
|
|
|
|
/s/ McGladrey & Pullen, LLP
|
|
|
|
|
|
|
|
|
Minneapolis, Minnesota
March 5, 2010
25
MakeMusic, Inc.
Balance Sheets
(In thousands of U.S. dollars, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
8,943 |
|
|
$ |
6,592 |
|
Accounts
receivable (net of allowance of $33 and $44 in 2009 and 2008, respectively) |
|
|
1,277 |
|
|
|
1,397 |
|
Inventories |
|
|
386 |
|
|
|
465 |
|
Deferred income taxes, net |
|
|
1,587 |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
294 |
|
|
|
293 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
12,487 |
|
|
|
8,747 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
533 |
|
|
|
673 |
|
Capitalized software products, net |
|
|
2,645 |
|
|
|
2,631 |
|
Goodwill |
|
|
3,630 |
|
|
|
3,630 |
|
Long Term deferred income taxes, net |
|
|
977 |
|
|
|
|
|
Other non-current assets |
|
|
6 |
|
|
|
10 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
20,278 |
|
|
$ |
15,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of capital lease obligations |
|
$ |
61 |
|
|
$ |
56 |
|
Accounts payable |
|
|
726 |
|
|
|
373 |
|
Accrued compensation |
|
|
1,167 |
|
|
|
1,170 |
|
Other accrued liabilities |
|
|
297 |
|
|
|
302 |
|
Post contract support |
|
|
132 |
|
|
|
146 |
|
Reserve for product returns |
|
|
414 |
|
|
|
382 |
|
Deferred revenue |
|
|
2,913 |
|
|
|
2,336 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
5,710 |
|
|
|
4,765 |
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, net of current portion |
|
|
30 |
|
|
|
76 |
|
Other long term liabilities |
|
|
8 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value: |
|
|
|
|
|
|
|
|
Authorized shares 10,000,000 |
|
|
|
|
|
|
|
|
Issued and
outstanding shares 4,756,891 and 4,635,529 in 2009 and 2008, respectively |
|
|
48 |
|
|
|
46 |
|
Additional paid-in capital |
|
|
65,980 |
|
|
|
65,716 |
|
Accumulated deficit |
|
|
(51,498 |
) |
|
|
(54,951 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
14,530 |
|
|
|
10,811 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
20,278 |
|
|
$ |
15,691 |
|
|
|
|
|
|
|
|
See accompanying notes.
26
MakeMusic, Inc.
Statements of Income
(In thousands of U.S. dollars, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Year |
|
|
|
Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
Notation revenue |
|
$ |
10,617 |
|
|
$ |
10,289 |
|
SmartMusic revenue |
|
|
5,014 |
|
|
|
4,070 |
|
Other revenue |
|
|
811 |
|
|
|
797 |
|
|
|
|
|
|
|
|
NET REVENUE |
|
|
16,442 |
|
|
|
15,156 |
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES |
|
|
2,598 |
|
|
|
2,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
13,844 |
|
|
|
12,776 |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
Development expenses |
|
|
5,081 |
|
|
|
4,633 |
|
Selling and marketing expenses |
|
|
4,139 |
|
|
|
4,318 |
|
General and administrative expenses |
|
|
3,736 |
|
|
|
3,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
12,956 |
|
|
|
12,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
|
888 |
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
Other, net |
|
|
71 |
|
|
|
59 |
|
|
|
|
|
|
|
|
Net income before income tax |
|
|
959 |
|
|
|
499 |
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
(2,494 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
3,453 |
|
|
$ |
491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.74 |
|
|
$ |
0.11 |
|
Diluted |
|
$ |
0.72 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
4,685,480 |
|
|
|
4,620,651 |
|
Diluted |
|
|
4,771,734 |
|
|
|
4,779,235 |
|
See accompanying notes.
27
MakeMusic, Inc.
Statement of Shareholders Equity
(In thousands of U.S. dollars, except shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
Shareholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Equity |
|
|
|
|
BALANCE AT DECEMBER 31, 2007 |
|
|
4,517,803 |
|
|
$ |
45 |
|
|
$ |
65,017 |
|
|
$ |
(55,442 |
) |
|
$ |
9,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and warrants |
|
|
117,726 |
|
|
|
1 |
|
|
|
299 |
|
|
|
|
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation |
|
|
|
|
|
|
|
|
|
|
400 |
|
|
|
|
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
491 |
|
|
|
491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2008 |
|
|
4,635,529 |
|
|
|
46 |
|
|
|
65,716 |
|
|
|
(54,951 |
) |
|
|
10,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and warrants |
|
|
37,800 |
|
|
|
1 |
|
|
|
85 |
|
|
|
|
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of stock, net of cashless option
exercise |
|
|
59,446 |
|
|
|
1 |
|
|
|
(121 |
) |
|
|
|
|
|
|
(120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares, net of forfeiture |
|
|
24,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation |
|
|
|
|
|
|
|
|
|
|
300 |
|
|
|
|
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,453 |
|
|
|
3,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2009 |
|
|
4,756,891 |
|
|
$ |
48 |
|
|
$ |
65,980 |
|
|
$ |
(51,498 |
) |
|
$ |
14,530 |
|
|
|
|
See accompanying notes.
28
MakeMusic, Inc.
Statements of Cash Flows
(In thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
Year |
|
|
|
Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,453 |
|
|
$ |
491 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
943 |
|
|
|
876 |
|
(Gain) Loss on disposal of assets |
|
|
(7 |
) |
|
|
21 |
|
Deferred income taxes, net |
|
|
(2,564 |
) |
|
|
|
|
Share based compensation |
|
|
300 |
|
|
|
400 |
|
Net changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
121 |
|
|
|
94 |
|
Inventories |
|
|
79 |
|
|
|
(133 |
) |
Prepaid expenses and other current assets |
|
|
(1 |
) |
|
|
(73 |
) |
Accounts payable |
|
|
353 |
|
|
|
(54 |
) |
Accrued liabilities and product returns |
|
|
(21 |
) |
|
|
95 |
|
Deferred revenue |
|
|
577 |
|
|
|
634 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
3,233 |
|
|
|
2,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(227 |
) |
|
|
(359 |
) |
Proceeds from disposal of property and equipment |
|
|
9 |
|
|
|
|
|
Capitalized development and other intangibles |
|
|
(570 |
) |
|
|
(1,684 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(788 |
) |
|
|
(2,043 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from stock options and warrants exercised |
|
|
86 |
|
|
|
300 |
|
Payments of redemption of stock |
|
|
(121 |
) |
|
|
|
|
Payments on capital leases |
|
|
(59 |
) |
|
|
(57 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(94 |
) |
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
2,351 |
|
|
|
551 |
|
Cash and cash equivalents, beginning of year |
|
|
6,592 |
|
|
|
6,041 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
8,943 |
|
|
$ |
6,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
10 |
|
|
$ |
13 |
|
Income taxes paid |
|
|
5 |
|
|
|
8 |
|
Other non-cash investment and financing activities |
|
|
|
|
|
|
|
|
Equipment acquired under capital lease |
|
|
18 |
|
|
|
|
|
See accompanying notes.
29
Notes to Financial Statements
1. Description of Business
MakeMusic develops and markets proprietary music technology solutions under the
Finale® and SmartMusic® brands that enhance music learning and composition,
increase productivity and make practicing and performing music engaging. Our innovative products
provide easy-to-use, efficient alternatives to traditional practice, education, and composition
techniques. Software product sales are made through traditional distribution channels and
MakeMusics websites.
2. Summary of Significant Accounting Policies
Revenue Recognition
Revenue for notation products is recognized when goods are shipped or delivered. SmartMusic
subscription revenue is recognized over the lives of the subscriptions. Notation revenue is
primarily derived from the sale of off the shelf products which are easily installed and used by
the customer. Software revenue is recognized in accordance with ASC 985-605, Software Software
Revenue Recognition, (formerly AICPA SOP 97-2) when all of the following conditions are met: there
is evidence of an agreement with the customer (normally a purchase order), delivery has occurred,
the total sales price is fixed and determinable, collection is probable, and any uncertainties with
regard to customer acceptance are insignificant. For our bundled products, we recognize revenue
based on the fair value of the individual components.
When a new version of Finale is released, dealers retain the right to return any unsold
versions of the prior release (normally 10% of total prior year sales) in exchange for an equal
number of units of the updated version of the product that is returned. The history of these
returns is tracked and revenue is deferred based on the expected return rate until the new product
is released, at which time the product may be returned for credit provided the customer places an
equivalent (number of units) order for the new version.
Shipping and handling charges are accounted for in accordance with ASC 605-45, Revenue
Recognition Principal Agent Considerations, (formerly EITF No. 00-10) with all charges to
customers for shipping and handling included in revenues and all costs in cost of revenues. Net
revenue for the years ended December 31, 2009, and 2008 includes $779,000 and $746,000 of shipping
and handling revenue, respectively. Cost of revenue for the years ended December 31, 2009 and 2008
includes $439,000 and $470,000 of shipping expense, respectively.
We record revenue net of any sales tax, use tax and value added tax. Sales taxes collected
from our customers are included in accounts payable until remitted to the appropriate taxing
jurisdiction.
Net Income Per Common Share
For years ended December 31, 2009, and 2008 diluted net income per common share was computed
by dividing net income by the weighted average number of common shares outstanding during the year,
including potentially dilutive shares such as options and warrants to purchase shares of common
stock at various amounts per share (Note 5). The dilutive effect of the additional shares for the
years ended December 31, 2009 and 2008 was to increase the weighted average common shares
outstanding by 86,254 and 158,584 respectively.
30
2. Summary of Significant Accounting Policies (Continued)
Fair Value of Financial Instruments
At December 31, 2009, and 2008 the carrying values of financial instruments such as cash and
cash equivalents, accounts receivable, and accounts payable approximated their market values based
on the short-term maturities of these instruments.
Cash and Cash Equivalents
Cash equivalents consist of money market instruments with original maturities of 90 days or
less. Cash equivalents are recorded at cost, which approximates fair value. Cash balances at
December 31, 2009 and 2008 exceed FDIC insurance limits. The Company has not experienced any losses
in such accounts.
Accounts Receivable
Accounts receivable are recorded for all credit sales at the time the products are shipped to
the customers. Credit terms for dealers and distributors are generally net 30 days and are granted
on the basis of credit references and payment history. Certain large volume dealers and
distributors are granted payment terms of 60 days. Schools submit purchase orders for shipments
with payment due in 30 days. Sales to individuals are paid prior to shipment with a credit card or
prepayment with the order. Payments not received within the agreed-upon terms are considered past
due.
The Company maintains an allowance for doubtful accounts based on bad debt history and
analysis of specific past due accounts. Analysis of the customers ability to pay includes contact
through statements, e-mail, and telephone as well as consideration of the customers payment
history. If the analysis indicates any customers are unlikely to pay, the accounts are written off
against the allowance for doubtful accounts, and if significant, sent to collections.
Inventories
Inventories are stated at the lower of weighted average cost or market, using the first-in
first-out (FIFO) method, and consist of finished products and components, net of a reserve for
obsolescence. An analysis of obsolescence reserves is conducted quarterly.
Property and Equipment
Property and equipment are stated at their acquisition costs net of accumulated depreciation.
Depreciation is computed by using the straight-line method over the estimated useful lives of the
purchased software (three years), computer equipment (three years), and furniture (five years).
Property and equipment held under capital leases are capitalized and depreciated over the
useful lives of the assets, in case of a contractual option to buy, or over the residual lives of
the lease contracts.
Capitalized Software Products
Capitalized software products consist of expenditures to develop software products for sale,
including repertoire software.
