e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
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o |
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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
0-26192
(Commission File Number)
MAKEMUSIC, INC.
(Exact name of registrant as specified in its charter)
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Minnesota
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41-1716250 |
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.) |
7615 Golden Triangle Drive, Suite M
Eden Prairie, Minnesota 55344-3848
(Address of principal executive offices)
(952) 937-9611
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
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 Web site, 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 þ No 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 a 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
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: As of July 29, 2011 there were 4,911,644 shares of Common Stock
outstanding.
PART I. FINANCIAL INFORMATION
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Item 1. |
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Condensed Financial Statements. |
MakeMusic, Inc.
Condensed Balance
Sheets
(In thousands of U.S. dollars, except share data)
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June 30, |
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2011 |
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December 31, |
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(Unaudited) |
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2010 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
9,177 |
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$ |
11,532 |
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Accounts
receivable (net of allowance of $11 and $20 in 2011 and 2010, respectively) |
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1,197 |
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1,238 |
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Inventories |
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160 |
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201 |
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Deferred income taxes, net |
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2,786 |
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2,786 |
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Prepaid expenses and other current assets |
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423 |
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252 |
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Total current assets |
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13,743 |
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16,009 |
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Property and equipment, net |
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296 |
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342 |
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Capitalized software products, net |
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2,318 |
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2,424 |
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Goodwill |
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3,630 |
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3,630 |
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Long term deferred income taxes, net |
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367 |
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214 |
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Other non-current assets |
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1 |
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2 |
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Total assets |
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$ |
20,355 |
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$ |
22,621 |
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Liabilities and Shareholders Equity |
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Current liabilities: |
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Current portion of capital lease obligations |
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$ |
7 |
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$ |
25 |
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Accounts payable |
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293 |
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489 |
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Accrued compensation |
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788 |
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1,372 |
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Other accrued expenses |
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286 |
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307 |
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Post contract support |
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150 |
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150 |
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Reserve for product returns |
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314 |
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380 |
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Current portion of deferred revenue |
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2,712 |
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3,603 |
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Total current liabilities |
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4,550 |
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6,326 |
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Capital lease obligations, net of current portion |
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0 |
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4 |
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Deferred revenue, net of current portion |
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111 |
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96 |
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Shareholders equity: |
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Common stock, $0.01 par value: |
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Authorized shares 10,000,000 |
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Issued and outstanding shares 4,861,644 and 4,895,983
in 2011 and 2010, respectively |
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49 |
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49 |
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Additional paid-in capital |
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66,617 |
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66,632 |
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Accumulated deficit |
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(50,972 |
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(50,486 |
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Total shareholders equity |
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15,694 |
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16,195 |
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Total liabilities and shareholders equity |
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$ |
20,355 |
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$ |
22,621 |
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See Notes to Condensed Financial Statements
3
MakeMusic, Inc.
Condensed Statements of Operations
(In thousands of U.S. dollars, except share and per share data)
(Unaudited)
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3 Months |
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6 Months |
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Ended June 30, |
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Ended June 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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Notation revenue |
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$ |
1,672 |
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$ |
2,462 |
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$ |
4,006 |
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$ |
5,030 |
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SmartMusic revenue |
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1,641 |
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1,315 |
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3,301 |
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2,747 |
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NET REVENUE |
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3,313 |
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3,777 |
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7,307 |
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7,777 |
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COST OF REVENUES |
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534 |
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571 |
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1,128 |
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1,222 |
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GROSS PROFIT |
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2,779 |
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3,206 |
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6,179 |
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6,555 |
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OPERATING EXPENSES: |
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Development expenses |
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1,085 |
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1,402 |
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2,300 |
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2,724 |
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Selling and marketing expenses |
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1,015 |
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1,035 |
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2,248 |
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2,234 |
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General and administrative expenses |
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989 |
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877 |
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2,097 |
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1,916 |
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Patent litigation expense |
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0 |
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0 |
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225 |
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0 |
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Total operating expenses |
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3,089 |
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3,314 |
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6,870 |
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6,874 |
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LOSS FROM OPERATIONS |
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(310 |
) |
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(108 |
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(691 |
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(319 |
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Other, net |
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25 |
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13 |
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52 |
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40 |
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Net loss before income tax |
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(285 |
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(95 |
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(639 |
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(279 |
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Income tax expense (benefit) |
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20 |
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(47 |
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(153 |
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(114 |
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Net loss |
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($305 |
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($48 |
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($486 |
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($165 |
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Loss per common share: |
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Basic and diluted |
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($0.06 |
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($0.01 |
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($0.10 |
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($0.03 |
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Weighted average common shares outstanding: |
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Basic and diluted |
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4,859,563 |
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4,818,295 |
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4,872,518 |
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4,793,334 |
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See Notes to Condensed