31
2. Summary of Significant Accounting Policies (Continued)
Product development
Costs incurred in the development of software products are capitalized in accordance with ASC
985-20, Software Costs of Software to be Sold, Leased or Marketed, (formerly FAS 86). The Company
periodically evaluates whether events and circumstances have occurred that indicate the remaining
balance of capitalized software development costs may not be recoverable.
Costs capitalized in accordance with ASC 985-20 for the development of SmartMusic Gradebook
application as of December 31, 2009 and 2008, net of amortization and reserves were $230,000 and
$332,000 respectively. The capitalized amount represents costs of developing the SmartMusic
Gradebook interface to the SmartMusic application as technological feasibility had been established
through the successful selling of the core SmartMusic application. The capitalized costs are being
amortized over a five-year period. We periodically evaluate whether events and circumstances have
occurred that indicate the remaining balance of capitalized software development costs may not be
recoverable.
As of December 31, 2009, and 2008, costs capitalized for the development of repertoire
software, net of amortization and reserves, were $2,415,000 and $2,299,000, respectively. The
capitalized amount represents costs of producing product masters for new songs as technological
feasibility had been established by the inclusion of solo repertoire in earlier SmartMusic
versions. When a large ensemble title is available for release, expenditures related to that title
are no longer capitalized and the capitalized cost of the title is amortized over a five-year
period using the straight-line method. We periodically evaluate whether events and circumstances
have occurred that indicate the remaining balance of capitalized repertoire development costs may
not be recoverable. For the years ended December 31, 2009 and 2008, amortization expense was
$449,000 and $328,000, respectively.
Goodwill
Goodwill represents the cost in excess of fair value of the tangible and identified intangible
assets of businesses acquired. In accordance with ASC 350, Intangibles Goodwill and Other,
(formerly SFAS 142) goodwill is not amortized but rather is reviewed for impairment annually in the
fourth quarter of MakeMusics fiscal year, or more often if indicators of impairment exist (see
Note 4).
Impairment of Long-Lived Assets
Long-lived assets, excluding goodwill, are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment
indicators are present and the estimated undiscounted cash flows are less than the carrying value
of the assets, the carrying value of the assets may require a reduction to their estimated fair
value as measured by discounted cash flows or appraised values.
32
2. Summary of Significant Accounting Policies (Continued)
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 carry-forwards 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 tax rates on the date of enactment.
Our provision for income taxes in 2008 was offset by a reduction in the deferred tax valuation
allowance. The only income tax expenses recorded during the year were minimum state income tax
payments. Due to the uncertainty regarding the realization of our deferred income tax assets and
specifically net operating loss carry-forwards, we recorded a valuation allowance against all of
our net deferred income tax assets at December 31, 2008.
In the fourth quarter of 2009, we determined that it had become more likely than not that we
would realize a portion of our net deferred tax assets. As a result, based on the estimated tax on
three years of forecasted net income, we reversed approximately $2,564,000 of our valuation
allowance in fiscal year 2009 which was recorded as a one-time income tax benefit. As of
December 31, 2009, we have a remaining valuation allowance of approximately $5,690,000 against net
deferred tax assets. The additional future potential decrease of the valuation allowance is
dependent on our future ability to realize the deferred tax assets that are affected by the future
profitability of MakeMusic.
The following table illustrates the change in our reserve for uncertain tax positions during
the year ended December 31, 2009, none of which is reflected as a liability on our balance sheet ($
in thousands):
|
|
|
|
|
Balance at January 1, 2009 |
|
$ |
3,142 |
|
Additions based on tax positions related to the current year |
|
|
20 |
|
Net reductions for tax provisions of prior years |
|
|
(29 |
) |
Settlements |
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
3,133 |
|
|
|
|
|
In the event the remaining valuation allowance on the net operating losses expiring in 2023 is
reversed we will need to recognize a reserve for uncertain tax positions of $3,133,000.
Interest and penalties related to any uncertain tax positions would be accounted for as a
long-term liability with the corresponding expense being charged to current period non-operating
expenses. As of December 31, 2009 and December 31, 2008, we have recognized no liability related to
interest and penalties. The total amount of unrecognized tax benefits that, if recognized, would
affect our effective tax rate is zero based on the fact that we currently have a full reserve
against our unrecognized tax benefits.
As of December 31, 2009, there are no open positions for which the unrecognized tax benefits
will significantly increase or decrease during the next twelve months. Additionally, tax years
still open for examination by federal and state agencies as of December 31, 2009, are 2004 to 2009.
We are currently undergoing an Internal Revenue Service audit for year ended December 31, 2007 and
do not anticipate any material findings.
33
2. Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation
A stock-based compensation plan is currently offered to MakeMusic employees, board members,
and consultants. This plan is administered by the compensation committee of the Board of Directors,
which recommends to the Board those persons eligible to receive awards and the number of shares
and/or options subject to each award, the terms, conditions, performance measures, and other
provisions of the award. Readers should refer to Note 5 for additional information related to our
stock-based compensation plans.
The Company accounts for share based payments in accordance with ASC 718, Compensation Stock
Compensation (formerly SFAS 123R) which applies to awards granted in 2006 and thereafter and to
awards that were outstanding on January 1, 2006, that are subsequently modified, repurchased, or
cancelled. Compensation cost recognized in 2009 and 2008 includes compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the standards then in effect, and compensation
cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date
fair value estimated.
Stock based compensation expense for the years ended December 31, 2009 and 2008, was $300,000
and $400,000, respectively.
During 2009 and 2008 we used the Black-Scholes option pricing model to estimate the fair value
of stock-based awards with the weighted average assumptions noted in the following table:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Risk-free interest rate |
|
|
1.27 |
% |
|
|
0.74 |
% |
Expected life, in years |
|
|
4.2 |
|
|
|
1.5 |
|
Expected volatility |
|
|
76.61 |
% |
|
|
79.57 |
% |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected volatility is based on the historical volatility of our share price for the period
prior to option grant equivalent to the expected life of the options. The expected term is based on
managements estimate of when the option will be exercised which is generally consistent with the
vesting period. The risk-free interest rate for periods within the contractual life of the option
is based on the U.S. Treasury yield curve in effect at the time of grant.
Advertising and Promotion
Product costs for promotional samples are classified in the statement of income as sales and
marketing expense. Costs associated with the purchase of tradeshow booths and equipment are
included in capitalized property and equipment and depreciated over their estimated useful lives.
All other advertising costs are expensed as incurred. Sales and marketing expenses include
advertising expense of $905,000 and $1,169,000 for the years ended December 31, 2009 and 2008,
respectively.
Use of Estimates
Preparation of the financial statements requires management to make estimates and assumptions
that affect reported amounts of assets and liabilities and related revenues and expenses. Actual
results could differ from those estimates.
34
2. Summary of Significant Accounting Policies (Continued)
Subsequent Events
The Company evaluated for subsequent events through March 5, 2010, the issuance date of the
Companys financial statements. No recognized subsequent events were noted.
3. New Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification and the Hierarchy of GAAP (ASC). The Codification is the single official
source of authoritative U.S. accounting and reporting standards applicable for all
nongovernmental entities, with the exception of guidance issued by the Securities and Exchange
Commission. The Codification did not change GAAP, but organized it into an online research system
sorted by individual accounting topics, which are further divided into subtopics. The FASB now
issues new standards in the form of Accounting Standards Updates. The Codification was effective
for the Company in 2009. The adoption of the Codification did not have a material impact on the
Companys financial statements.
4. Supplemental Balance Sheet Information
Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(In thousands) |
Components |
|
$ |
317 |
|
|
$ |
391 |
|
Finished goods |
|
|
138 |
|
|
|
123 |
|
Reserve for obsolescence |
|
|
(69 |
) |
|
|
(49 |
) |
|
|
|
|
|
$ |
386 |
|
|
$ |
465 |
|
|
|
|
Property and Equipment
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(In thousands) |
Computer equipment and software |
|
$ |
2,551 |
|
|
$ |
2,458 |
|
Office furniture and other |
|
|
482 |
|
|
|
657 |
|
|
|
|
|
|
|
3,033 |
|
|
|
3,115 |
|
Less accumulated depreciation |
|
|
(2,500 |
) |
|
|
(2,442 |
) |
|
|
|
|
|
$ |
533 |
|
|
$ |
673 |
|
|
|
|
Depreciation expense for years ended December 31, 2009 and 2008 was $383,000 and $416,000,
respectively.
Certain equipment has been financed through capital lease contracts. Leased property and
equipment includes $222,000 of gross assets held as capital leases during 2009 and 2008 which had
accumulated depreciation of $59,000 and $62,000 as of December 31, 2009 and 2008, respectively.
35
4. Supplemental Balance Sheet Information (Continued)
Capitalized Software Products
Capitalized software products are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Repertoire development |
|
$ |
4,032 |
|
|
$ |
3,467 |
|
Software translation |
|
|
125 |
|
|
|
125 |
|
SmartMusic website |
|
|
461 |
|
|
|
461 |
|
SmartMusic Gradebook development |
|
|
511 |
|
|
|
511 |
|
|
|
|
|
|
|
5,129 |
|
|
|
4,564 |
|
Less accumulated depreciation and amortization |
|
|
(2,484 |
) |
|
|
(1,933 |
) |
|
|
|
|
|
$ |
2,645 |
|
|
$ |
2,631 |
|
|
|
|
Amortization expense related to the capitalized software was $556,000 and $471,000 for the
years ended December 31, 2009, and 2008, respectively. Of the $2,645,000 in capitalized software as
of December 31, 2009, $566,000 is for repertoire development in progress that has not yet been
released into a current product. When the content that is currently in development is released into
current product, these additional amounts will also be amortized over five years on a straight-line
basis. The estimated future amortization expense for existing capitalized software is as follows:
|
|
|
|
|
|
|
(In thousands) |
|
2010 |
|
$ |
726 |
|
2011 |
|
|
726 |
|
2012 |
|
|
607 |
|
2013 |
|
|
409 |
|
2014 |
|
|
177 |
|
|
|
|
|
|
|
$ |
2,645 |
|
|
|
|
|
Goodwill
Goodwill of $3,630,000 resulted from a reverse merger in 2000. In 2009, as a result of the
reorganization of its internal reporting structure, MakeMusic now has two reporting units.
Accordingly, effective January 1, 2009, MakeMusic assigned all goodwill to the Notation reporting
unit. On an annual basis, or more often if indicators of impairment exist, we evaluate
the fair value of goodwill to determine whether any impairment may have occurred. Our impairment
analyses for years ended December 31, 2009, and 2008 indicated no impairment had occurred.
36
4. Supplemental Balance Sheet Information (Continued)
Deferred Revenue
Deferred revenue is composed of the unearned portion of SmartMusic subscriptions lasting more
than one month, deferrals of Finale notation revenue for free upgrades granted to customers
purchasing Finale immediately prior to release of a new version, Finale maintenance agreements,
deposits for commission on sheet music revenue sold by partners that received referrals from the
MakeMusic websites, and deposits for royalties earned from partners incorporating MakeMusic
products into their sales items, as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(In thousands) |
Deferred SmartMusic subscription revenue |
|
$ |
2,834 |
|
|
$ |
2,235 |
|
Deferred notation revenue |
|
|
42 |
|
|
|
51 |
|
Deposits |
|
|
37 |
|
|
|
50 |
|
|
|
|
|
|
$ |
2,913 |
|
|
$ |
2,336 |
|
|
|
|
Other Accrued Liabilities
Other accrued liabilities are composed of accrued royalties and other miscellaneous accrued
expenses as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(In thousands) |
Accrued royalties |
|
$ |
82 |
|
|
$ |
56 |
|
Accrued general expenses |
|
|
223 |
|
|
|
246 |
|
|
|
|
|
|
$ |
305 |
|
|
$ |
302 |
|
|
|
|
5. Shareholders Equity
Stock Options and Warrants
MakeMusic has a Stock Option Plan (the 2003 Plan) pursuant to which options for up to
1,500,000 shares of its common stock may be issued to its key employees and directors. Under the
2003 Plan, the options generally may not exceed 10 years and are granted at prices that must be
equal to or more than the stocks fair market value at the grant date. There were 445,755 options
outstanding under the 2003 plan as of December 31, 2009.
37
5. Shareholders Equity (Continued)
The following table represents stock option and restricted stock activity for the year ended
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Weighted Average |
|
|
|
Shares Reserved |
|
|
2003 Plan |
|
|
|
|
|
|
Option Exercise |
|
|
Remaining Contract |
|
|
|
for Future Grant |
|
|
Restricted Shares |
|
|
Plan Option Shares |
|
|
Price |
|
|
Life |
|
At December 31, 2008 |
|
|
635,663 |
|
|
|
|
|
|
|
659,855 |
|
|
$ |
4.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
(136,644 |
) |
|
|
26,644 |
|
|
|
110,000 |
|
|
$ |
3.39 |
|
|
|
|
|
Expired |
|
|
52,500 |
|
|
|
|
|
|
|
(59,300 |
) |
|
$ |
6.13 |
|
|
|
|
|
Cancelled |
|
|
34,528 |
|
|
|
(2,528 |
) |
|
|
(32,000 |
) |
|
$ |
5.83 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
(232,800 |
) |
|
$ |
2.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 |
|
|
586,047 |
|
|
|
24,116 |
|
|
|
445,755 |
|
|
$ |
5.09 |
|
|
2.9 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Exercisable Options at December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
297,255 |
|
|
$ |
5.19 |
|
|
1.9 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average fair value of options granted during 2009 and 2008 (computed using
the Black-Scholes method) was $2.05 and $1.36, respectively.
The following summarizes information about stock options outstanding at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices |
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Remaining |
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Number |
|
Contractual Life |
|
Exercise |
|
Number |
|
Exercise |
From |
|
to |
|
Outstanding |
|
(in Years) |
|
Price |
|
Outstanding |
|
Price |
|
$ 0.00 |
|
to |
|
$ |
2.27 |
|
|
|
32,200 |
|
|
|
0.51 |
|
|
$ |
2.27 |
|
|
|
32,200 |
|
|
$ |
2.27 |
|
$ 2.27 |
|
to |
|
$ |
3.50 |
|
|
|
129,729 |
|
|
|
3.85 |
|
|
$ |
2.99 |
|
|
|
61,729 |
|
|
$ |
2.46 |
|
$ 3.51 |
|
to |
|
$ |
6.00 |
|
|
|
168,995 |
|
|
|
2.05 |
|
|
$ |
5.38 |
|
|
|
122,745 |
|
|
$ |
5.50 |
|
$ 6.01 |
|
to |
|
$ |
10.00 |
|
|
|
84,833 |
|
|
|
3.68 |
|
|
$ |
6.96 |
|
|
|
60,583 |
|
|
$ |
7.22 |
|
$10.01 |
|
to |
|
$ |
11.00 |
|
|
|
29,998 |
|
|
|
4.37 |
|
|
$ |
10.21 |
|
|
|
19,998 |
|
|
$ |
10.23 |
|
|
Total |
|
445,755 |
|
|
|
2.93 |
|
|
$ |
5.09 |
|
|
|
297,255 |
|
|
$ |
5.19 |
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the aggregate intrinsic value of options outstanding was $221,000
and the aggregate intrinsic value of options exercisable was $171,000. Total intrinsic value of
options exercised during 2009 was $405,000. At December 31, 2009, there was $226,000 of
unrecognized compensation cost related to nonvested share-based payments which is expected to be
recognized over a weighted-average period of 1.7 years. At December 31, 2009, there was $63,000 of
unrecognized compensation cost related to the issuance of restricted stock which is expected to be
recognized over a weighted-average period of 2.0 years.
There were no new warrants issued during 2009 or 2008. Total warrants of 30,083 at a weighted
average exercise price of $3.34 were outstanding at December 31, 2009, all of which are
exercisable. There were no warrants that expired during the fiscal year ended December 31, 2009 and
46,432 warrants that expired during the fiscal year ended December 31, 2008. The remaining warrants
expire as follows:
2010 15,083
2011 15,000
38
6. Commitments
Capital Lease Obligations
Future minimum lease payments under capital lease obligations due for the years ending
December 31 are as follows (in thousands):
|
|
|
|
|
2010 |
|
$ |
67 |
|
2011 |
|
|
26 |
|
2012 |
|
|
5 |
|
|
|
|
|
Total minimum lease payments |
|
|
98 |
|
Less amount representing interest |
|
|
(7 |
) |
|
|
|
|
Present value of net minimum lease payments |
|
|
91 |
|
Less current portion |
|
|
(61 |
) |
|
|
|
|
Long-term portion |
|
$ |
30 |
|
|
|
|
|
Operating Leases
The Company leases office and warehouse space and certain equipment under operating leases.
Total future minimum lease payments, excluding common area charges, under these leases as of
December 31, 2009, are as follows (in thousands):
|
|
|
|
|
2010 |
|
$ |
192 |
|
2011 |
|
|
48 |
|
Total |
|
$ |
240 |
|
|
|
|
|
Rent expense, including common area maintenance expense for the years ended December 31, 2009,
and 2008 was $251,000 and $258,000, respectively.
7. 401(k) Savings Plan
The Company has a 401(k) savings plan for the benefit of qualified employees. Under the plan,
qualified employees may elect to defer up to 80% of their compensation, subject to a limit
determined by the Internal Revenue Service. The Company, at the discretion of the Board of
Directors, may elect to make additional discretionary contributions. The Company made no
contributions to the plan in 2009 or 2008.
39
8. Income Taxes
The tax effects of temporary differences for 2009 and 2008 at assumed effective annual rates
of 37.8% and 36%, respectively (combined federal rate and state tax rate) for both years are shown
in the following table:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Loss carry-forwards |
|
$ |
6,474 |
|
|
$ |
6,955 |
|
Research and development credits |
|
|
1,069 |
|
|
|
1,055 |
|
Inventory |
|
|
26 |
|
|
|
18 |
|
Depreciation and amortization |
|
|
114 |
|
|
|
157 |
|
Deferred revenue |
|
|
1,087 |
|
|
|
823 |
|
Software development and prepaid royalties |
|
|
55 |
|
|
|
51 |
|
Accrued expenses |
|
|
420 |
|
|
|
486 |
|
Accounts receivable |
|
|
13 |
|
|
|
16 |
|
Valuation allowance for deferred tax assets |
|
|
(5,690 |
) |
|
|
(8,612 |
) |
|
|
|
|
|
|
|
Deferred tax assets |
|
$ |
3,568 |
|
|
$ |
949 |
|
Deferred tax liability: |
|
|
|
|
|
|
|
|
Software development costs |
|
|
1,004 |
|
|
|
949 |
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
2,564 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The components giving rise to the net deferred income tax assets described above have been
included in the accompanying balance sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Current assets |
|
$ |
1,587 |
|
|
$ |
|
|
Long-term assets |
|
|
977 |
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
2,564 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The components of income tax expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Current tax expense |
|
$ |
70 |
|
|
$ |
8 |
|
Deferred tax benefit |
|
|
(2,564 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total tax expense (benefit) |
|
|
($2,494 |
) |
|
$ |
8 |
|
|
|
|
|
|
|
|
40
8. Income Taxes (continued)
Realization of deferred tax assets is dependent upon the generation of sufficient future
taxable income. Management has determined that sufficient uncertainty exists regarding
realizability of the net deferred tax assets and has provided a valuation allowance against all of
the net deferred tax assets in 2008 and $5,690,000 in 2009.
A reconciliation of the income tax expense computed using the U.S. statutory rate (34%) to the
effective income tax expense (benefit) included in the statements of income is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(In thousands) |
Income tax expense computed at the statutory rate
|
|
$ |
326 |
|
|
$ |
169 |
|
State tax expense, net of calculated federal income tax effects
|
|
|
37 |
|
|
|
10 |
|
R&D Credits
|
|
|
(10 |
) |
|
|
(22 |
) |
Change in Valuation Allowance
|
|
|
(2,922 |
) |
|
|
(324 |
) |
Permanent differences
|
|
|
80 |
|
|
|
151 |
|
Other
|
|
|
(5 |
) |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$ |
(2,494 |
) |
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
Net Operating Losses
At
December 31, 2009, we had Federal net operating loss carry-forwards (NOLs) and research and
development credit carry-forwards which may be used to offset otherwise future taxable income with
the following expiration dates:
|
|
|
|
|
|
|
Federal
Net Operating Loss |
|
Research and Development Credits |
|
|
(In thousands) |
2010 |
|
$710 |
|
$47 |
2011 |
|
2,192 |
|
43 |
2012 |
|
1,736 |
|
38 |
2018 |
|
770 |
|
46 |
2019 |
|
491 |
|
36 |
2020 |
|
|
|
|
2021 |
|
1,474 |
|
72 |
2022 |
|
1,336 |
|
116 |
2023 |
|
9,115 |
|
72 |
2024 |
|
|
|
91 |
2025 |
|
|
|
68 |
2026 |
|
|
|
71 |
2027 |
|
|
|
168 |
2028 |
|
|
|
101 |
2029 |
|
|
|
100 |
|
|
|
|
|
$17,824 |
|
$1,069 |
|
|
|
Section 382 of the Internal Revenue Code restricts the annual utilization of NOLs incurred
prior to a change in ownership. Such a change in ownership occurred in connection with the Coda
reverse merger, thereby potentially restricting the NOLs available. In 2009 we completed a further
Section 382 analysis for the time period since the reverse merger and determined that there are
limitations relating to ownership changes. The acquisition of additional shares by a greater than
5% shareholder in January 2007 resulted in an ownership change under Section 382 over a three
year period resulting in potential future limitations on the utilization of our NOLs. However,
since we have a valuation allowance against our net deferred tax asset for the years that would be
impacted by such limitation, there was no effect on our financial results.
41
9. Litigation
In the ordinary course of business, we may be party to legal actions, proceedings, or claims.
Corresponding costs are accrued when it is probable that a loss will be incurred and the amount can
be precisely or reasonably estimated. We are currently not aware of any threatened or actual
litigation that would have a material effect on its financial condition or results of operations.
10. Segment and Geographic Data
Effective January 1, 2009, MakeMusic began reporting results of operations by two unique
reportable segments, Notation and SmartMusic. Historically, net revenue has been reported
separately for these two product lines. However, direct and operating costs had not been previously
assessed or reported by segment and therefore, prior year comparative costs are not reported.
The Notation segment includes the design, development, and sales and marketing for the Finale
family of music notation software products.
The SmartMusic segment includes the design, development, amortization of capitalized song
title development, and sales and marketing of the subscription-based SmartMusic product line, and
related accessories.
Unallocated expenses are reported in the reconciliation of the segment totals to consolidated
totals as Other income and income taxes. These expenses include costs related to general and
administrative and business systems functions performed that are not directly attributable to a
particular segment.
MakeMusic does not allocate its balance sheet assets by segment because such information is
not available nor is it used by the chief operating decision maker. Therefore, information relating
to segment assets is not presented.
The following table presents results of operations by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
Notation |
|
|
SmartMusic |
|
|
Other |
|
|
Total |
|
NET REVENUE |
|
$ |
11,060 |
|
|
$ |
5,382 |
|
|
$ |
0 |
|
|
$ |
16,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES |
|
|
940 |
|
|
|
1,658 |
|
|
|
0 |
|
|
|
2,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
10,120 |
|
|
|
3,724 |
|
|
|
0 |
|
|
|
13,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development expenses |
|
|
1,898 |
|
|
|
1,937 |
|
|
|
1,246 |
|
|
|
5,081 |
|
Selling and marketing expenses |
|
|
1,816 |
|
|
|
1,607 |
|
|
|
716 |
|
|
|
4,139 |
|
General and administrative expenses |
|
|
77 |
|
|
|
70 |
|
|
|
3,589 |
|
|
|
3,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
3,791 |
|
|
|
3,614 |
|
|
|
5,551 |
|
|
|
12,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from Operations |
|
|
6,329 |
|
|
|
110 |
|
|
|
(5,551 |
) |
|
|
888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income and income taxes |
|
|
0 |
|
|
|
0 |
|
|
|
2,565 |
|
|
|
2,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS) |
|
$ |
6,329 |
|
|
$ |
110 |
|
|
|
($2,986 |
) |
|
$ |
3,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
10. Segment and Geographic Data (continued)
All of our long-lived assets are located in North America. The geographic distribution of our
revenues is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(In thousands) |
Net sales: |
|
|
|
|
|
|
|
|
North America
|
|
$ |
13,921 |
|
|
$ |
12,755 |
|
Europe
|
|
|
1,314 |
|
|
|
1,334 |
|
Japan
|
|
|
716 |
|
|
|
625 |
|
Other foreign countries
|
|
|
491 |
|
|
|
442 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,442 |
|
|
$ |
15,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None
|
|
|
ITEM 9A(T). |
|
CONTROLS AND PROCEDURES |
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and
reported within the timelines specified in the Securities and Exchange Commissions rules and
forms, and that such information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well designed and operated,
can only provide reasonable assurance of achieving the desired control objectives, and in reaching
a reasonable level of assurance, management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as of the
end of the period covering this report. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures are effective to
provide reasonable assurance that information required to be disclosed in the reports that are
filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified by the Securities and Exchange Commissions rules and forms and that our
disclosure controls and procedures are designed to ensure that information required to be disclosed
in the reports that we file or submit under the Exchange Act is accumulated and communicated to our
management including our Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.
Managements Report on Internal Control Over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board
of Directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and includes those policies
and procedures that:
43
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of our assets;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorization of our management and directors; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting cannot provide
absolute assurance of preventing and detecting misstatements on a timely basis. Internal control
over financial reporting is a process that involves human diligence and compliance and is subject
to lapses in judgment and breakdowns resulting from human failures. Internal control over financial
reporting also can be circumvented by collusion or improper management override. In addition,
projections of any evaluation of effectiveness to future periods are subject to the risks that
controls may become inadequate due to changes in conditions, or that the degree of compliance with
policies or procedures may deteriorate. However, these inherent limitations are known features of
the financial reporting process. It is possible to design into the process safeguards to reduce,
though not eliminate, the risk that misstatements are not prevented or detected on a timely basis.
Management is responsible for establishing and maintaining adequate internal control over financial
reporting for the Company.
Management has used the framework set forth in the report entitled Internal Control-Integrated
Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known
as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on
this assessment, management has concluded that, as of December 31, 2009, our internal control over
financial reporting was effective to provide reasonable assurance regarding the reliability of
financial reporting and the preparation and presentation of financial statements for external
purposes in accordance with generally accepted accounting principles.
This annual report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit us to provide only
managements report in this annual report.
Changes in Internal Controls
There has been no change in our internal control over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
|
|
|
ITEM 9B. |
|
OTHER INFORMATION |
All information required to be reported in a report on Form 8-K during the fourth quarter of
the year covered by this report has been reported.
44
PART III
|
|
|
ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Directors and Executive Officers
The following table lists our executive officers and directors and their respective ages and
positions as of the date of this report:
|
|
|
|
|
|
|
Name |
|
|
Age |
| |
Position |
Jeffrey A. Koch
|
|
|
45 |
|
|
Chairman of the Board |
Ronald B. Raup
|
|
|
59 |
|
|
Chief Executive Officer and Director |
Michael E. Cahr
|
|
|
69 |
|
|
Director |
Trevor A. DSouza(1)
|
|
|
44 |
|
|
Director |
Keith A. Fenhaus(2)
|
|
|
52 |
|
|
Director, Lead Independent Director |
Robert B. Morrison
|
|
|
48 |
|
|
Director |
Graham Richmond
|
|
|
37 |
|
|
Director |
Michael Skinner
|
|
|
59 |
|
|
Director |
Andrew C. Stephens(1)
|
|
|
46 |
|
|
Director |
Karen L. VanDerBosch
|
|
|
46 |
|
|
Chief Financial Officer and Treasurer |
|
|
|
(1) |
|
As previously disclosed, Mr. DSouza and Mr. Stephens were appointed to the Board of
Directors effective March 2, 2010. |
|
(2) |
|
The Board of Directors has determined that Mr. Fenhaus qualifies as an audit committee financial expert under the applicable federal securities laws. |
Current committee membership is as follows;
|
|
|
|
|
Audit Committee |
|
Compensation Committee |
|
Governance Committee |
Keith A. Fenhaus, Chair
|
|
Michael Skinner, Chair
|
|
Graham Richmond, Chair |
Michael E. Cahr
|
|
Michael E. Cahr
|
|
Keith A. Fenhaus |
Graham Richmond
|
|
Robert B. Morrison
|
|
Robert B. Morrison |
On March 1, 2010, in connection with the election of Mr. Trevor A. DSouza and Andrew C.
Stephens to the Board of Directors and upon the recommendation of the Governance Committee, the
Board approved committee reassignments as follows, which will be effective March 15, 2010:
|
|
|
|
|
Audit Committee |
|
Compensation Committee |
|
Governance Committee |
Keith A. Fenhaus, Chair
|
|
Michael Skinner, Chair
|
|
Graham Richmond, Chair |
Michael E. Cahr
|
|
Michael E. Cahr
|
|
Robert B. Morrison |
Trevor A. DSouza
|
|
Jeffrey A. Koch
|
|
Trevor A. DSouza |
Jeffrey A. Koch joined MakeMusic as a director on July 20, 2006, and was elected the Chairman
of the Board on October 19, 2006. Effective March 15, 2010, Mr. Koch will serve on the Compensation
Committee. Mr. Koch is currently employed as a corporate bond trader with Agency Trading Group,
Inc. From 2005 to 2009, Mr. Koch was the Chief Executive Officer of LaunchEquity Partners, LLC, a
firm that specializes in investing in early stage companies with high growth potential in both the
public and private markets. Mr. Koch is serving as a representative of LaunchEquity in connection
with an agreement dated March 2, 2010 among MakeMusic,
45
LaunchEquity Partners, LLC and LaunchEquity
Acquisition Partners, LLC Designated Series Education Partners,
relating to MakeMusics Board composition and certain other matters (the LaunchEquity
Agreement). Prior to founding LaunchEquity Partners, Mr. Koch was the co-head of the High Yield
Bond business at Metropolitan West Asset Management from 2003 to 2004. From 1989 to 2002, Mr. Koch
held the position of Portfolio Manager of various fixed income portfolios for Strong Capital
Management, the most recent being the head of the High Yield Bond business from 1996 to 2002. Mr.
Koch received a B.S. from the University of Minnesota, Morris in 1987 and an MBA from the John M.
Olin School of Business at Washington University in St. Louis in 1989. Mr. Koch is a Chartered
Financial Analyst. Among other attributes, skills, experiences and qualifications, the Board
believes that Mr. Kochs education and experience give him insight into investment industry trends
and practices and an ability to understand generally accepted accounting principles, internal
control procedures and analyze and evaluate financial statements, all of which allow him to make a
valuable contribution as a MakeMusic director.
Ronald B. Raup is our Chief Executive Officer, serving in that position since November 24,
2008. From December 6, 2007 to November 24, 2008, he served as co-Chief Executive Officer and has
served as President, Chief Operating Officer and director since October 2006. Prior to that, Mr.
Raup served as Chief Marketing Officer from September 2005 until October 2006, and as a member of
our Board of Directors from September 2004 until September 2005. Mr. Raup has more than thirty
years of experience in the music product industry. From 2003 through 2005, Mr. Raup served as Vice
President-Piano Division of Brook Mays Music Company, the largest full-line music product retailer
in the United States. In addition to his three-year term as Vice President, Mr. Raup also served as
Chief Operating Officer for Brook Mays from 1999 through 2002. From 1995 to 1999, he was employed
at MakeMusic as our President and Chief Operating Officer. Mr. Raup has also served as Senior Vice
President of Marketing and Sales at Yamaha Corporation of America, the largest music products
company in the world. He also served on Yamahas Board of Directors. Mr. Raup has served on various
industry boards including NAMM, the International Music Products Association, American Music
Conference, and the World Economic Summit. Among other attributes, skills, experiences
and qualifications, the Board believes that it is beneficial for Mr. Raup to serve as a director of
MakeMusic because his history with MakeMusic, his leadership experience in the music product
industry and his relationships with music industry leaders uniquely qualify him to execute the
companys strategic direction.
Michael E. Cahr was elected as a director on January 28, 2009 and is a member of the Audit
Committee and Compensation Committee. Mr. Cahr is a general partner at Focus Equity Partners, a
private equity investment and management firm that acquires middle-market companies and assists
them in reaching their performance potential. Mr. Cahr has more than 30 years of experience as a
venture capitalist, CEO and director of public and private companies. From September 2004 to June
2006, Mr. Cahr served as CEO of one of Focus Equitys investments, C&M Pharmacy, a Glenview,
Illinois, specialty pharmacy company, and engineered the sale of the company to Walgreen Co.
Currently, Mr. Cahr acts as board member and advisor to another Focus investment, Business Only
Broadband (BOB), a premier provider of carrier-class, fixed wireless primary and co-primary data
network solutions for the business sectors in Chicago and the New York metropolitan area. Prior to
joining Focus, Mr. Cahr was president of Saxony Consultants, a provider of financial and marketing
expertise, and from 1994 to 1999 served variously as president, CEO and chairman of publicly held
Allscripts, Inc., the leading developer of hand-held devices that provide physicians with real-time
access to health, drug and other critical medical information. Prior to Allscripts, Mr. Cahr was
venture group manager for Allstate Venture Capital where he oversaw domestic and international
investments in technology, healthcare services, biotech and medical services. Mr. Cahr serves as a
director of Pacific Health Laboratories, a publicly-traded nutritional products firm that develops
and commercializes functionally unique nutritional products. Mr. Cahr was also a director of
Lifecell Corporation from 1989 to 2007 where he served as the chairman of the audit committee.
Among other attributes, skills, experiences and qualifications, the Board believes that it is
beneficial for Mr. Cahr to serve as a director of MakeMusic because his private equity and
micro-cap public company management and directorship experience is a valuable asset to the board
structure.
Trevor DSouza joined the Board March 2, 2010, in connection with the LauchEquity Agreement.
Effective March 15, 2010, Mr. DSouza will serve as a member of the Audit Committee and Governance
Committee. Since 2000, Mr. DSouza has served as Managing Director of Mason Wells, where he is
responsible for managing the venture investment activities of the firm. Through his role with
Mason Wells, Mr. DSouza has served as a director of a number of companies, including: Teramedica,
Inc. (chairman, 2001-present), Zystor Therapeutics, Inc.
46
(2004-present), Deltanoid Pharmaceuticals,
Inc. (2002-present), OpGen, Inc. (2002-2009), NameProtect, Inc.
(chairman, 2000-2007), and Dedicated Computing (2007-2009). Prior to joining Mason Wells, Mr.
DSouza served as the President and CEO of Pharmasoft North America, Inc. from 1997 to 1999, and as
a Program Manager for Booz-Allen & Hamilton from 1994 to 1997. Mr. DSouza earned a Masters Degree
in Business Administration from George Washington University, and a Bachelor of Science in
Engineering from the Catholic University of America. Among other attributes, skills, experiences
and qualifications, the Board believes that it is beneficial for Mr. DSouza to serve as a director
of MakeMusic because he has significant board experience, particularly with respect to companies
that are similar in size to MakeMusic, as well as valuable business and management expertise. The
Board believes these experiences will allow Mr. DSouza to understand issues that face MakeMusic,
and to contribute to oversight of compliance with SEC and accounting rules.
Keith A. Fenhaus was elected as a director on March 15, 2007. Mr. Fenhaus has served as the
Audit Committee Chairman and a member of the Governance Committee since the date of his
appointment. Effective March 15, 2010, Mr. Fenhaus will step down from the Governance Committee but
will continue to serve as Audit Committee Chairman. Mr. Fenhaus was named lead independent director
on January 28, 2008. Since 2002, Mr. Fenhaus has been President of Hallmark Insights, a
wholly-owned subsidiary of Hallmark Cards, specializing in business incentive solutions. Mr.
Fenhaus has previously served Hallmark Insights, where he has been employed since 1992, as
Executive Vice President and Chief Financial Officer. Prior to joining Hallmark Insights, Mr.
Fenhaus was the Chief Financial Officer of Sheffert & Wein. His previous positions included Senior
Vice President, Finance, Community Financial Services at First Bank (now US Bank), and Vice
President and Controller at Norwest Mortgage (now Wells Fargo Home Mortgage). Mr. Fenhaus has a
bachelor of business administration degree from the University of Wisconsin. Among other
attributes, skills, experiences and qualifications, the Board believes that it is beneficial for
Mr. Fenhaus to serve as a director of MakeMusic because his business leadership experience allows
him to understand the challenges and requirements applicable to a public company, particularly
companies that are to MakeMusic in size and structure, and his education and financial industry
experience give him an ability to understand generally accepted accounting principles and internal
control procedures and analyze and evaluate financial statements.
Robert B. Morrison was appointed to the Board of Directors on July 9, 2007 and serves on the
Compensation Committee and Governance Committee. Effective March 15, 2010, Mr. Morrison will step
down from the Compensation Committee, but will continue to serve on the Governance Committee. Mr.
Morrison is co-founder of Quadrant Arts Education Research, one of the nations leading research
and market intelligence organizations focusing on music and arts education. Quadrant serves both
the commercial and governmental sectors and has pioneered ground breaking research on the status
and condition of arts education in the United States. Prior to founding Quadrant, Mr. Morrison was
the founder and chairman emeritus of Music for All (MFA), a not-for-profit educational organization
whose mission is expand access to music and arts education. Mr. Morrison also served as the Chief
Executive Officer of the VH1 Save the Music Foundation, the national non-profit organization
committed to restoring music education in Americas public schools. Mr. Morrison has also served as
director of market development for NAMM, the international music products association, was an
executive director of the American Music Conference (AMC), where he directed AMCs media efforts,
and was a senior executive with the Pearl Corporation. Mr. Morrison has received an honorary
doctorate degree from the State University of New York, the Mr. Hollands Opus Award from the
National Academy of Recording Arts and Science and the Life Achievement Award from the Music
Distributors Association. Mr. Morrison has earned both an Emmy and Peabody Award for his work on
behalf of music education. Mr. Morrison served as a member of the board of trustees for the Berklee
College of Music in Boston and currently serves on several national music and arts education policy
boards. Among other attributes, skills, experiences and qualifications, the Board believes that it
is beneficial for Mr. Morrison to serve as a director of MakeMusic because his industry experience
allows him to understand MakeMusics challenges, strategies and potential opportunities. He shares
MakeMusics commitment to music education, and his extensive connections in the education market
segments and music products industry all contribute to Mr. Morrisons ability to help challenge and
guide MakeMusics long-term strategies.
Graham Richmond was elected to the Board of Directors on July 25, 2006. Mr. Richmond is
Chairman of the Governance Committee and is currently a member of the Audit Committee, but will
step down from the Audit Committee effective March 15, 2010. Mr. Richmond is the Chief Executive
Officer and co-founder of Clear Admit, LLC, an educational counseling company focused on management
education. Prior to launching Clear Admit at the
47
end of 2001, Mr. Richmond worked as an admissions
counselor and technology consultant for the Wharton School at
the University of Pennsylvania. Mr. Richmonds career also includes a position as Vice
President of Marketing and Operations at MCS Multi-App, an educational technology company that
served the leading law and business schools with software applications in the 1990s. Beyond his
professional career, Mr. Richmond has pursued his passion for music as a classical and jazz
flautist and singer/songwriter/guitarist. He holds an undergraduate degree in art history from
Swarthmore College and an MBA in entrepreneurial management from the Wharton School at the
University of Pennsylvania. Among other attributes, skills, experiences and qualifications, the
Board believes that it is beneficial for Mr. Richmond to serve as a director of MakeMusic because
his business leadership experience and education allow him to understand MakeMusics challenges and
strategies, and his knowledge of e-commerce marketing strategies complement MakeMusics strategy
and products.
Michael Skinner was appointed to the Board of Directors on November 20, 2006, and is Chairman
of the Compensation Committee. Mr. Skinner is a summa cum laude graduate of Berklee College of
Music with a bachelors degree in music education. He received his masters degree in music
composition from the University of Miami. Mr. Skinner has worked as a composer, arranger,
clinician, and performer, as well as a music educator, having taught elementary through high school
music. In 1986, Mr. Skinner became the national clinician for Vandoren and a Yamaha performing
artist. He later became marketing manager for J. DAddario & Co., marketing Vandoren products as
well as J. DAddario education products. From 1991-2001, Mr. Skinner served as the marketing
manager for education products for the Band & Orchestral Division, Yamaha Corporation of America.
During his tenure at Yamaha Mr. Skinner managed the technology driven education system called Music
In Education , a software and hardware based keyboard system integrating curriculum and assessment
into a keyboard lab. In July of 2001, he returned to J. DAddario & Co. as Director of Marketing
for Band & Orchestra products. In July 2004, Mr. Skinner formed DANSR and became the sole U.S.
importer of Vandoren Products. Today, he remains the President of DANSR. Among other attributes,
skills, experiences and qualifications, the Board believes that it is beneficial for Mr. Skinner to
serve as a director of MakeMusic because his extensive experience in marketing to music educators
and music product retailers allow him to understand MakeMusics opportunities and challenges and
make strategic contributions.
Andrew C. Stephens joined the Board March 2, 2010, in connection with the LaunchEquity
Agreement. Mr. Stephens is a partner and Managing Director of Artisan Partners, LP, an investment
management firm. Mr. Stephens is responsible for the firms U.S. growth strategies. He joined
Artisan in 1997. Prior to joining Artisan Partners, Mr. Stephens was co-manager of the Strong
Asset Allocation Fund at Strong Capital Management from 1993 to 1997. In addition, Mr. Stephens
was a Senior Research Analyst for the Strong Common Stock Fund and the Strong Opportunity Fund. He
began his career at Strong Capital Management in 1986 and joined the investment department there in
1990. Mr. Stephens holds a bachelor of science degree from the University of WisconsinMadison.
Among other attributes, skills, experiences and qualifications, the Board believes that Mr.
Stephenss extensive insight into investment industry trends and practices, along with his
significant financial expertise, including his ability to understand generally accepted accounting
principles and evaluate financial statements, will allow him to make a valuable contribution as a
MakeMusic director.
Karen L. VanDerBosch joined MakeMusic as Chief Financial Officer and Treasurer in December
2006. Ms. VanDerBosch was most recently the CFO of Sagebrush Corporation, a privately held
developer of library automation software, and services, analytical software and book re-binder for
the K-12 education market. Ms. VanDerBosch previously served as CFO for KB Gear Interactive, a
privately held developer and marketer of interactive digital devices and applications serving
retail markets. Her extensive background in manufacturing and technology industries also included
CFO positions at EMPAK Inc. and the publicly traded Fieldworks Inc. Ms. VanDerBosch holds a
bachelor of science degree in accounting from the University of Minnesota.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the Exchange Act) requires our
executive officers, directors, and persons who own more than 10% of our Common Stock, to file with
the Securities and Exchange Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of MakeMusic. Officers, directors, and
greater than 10% shareholders (Insiders) are required by SEC regulations to furnish us with
copies of all Section 16(a) forms they file. To our knowledge, based on a review of the
48
copies of
such reports furnished to MakeMusic, during the fiscal year ended December 31, 2009 all Section
16(a)
filing requirements applicable to Insiders were complied with, except for the following: Keith
Fenhaus, Robert Morrison, Graham Richmond, Michael Skinner, and Michael Cahr each filed one late
Form 4 on January 7, 2009 related to an option grant on January 2, 2009.
Code of Ethics and Business Conduct
The Board has a Code of Ethics and Business Conduct (Code of Ethics) that applies to all of
our employees, directors, and officers, including our principal executive officers, principal
financial officer, and controller. The Code of Ethics addresses such topics as protection and
proper use of our assets, compliance with applicable laws and regulations, accuracy and
preservation of records, accounting and financial reporting, conflicts of interest, and insider
trading. The Code of Ethics is available in print, free of charge to any stockholder who sends a
request for a paper copy to MakeMusic, Inc., Attn: Investor Relations, 7615 Golden Triangle Drive,
Suite M, Eden Prairie, Minnesota 55344-3848. MakeMusic intends to include on its website any
amendment to, or waiver from, a provision of its Code of Ethics that applies to our principal
executive officers, principal financial officer, and controller that relates to any element of the
code of ethics definition enumerated in Item 406(b) of Regulation S-K.
Audit Committee
The current members of our Audit Committee are Mr. Fenhaus (Chair), Mr. Cahr and Mr. Richmond.
Effective March 15, 2010, our Audit Committee will be comprised of Mr. Fenhaus (Chair), Mr. Cahr,
and Mr. DSouza. Our Board of Directors has determined that Mr. Fenhaus qualifies as an audit
committee financial expert, as defined by applicable rules of the SEC. The Board has further
determined that all members of the Audit Committee are independent within the meaning of the
applicable listing standards of the Nasdaq Stock Market and Rule 10A-3 of the Exchange Act.
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ITEM 11. |
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EXECUTIVE COMPENSATION |
Overview
The Compensation Committee views executive compensation as a total package that includes base
salary, annual performance-based non-equity incentive plan awards, and long-term equity
compensation in the form of stock options and restricted stock awards. MakeMusic does not currently
provide a defined benefit pension plan, 401K match, or retiree health care.
Employment Agreements and Termination of Employment Agreements
On May 8, 2009, we entered into an employment agreement with Ronald Raup, which replaced his
previous employment agreement dated February 20, 2007 and amended October 27, 2008. Mr. Raups new
employment agreement provided that he would receive an initial annual base salary of $216,000 for
service in 2009. In addition, Mr. Raups employment agreement provides that he may be eligible for
equity and non-equity incentive compensation as determined by the Board of Directors or a
committee. For 2009, Mr. Raup was eligible to receive a cash incentive award equal to 80% of his
base salary and to receive a restricted stock incentive award equal to 80% of his salary, with
actual compensation dependent upon achievement during 2009 of company financial objectives that are
set by the Compensation Committee for the fiscal year. Mr. Raup is also eligible to receive certain
other benefits that we make available to executive officers. Mr. Raups employment agreement has an
indefinite term and is effective until Mr. Raups employment is terminated pursuant to the
agreement. The agreement may be terminated by mutual agreement of the parties, by the Company with
or without cause, or by Mr. Raup. If we terminate Mr. Raup without cause, he would be entitled to
receive monthly cash payments equal to his then-current base salary for one year and a pro-rated
portion of any incentive compensation earned through the date of termination.
On May 8, 2009, the Company also entered into an employment agreement with Karen VanDerBosch,
pursuant to which Ms. VanDerBosch was paid an annual base salary of $185,000 in 2009. In addition,
Ms. VanDerBoschs employment agreement provides that she may be eligible for non-equity incentive
compensation as determined by the Board of Directors or a committee. For 2009, Ms. VanDerBosch was
eligible to receive a cash incentive award equal to 60% of her base salary and to receive a
restricted stock incentive award equal to 60% of her
49
salary, with actual compensation dependent
upon achievement during 2009 of company financial objectives that are
set by the Compensation Committee for the fiscal year. Ms. VanDerBosch is also eligible to receive
certain other benefits that we make available to executive officers. Ms. VanDerBoschs employment
agreement has an indefinite term and is effective until Ms. VanDerBoschs employment is terminated
pursuant to the agreement. The agreement may be terminated by mutual agreement of the parties, by
the Company with or without cause, or by Ms. VanDerBosch. If we terminate Ms. VanDerBosch without
cause, she would be entitled to receive monthly cash payments equal to her then-current base salary
for one year and a pro-rated portion of any incentive compensation earned through the date of
termination.
Base Salaries
In determining appropriate base salaries for executives in fiscal 2009, in addition to
reviewing market data, the Compensation Committee considered:
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the Chief Executive Officers recommendations as to compensation for all other
executive officers; |
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the scope of responsibility, experience, time in position, and individual
performance of each officer, including the Chief Executive Officers; |
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the effectiveness of each executives leadership performance and potential to
enhance stockholders value; and |
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internal equity. |
The Compensation Committees analysis is a subjective process that utilizes no specific
weighting or formula of the factors above in determining executives base salaries.
Adjustments to base salaries are determined based on merit and market. This requires an
evaluation of individual performance, competitive market levels and rates of increase, executive
experience and internal equity, as well as our overall salary budget. Since annual
performance-based incentives (as discussed below) are based on a percentage of base salary, base
salary increases also have the effect of increasing the size of annual incentive opportunity.
Executive Incentive Compensation
In order to provide motivation to our Named Executive Officers (as defined below) and other
key employees, we award performance-based compensation upon their achievement of goals that the
Compensation Committee identifies on an annual basis. On March 2, 2009, the Compensation Committee
of the Board of Directors adopted an Executive Incentive Compensation Plan (the Executive Plan).
The Compensation Committee subsequently approved revisions to the Executive Plan on May 5, 2009.
The Executive Plan was used to provide incentive compensation to our Named Executive Officers and
other key employees in 2009 and is intended to be available for use in 2010 and future years. The
Executive Plan is applicable to our Named Executive Officers and certain other key employees, as
designated by the Compensation Committee. Participants have the potential to earn cash and
restricted stock. In addition, the Compensation Committee may grant options to participants or
other employees if certain performance levels are achieved. All equity awards made pursuant to the
Executive Plan are be governed by our 2003 Equity Incentive Plan, or any amended version thereof.
The amount of cash and the number of options and shares of restricted stock awarded to our
Named Executive Officers in each of 2009 and 2008 was based on our achievement of Management Bonus
Objectives (MBOs). When selecting the MBOs, the Compensation Committee considers our business
plan, the individual skills and potential of the participants, targeted total compensation amounts
based on publicly available market data, and recommendations from the Chief Executive Officer.
The MBOs under the 2008 Executive Compensation Plan were based on achievement of quantifiable
financial performance in accordance with the annual business plan and included return on assets,
operating margin, product revenues and product subscriptions. For fiscal 2009, the Compensation
Committee set the MBOs as free cash flow, operating margins, asset turns, Notation revenue,
SmartMusic revenue and SmartMusic subscriptions, with a maximum of $172,800 cash and $172,800 worth
of restricted stock for our Chief Executive Officer and a maximum of $111,000 cash and $111,000
worth of restricted stock for our Chief Financial Officer. These MBOs and target
50
incentive compensation amounts reflect the Compensation Committees belief that annual incentives
should be closely aligned with financial performance.
The Compensation Committee evaluates the Companys performance after each completed fiscal
year to determine the amount of cash and the number of shares of restricted stock each participant
has earned.
Material Terms of Non-Equity Incentive Plan Awards
The Named Executive Officers were not entitled to receive discretionary payments which would
be characterized as Bonus payments for the fiscal years ended December 31, 2009 and December 31,
2008. Amounts listed for each of 2009 and 2008 in the Summary Compensation Table under the column
entitled Non-Equity Incentive Plan Compensation, were approved by the Compensation Committee on
February 23, 2010 and March 2, 2009, respectively. These payments are intended to compensate the
executive officers for services rendered in fiscal 2009 and 2008, respectively.
The Compensation Committee considers annual performance-based cash awards to be a motivational
method for encouraging and rewarding individual performance that contributes to our overall company
performance. Target performance-based compensation amounts are positioned to be competitive with
market data and for awards based on performance in fiscal year 2009 ranged as a percentage of
salary from 60% to 80% for the Named Executive Officers with an increasing scale if financial
performance was exceeded. These amounts reflect the programs objective to reward individual
performance that contributes to our overall performance.
As shown in the column entitled Non-Equity Incentive Plan Compensation, of the Summary
Compensation Table, actual cash incentive awards paid to our executive officers pursuant to MBOs
ranged from 42% to 56% of base salary in fiscal 2009. The Compensation Committee did not waive or
modify for any Named Executive Officer any of the specified performance targets, goals or
conditions to payout for performance-based compensation that were in place during fiscal 2009.
Long-Term Incentive Compensation
Our long-term incentive compensation in the form of stock option and restricted stock awards
is designed to attract and retain key executives, build an integrated management team, reward
innovation and performance, and share long-term successes. The intent is to align executive and
shareholder interests, thereby increasing shareholder value.
Based on the amounts of total compensation listed in the Summary Compensation Table, long-term
variable compensation represented from 13.8% to 15.3% of total compensation for the Named Executive
Officers in fiscal year 2009, which is consistent with the committees overall compensation
objectives.
Material Terms of Option Grants
Prior to adoption of the Executive Plan, our practice was to occasionally grant executives
options to purchase shares of MakeMusic common stock as a form of compensation at the time of hire
or following performance evaluations. The grants were based on a subject evaluation, in
consideration of the executives prior performance, contributions to the Company, level of
responsibility, other compensation, ability to influence our long-term growth and profitability,
and prior stock option grants. Under the Executive Plan, the Compensation Committee has authority
to grant options to our Named Executive Officers and other employees when 80% of target performance
is met or surpassed for all MBOs.
We made two incentive stock option grants to Named Executive Officers in fiscal 2009. On
January 8, 2009, we granted seven-year incentive stock options to Ronald Raup and Karen
VanDerBosch. The options allow the executives to purchase 21,000 shares of common stock and 15,000
shares of common stock, respectively, with an exercise price of $3.50. The options vest ratably
over 48 months, beginning January 31, 2009 and ceasing December 31, 2013.
51
On February 1, 2010, we granted seven-year incentive stock options to Ronald Raup and Karen
VanDerBosch in recognition of performance during the 2009 fiscal year. Because the options were
granted in 2010, they are not reflected in the Summary Compensation Table. Mr. Raup and Ms.
VanDerBosch both received an option to purchase 40,000 shares of common stock. The shares vest
ratably over 48 months beginning February 28, 2010 and ceasing January 31, 2014. The options have
an exercise price of $4.56.
Option grants to executives are made under the 2003 Equity Incentive Plan and are subject to
the terms of our form of incentive stock option agreement. The form of agreement provides that the
exercise price of a grant is equal to the fair market value on the date of grant. The form of
agreement also provides that if the executive leaves MakeMusic for any reason other than death,
vesting immediately ceases and options expire in 90 days after the end of employment. In the event
of the termination of an employees relationship with MakeMusic in connection with a change of
control event, all unvested shares of stock subject to the option grant shall immediately vest.
Incentive stock options typically vest over a four-year period.
Material Terms of Restricted Stock Awards
We granted restricted stock awards in 2009, for performance in 2008. In March 2009, the
Compensation Committee granted restricted stock awards in the amount of 7,189 shares to Ron Raup
and 4,448 shares to Karen VanDerBosch. The restricted stock awards were granted to the Named
Executive Officers under the 2008 Executive Compensation Plan, based on achievement in fiscal 2008
of MBOs for that year, and in lieu of restricted stock units in identical amounts to which they
were originally entitled. Ron Raup was eligible for 20,539 restricted stock units (with a value of
$160,000 based on the per share price of Company common stock on the date the 2008 Executive
Compensation Plan was approved), and Karen VanDerBosch was eligible for 12,708 restricted stock
units (with a value of $99,000 based on the per share price of our common stock on the date the
restricted stock was granted).
Under the Executive Plan and the 2009 MBOs, Ron Raup was eligible for 45,836 shares of
restricted stock (with a value of $172,800, based on the average daily per share price of Company
common stock between October 1, 2008 and December 31, 2008), and Karen VanDerBosch was eligible for
29,443 shares of restricted stock (with a value of $111,000, based on the average daily per share
price of Company common stock between October 1, 2008 and December 31, 2008). On February 23, 2010
the Compensation Committee evaluated achievement of the MBOs in fiscal 2009 based on our audited
financial statements. The Compensation Committee awarded 24,926 shares of restricted stock to Ron
Raup and 16,012 shares of restricted stock to Karen VanDerBosch effective March 15, 2010. Because
the awards were made in 2010, they are not reflected in the Summary Compensation Table.
Restricted stock awards are made under our 2003 Equity Incentive Plan and are subject to the
terms thereof and our form of restricted stock award agreement. The risks of forfeiture on the
earned shares of restricted stock lapse immediately on the delivery date as to twenty-five percent
of the award and in twenty-five percent increments during the following three years. If a
participant voluntarily terminates employment without good reason or has been terminated by the
Company for cause, he or she will forfeit any portion of the award that remains restricted.
Summary Compensation Table
The following table sets forth all of the compensation awarded to, earned by or paid to (i)
each individual who served as our principal executive officer during the fiscal year ended December
31, 2009; and (ii) each other individual that served as an executive officer at the conclusion of
the fiscal year ended December 31, 2009 and who received total compensation in excess of $100,000
during such fiscal year. We refer to these individuals as our Named Executive Officers.
52
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Change in Pension |
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Value and |
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Non-Equity |
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Nonqualified |
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Incentive Plan |
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Deferred |
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Bonus |
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Stock Awards |
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Option Awards |
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Compensation |
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Compensation |
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All Other |
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Salary |
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(1) |
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Earnings |
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Compensation |
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Total |
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Name and Principal Position |
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Year |
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($) |
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($) |
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($) |
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($) |
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($) |
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Ronald B. Raup |
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2009 |
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$ |
216,000 |
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$ |
16,175 |
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$ |
45,039 |
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$ |
120,960 |
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$ |
1,000 |
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$ |
399,174 |
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Chief Executive Officer |
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2008 |
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$ |
200,000 |
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$ |
56,000 |
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$ |
256,000 |
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Karen L. VanDerBosch |
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2009 |
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$ |
185,000 |
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$ |
10,008 |
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32,170 |
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77,700 |
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$ |
304,878 |
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Secretary, Treasurer and
Chief Financial Officer |
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2008 |
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165,000 |
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$ |
8,663 |
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125,999 |
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34,650 |
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325,649 |
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The Bonus column is used by us to include only discretionary bonus payments apart from
our non-equity incentive compensation plans. Payments under such incentive plans, including
payments for achieving certain financial performance goals, are set forth in the Non-Equity
Incentive Plan Compensation column. Payments under the 2008 Executive Compensation Plan have
been made in 2009 for services and performance during 2008, and payments under the Executive
Incentive Compensation Plan have been made in 2010 for services and performance during 2009. |
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Represents the grant date fair value of options awarded during the fiscal years ended
December 31, 2009 and December 31, 2008, in accordance with Financial Accounting Standards
Board Accounting Standards Codification Topic 718, Compensation Stock Compensation, for
outstanding performance-based share or unit grants (Stock Awards column) and option awards
(Option Awards column) under the 2003 Equity Incentive Plan, as amended with shareholder
approval in 2006 and 2008 (the 2003 Plan). The assumptions used to determine the valuation
of the 2009 awards are discussed in Note 5 to our consolidated financial statements. See the
table entitled Outstanding Equity Awards at 2009 Fiscal Year End and the narrative
discussion entitled Material Terms of Option Grants and Material Terms of Restricted Stock
Awards for further information regarding option awards and stock awards. The assumptions used
to determine the valuation of the 2008 awards are discussed in Note 5 to our consolidated
financial statements, included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008. |
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Outstanding Equity Awards at 2009 Fiscal Year End
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards |
|
|
Equity Incentive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive |
|
|
Plan Awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Awards: |
|
|
Market or |
|
|
|
|
|
|
|
|
|
|
|
Option Awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market |
|
|
Number of |
|
|
Payout Value |
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of |
|
|
Unearned Shares, |
|
|
of Unearned |
|
|
|
|
|
|
|
|
|
|
|
Plan Awards: Number |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Shares of |
|
|
Units or |
|
|
Shares, Units |
|
|
|
Number of |
|
|
Number of |
|
|
of Securities |
|
|
|
|
|
|
|
|
|
|
Shares or |
|
|
Units of |
|
|
Other |
|
|
or other |
|
|
|
Securities |
|
|
Securities |
|
|
Underlying |
|
|
|
|
|
|
|
|
|
|
Units of |
|
|
Stock that |
|
|
Rights that |
|
|
Rights that |
|
|
|
Underlying |
|
|
Underlying |
|
|
Unexercised |
|
|
Option Exercise |
|
|
Option Expiration |
|
|
Stock that |
|
|
Have not |
|
|
have not |
|
|
have not |
|
|
|
Unexercised Options |
|
|
Unexercised Options |
|
|
Unearned Options |
|
|
Price |
|
|
Date |
|
|
have not Vested |
|
|
Vested(9) |
|
|
Vested |
|
|
Vested |
|
Name |
|
(#) Exercisable |
|
|
(#) Unexercisable |
|
|
(#) |
|
|
($) |
|
|
|
|
|
(#) |
|
|
($) |
|
|
(#) |
|
|
($) |
|
Ronald B. Raup |
|
|
2,664 |
|
|
|
0 |
(1) |
|
|
|
|
|
$ |
4.90 |
|
|
|
2/1/2012 |
|
|
|
5,392 |
(7) |
|
$ |
22,215 |
|
|
|
|
|
|
|
|
|
|
|
|
24,000 |
|
|
|
0 |
(1) |
|
|
|
|
|
$ |
3.75 |
|
|
|
9/15/2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,750 |
|
|
|
21,250 |
(2) |
|
|
|
|
|
$ |
6.00 |
|
|
|
12/31/2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,244 |
|
|
|
15,756 |
(3) |
|
|
|
|
|
$ |
3.50 |
|
|
|
1/7/2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Karen L. VanDerBosch |
|
|
23,125 |
|
|
|
6,875 |
(4) |
|
|
|
|
|
$ |
6.14 |
|
|
|
12/7/2013 |
|
|
|
3,336 |
(8) |
|
$ |
13,744 |
|
|
|
|
|
|
|
|
|
|
|
|
9,984 |
|
|
|
10,016 |
(5) |
|
|
|
|
|
$ |
10.15 |
|
|
|
1/2/2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,744 |
|
|
|
11,256 |
(5) |
|
|
|
|
|
$ |
3.50 |
|
|
|
1/7/2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Options are fully vested. |
|
(2) |
|
Options vest annually on December 31 for the first three years, and on the first day of each
quarter during the fourth year. |
|
(3) |
|
Monthly vesting 437 options for 47 months and 461 for 1 month beginning January 31, 2009. |
|
(4) |
|
Monthly vesting 625 options for 48 months beginning December 31, 2006. |
|
(5) |
|
Monthly vesting 416 options for 47 months and 448 for 1 month beginning January 31, 2008. |
|
(6) |
|
Monthly vesting 312 options for 47 months and 336 for 1 month beginning January 31, 2009. |
|
(7) |
|
On March 2, 2009, Mr. Raup was awarded 7,189 shares of restricted stock under the 2008
Executive Compensation Plan for exceeding the target level of operating margins for the 2008
fiscal year. The risks of forfeiture lapse as to 25% of the award each year beginning on March
2, 2009, and ending on March 2, 2012, provided that Mr. Raup does not voluntarily terminate
his employment without good reason and is not terminated for cause. |
|
(8) |
|
On March 2, 2009, Ms. VanDerBosch was awarded 4,448 shares of restricted stock under the 2008
Executive Compensation Plan for exceeding the target level of operating margins for the 2008
fiscal year. The risks of forfeiture lapse as to 25% of the award each year beginning on March
2, 2009, and ending on March 2, 2012, provided that Ms. VanDerBosch does not voluntarily
terminate her employment without good reason and is not terminated for cause. |
|
(9) |
|
The amounts reflect the value based on the closing price of our Common Stock on December 31,
2009 of $4.12. |
54
Director Compensation
In 2009, each director was compensated in accordance with the MakeMusic, Inc. Board
Compensation Plan adopted on February 15, 2007, amended on January 31, 2008 and further amended on
January 28, 2009 (the Board Compensation Plan). Each non-employee director who was serving at the
beginning of fiscal 2009 received $5,000 per calendar quarter for Board membership and $2,500 per
calendar quarter for serving as the board or committee chairperson. Each eligible director also
received an annual non-qualified stock option grant to purchase 4,000 shares of MakeMusics common
stock, with an exercise price equal to the fair market value of common stock on the date of the
grant. An eligible director is defined as a non-employee member of the Board who is not (i)
otherwise compensated by MakeMusic or (ii) a representative of a shareholder who beneficially owns
5% or more of our common stock. The options were issued under the 2003 Equity Incentive Plan, have
a four-year term and vested ratably over twelve months. In the event a directors service
terminated for any reason or if the director was no longer an eligible director, vesting of the
option would have ceased with the director having the right to exercise any vested shares through
the remaining term of the option.
In accordance with the Board Compensation Plan, on January 4, 2010, the Board granted each of
Keith Fenhaus, Bob Morrison, Graham Richmond, Michael Skinner, and Michael Cahr, who were
MakeMusics eligible directors at that time, a four-year non-qualified option to purchase 4,000
shares at $4.58 per share, which option vested monthly between the date of grant and December 31,
2010.
Director Compensation Table
The following table sets forth certain information regarding compensation paid to and earned
by the non-employee directors who served on MakeMusics Board of Directors during the 2009 fiscal
year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Pension |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified |
|
|
|
|
|
|
|
|
|
Fees Earned or Paid |
|
|
|
|
|
|
|
|
|
|
Non-Equity |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
in |
|
|
|
|
|
|
Option |
|
|
Incentive Plan |
|
|
Compensation |
|
|
All Other |
|
|
|
|
|
|
Cash(1) |
|
|
Stock Awards |
|
|
Awards(2) |
|
|
Compensation |
|
|
Earnings |
|
|
Compensation |
|
|
Total |
|
Name |
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
Michael Cahr |
|
$ |
20,000 |
|
|
|
|
|
|
$ |
5,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,363 |
|
Keith Fenhaus |
|
$ |
30,000 |
|
|
|
|
|
|
$ |
5,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,363 |
|
Jeffrey Koch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
60,956 |
(3) |
|
$ |
60,956 |
|
Robert Morrison |
|
$ |
30,000 |
|
|
|
|
|
|
$ |
5,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,363 |
|
Graham Richmond |
|
$ |
30,000 |
|
|
|
|
|
|
$ |
5,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,363 |
|
Michael Skinner |
|
$ |
30,000 |
|
|
|
|
|
|
$ |
5,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,363 |
|
|
|
|
(1) |
|
All directors received the amount of cash compensation to which they were entitled
under the Board Compensation Plan, as described in the paragraphs directly preceding this
Director Compensation Table in the section entitled Director Compensation. In lieu of
director fees, Jeffrey Koch provided consulting services to MakeMusic during 2009 and was
compensated in that capacity. |
|
(2) |
|
Represents the grant date fair value of options awarded during the fiscal year ended
December 31, 2009, in accordance with Financial Accounting Standards Board Accounting
Standards Codification Topic 718, Compensation Stock Compensation. The assumptions used to
determine the valuation of the awards are discussed in Note 5 to our consolidated financial
statements, included in our Annual Report on Form 10-K for the fiscal year ended December 31,
2009. At fiscal year end the aggregate number of option awards outstanding for each
non-employee director then serving as a director was as follows: Jeffrey Koch, 0; Michael
Cahr, 8,000, Keith Fenhaus, 11,333; Robert Morrison, 14,000; Graham Richmond, 18,000; and
Michael Skinner, 16,000. |
|
(3) |
|
Jeffrey Koch was paid a fee for consulting services provided to the Company. |
55
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS |
PRINCIPAL SHAREHOLDERS
The following table provides information concerning persons known to us to be the beneficial
owners of more than 5% of our outstanding Common Stock as of March 5, 2010. Unless otherwise
indicated, the shareholders listed in the table have sole voting and investment powers with respect
to the shares indicated.
|
|
|
|
|
|
|
|
|
Name and Address |
|
Number of Shares |
|
|
Percent |
|
of Beneficial Owner |
|
Beneficially Owned |
|
|
of Class |
|
LaunchEquity
Partners, LLC Designated Series Education Partners |
|
|
1,362,829 |
(1) |
|
|
28.6 |
% |
4230 N Oakland Ave #317
Shorewood, WI 53211-2042 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents shares held by LaunchEquity Acquisition Partners, LLC Designated
Series Education Partners, a designated series of a Delaware series limited liability company
(LEAP), as set forth in the most recent Schedule 13D/A filed by LaunchEquity Partners, LLC
with the Securities and Exchange Commission on March 5, 2010. LEAP is solely managed by
LaunchEquity Partners, LLC, an Arizona limited liability company, the
managing members of which are
Andrew C. Stephens and Jane Kim. LaunchEquity Partners, LLC and its
managing members, have voting
and dispositive power over all the shares held by LEAP. |
MANAGEMENT SHAREHOLDINGS
The following table sets forth the number of shares of Common Stock beneficially owned as of
March 5, 2010, by each of our Named Executive Officers, by each director and by all directors and
executive officers as a group. Unless otherwise indicated, the shareholders listed in the table
have sole voting and investment powers with respect to the shares indicated.
|
|
|
|
|
|
|
|
|
Name of Beneficial |
|
Number of Shares |
|
|
Percent |
|
Owner or Identity of Group |
|
Beneficially Owned |
|
|
of Class(1) |
|
Ronald B. Raup |
|
|
124,704 |
(2) |
|
|
2.6 |
% |
Karen L. VanDerBosch |
|
|
49,212 |
(3) |
|
|
1.0 |
% |
Jeffrey A. Koch |
|
|
64,919 |
(4) |
|
|
1.4 |
% |
Michael E. Cahr |
|
|
32,710 |
(5) |
|
|
* |
|
Trevor A. DSouza |
|
|
0 |
|
|
|
* |
|
Keith A. Fenhaus |
|
|
12,665 |
(6) |
|
|
* |
|
Robert B. Morrison |
|
|
11,332 |
(6) |
|
|
* |
|
Graham Richmond |
|
|
15,332 |
(6) |
|
|
* |
|
Michael Skinner |
|
|
13,331 |
(6) |
|
|
* |
|
Andrew C. Stephens |
|
|
1,362,829 |
(7) |
|
|
28.6 |
% |
|
|
|
|
|
|
|
|
All current
executive officers and directors as a group (8 persons) |
|
|
1,687,034 |
(8) |
|
|
33.9 |
% |
|
|
|
* |
|
Less than 1% |
|
(1) |
|
Based on 4,759,391 shares of Common Stock issued and outstanding as of March 5,
2010. Shares not outstanding but deemed beneficially owned by virtue of the right of a person
to acquire them as of March 5, 2010, or within sixty days of such date, are treated as
outstanding only when determining the percent owned by such individual and when determining
the percent owned by a group. |
56
|
|
|
(2) |
|
Includes 10,580 shares which are owned outright and 110,529 shares that may be
purchased upon exercise of options that are exercisable as of March 5, 2010 or within 60 days
of such date. |
|
(3) |
|
Includes 2,224 shares which are owned outright and 44,764 shares that may be purchased
upon exercise of options that are exercisable as of March 5, 2010 or within 60 days of such
date. |
|
(4) |
|
Represents shares held by The Koch Family Trust (the Trust). Mr. Koch is trustee
of the Trust and thus has voting and dispositive power over all the shares held by the Trust.
Mr. Koch disclaims beneficial ownership of the shares in the Trust except to the extent of his
pecuniary interest therein. |
|
(5) |
|
Includes 27,378 shares which are owned outright and 5,332 shares that may be
purchased upon exercise of options that are exercisable as of March 5, 2010 or within 60 days
of such date. |
|
(6) |
|
Represents shares that may be purchased upon exercise of options that are
exercisable as of March 5, 2010 or within 60 days of such date. |
|
(7) |
|
Represents 1,362,829 shares held by LaunchEquity Acquisition Partners, LLC
Designated Series Education Partners. Mr. Stephens has
shared voting and investment power with
respect to such shares. See footnote (1) to preceding table. |
|
(8) |
|
Includes 213,285 shares that may be purchased by all officers and directors as a
group upon exercise of options exercisable as of March 5, 2010 or within 60 days of such date. |
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information concerning our equity compensation plans as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
securities |
|
|
|
|
|
|
|
|
|
|
|
remaining |
|
|
|
|
|
|
|
|
|
|
|
available for |
|
|
|
|
|
|
|
|
|
|
|
future issuance |
|
|
|
Number of |
|
|
|
|
|
|
under equity |
|
|
|
securities to be |
|
|
|
|
|
|
compensation plans |
|
|
|
issued upon |
|
|
Weighted-average |
|
|
(excluding |
|
|
|
exercise of |
|
|
exercise price of |
|
|
securities |
|
|
|
outstanding |
|
|
outstanding |
|
|
reflected in |
|
|
|
options |
|
|
options |
|
|
column (a) |
|
Plan category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation plans approved by
security holders |
|
|
445,755 |
|
|
$ |
5.09 |
|
|
|
586,047 |
|
Total |
|
|
445,755 |
|
|
$ |
5.09 |
|
|
|
586,047 |
|
|
|
|
ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Certain Relationships and Related Transactions
There were no related party transactions in 2009 or 2008.
Director Independence
The Board has determined that currently and at all times during the year ended December 31,
2009, a majority of its members are independent as defined by the listing standards of the Nasdaq
Stock Market. The Board considers in its evaluation of independence any existing related-party
transactions, and the Boards determination is based on its belief that none of the independent
directors have any relationships that, in the opinion of the Board of Directors, would interfere
with the exercise of independent judgment in carrying out the responsibilities of a director. The
current independent directors are Michael Cahr, Trevor DSouza, Keith Fenhaus, Jeffrey Koch, Robert
Morrison, Graham Richmond, Michael Skinner and Andrew Stephens. In determining the independence of
Mr. Morison and Mr. Koch, the board has considered the paid consulting services that Mr. Koch
provided through April 2009 and that Mr. Morrison may from time to time provide. In determining the
independence
57
of Mr. DSouza, Mr. Koch and Mr. Stephens, the Board considered the LauchEquity
Agreement and the share ownership of LauchEquity. Mr. Raup is precluded from being considered
independent since he currently serves as an executive officer of MakeMusic.
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Audit Fees
The following table sets forth the approximate fees billed by our principal accountant in 2008
and 2009:
|
|
|
|
|
|
|
|
|
|
|
McGladrey & Pullen, LLP |
|
|
|
2008 |
|
|
2009 |
|
Audit Fees |
|
$ |
232,000 |
|
|
$ |
202,000 |
|
Audit-Related Fees |
|
|
|
|
|
|
|
|
Tax Fees |
|
|
18,000 |
|
|
|
78,000 |
|
All Other Fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
250,000 |
|
|
$ |
280,000 |
|
Audit Fees are for professional services rendered for the audit of our annual financial
statements and review of financial statements included in our Forms 10-K and 10-Q and attendance at
Audit Committee meetings and review of documents filed with the SEC.
Tax Fees include fees for services provided in connection with preparation of federal and
state tax returns, and tax consulting projects.
Our Audit Committee has considered whether provision of the above non-audit services is
compatible with maintaining the independence of McGladrey & Pullen, LLP and has determined that
such services are compatible with maintaining their independence.
Pre-Approval of Audit Fees
The Audit Committee is responsible for pre-approving all audit and permitted non-audit
services to be performed for MakeMusic by its independent auditors or any other auditing or
accounting firm. Unless a particular service has received general pre-approval by the Audit
Committee, each service provided must be specifically pre-approved. Any proposed services exceeding
pre-approved cost levels will also require specific pre-approval by the Audit Committee.
Pursuant to its pre-approval policy, the Audit Committee has pre-approved certain non-audit
services, including certain tax services. All of the non-audit services rendered by McGladrey &
Pullen, LLP during 2009 were pre-approved in accordance with this policy.
58
PART IV
|
|
|
ITEM 15. |
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) Documents filed as part of this report.
|
(1) |
|
Financial Statements. The following financial statements are included in Part II, Item
8 of this Annual Report on Form 10-K: |
|
|
|
|
Report of McGladrey & Pullen LLP on Financial Statements as of and for the periods
ended December 31, 2009 and December 31, 2008 |
|
|
|
|
Balance Sheets as of December 31, 2009 and 2008 |
|
|
|
|
Statements of Income for the years ended December 31, 2009 and 2008 |
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Statements of Shareholders Equity for the years ended December 31, 2009 and 2008 |
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Statements of Cash Flows for the years ended December 31, 2009 and 2008 |
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Notes to Financial Statements |
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(2) |
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Financial Statement Schedules. The following consolidated financial statement schedules
are included in Item 8: Not applicable. |
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(3) |
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Exhibits. See Exhibit Index to Form 10-K immediately following the signature page
of this Form 10-K for a description of the documents that are filed as Exhibits to this
report or incorporated by reference herein. |
59
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.
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MakeMusic, Inc.
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Dated: March 5, 2010 |
By: |
/s/ Ronald B. Raup
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Ronald B. Raup, Chief Executive Officer |
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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 Ronald B. Raup and Karen L.
VanDerBosch 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-K 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.
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Signature and Title |
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Date |
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March 5, 2010 |
Ronald B. Raup, Chief Executive Officer and Director |
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March 5, 2010 |
Karen L. VanDerBosch, Chief Financial Officer |
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March 5, 2010 |
Jeffrey A. Koch, Chairman of the Board, Director |
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March 5, 2010 |
Michael E. Cahr, Director |
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March 5, 2010 |
Trevor A. DSouza, Director |
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March 5, 2010 |
Keith A. Fenhaus, Director |
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March 5, 2010 |
Robert Morrison, Director |
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March 5, 2010 |
Graham Richmond, Director |
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March 5, 2010 |
Michael R. Skinner, Director |
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March 5, 2010 |
Andrew C. Stephens, Director |
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60
MAKEMUSIC, INC.
EXHIBIT INDEX FOR
FORM 10-K FOR 2009 FISCAL YEAR
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Exhibit |
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Number |
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Description |
3.1
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|
Restated Articles of Incorporation as amended incorporated by reference to Exhibit 3.1 to the
Registrants Form 10-QSB for the quarter ended June 30, 2006 |
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3.2
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Bylaws as amended incorporated by reference to Exhibit 3.1 to the Registrants Form 8-K filed
December 10, 2007 |
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4.1
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Form of specimen certificate representing common stock of MakeMusic, Inc. incorporated by
reference to Exhibit 4.1 to the Registrants Form 10-KSB for the year ended December 31, 2007 |
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10.1*
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MakeMusic 2003 Equity Incentive Plan, as amended through November 24, 2008 incorporated by
reference to Exhibit 10.9 to the Registrants Form 10-K for the year ended December 31, 2008 |
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10.2*
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Form of Incentive Stock Option Agreement under the MakeMusic 2003 Equity Incentive Plan
incorporated by reference to Exhibit 10.21 to the Registrants Form 10-KSB for the year ended
December 31, 2004 |
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10.3*
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Form of Nonqualified Stock Option Agreement under the MakeMusic 2003 Equity Incentive Plan
incorporated by reference to Exhibit 10.22 to the Registrants Form 10-KSB for the year ended
December 31, 2004 |
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10.4*
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Form of Restricted Stock Agreement under the MakeMusic 2003 Equity Incentive Plan incorporated
by reference to Exhibit 10.9 to the Registrants Form 10-K for the year ended December 31, 2008 |
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10.5*
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Form of Restricted Stock Unit Agreement under the MakeMusic 2003 Equity Incentive Plan
incorporated by reference to Exhibit 10.9 to the Registrants Form 10-K for the year ended
December 31, 2008 |
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10.6*
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Board Compensation Plan effective February 15, 2007, as amended January 31, 2008 and as further
amended January 28, 2009 incorporated by reference to Exhibit 10.6 to the Registrants Form
10-K for the year ended December 31, 2008. |
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10.7*
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Employment Agreement dated May 8, 2009 between the Registrant and Ronald B. Raup incorporated
by reference to Exhibit 10.3 to the Registrants Form 10-Q for the quarter ended March 31, 2009 |
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10.8*
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Employment Agreement dated May 8, 2009 between the Registrant and Karen L. VanDerBosch
incorporated by reference to Exhibit 10.4 to the Registrants Form 10-Q for the quarter ended
March 31, 2009 |
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10.9*
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Amendment No. 1 to Employment Agreement between the Registrant and John W. Paulson
incorporated by reference to Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended
September 30, 2008 |
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10.10*
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Separation Agreement effective December 31, 2008 between the Registrant and John W. Paulson
incorporated by reference to Exhibit 10.9 to the Registrants Form 10-K for the year ended
December 31, 2008 |
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10.11*
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2009 Executive Compensation Plan incorporated by reference to Exhibit 10.2 to the Registrants
Form 10-Q for the quarter ended March 31, 2009 |
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10.12
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Agreement dated March 2, 2010 among the Registrant, LaunchEquity Partners, LLC and LaunchEquity
Acquisition Partners, LLC Designated Series Education Partners incorporated by reference to
Exhibit 10.1 to the Registratnts 8-K filed March 3, 2010 |
61
|
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Exhibit |
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Number |
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Description |
23.1
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Consent of McGladrey & Pullen LLP, independent registered public accounting firm |
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24.1
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Power of Attorney (included on the Signatures page of this Form 10-K) |
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31.1
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Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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* |
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Indicates a management contract or compensatory plan or arrangement required to be filed as an
exhibit to this Form 10-K. |
62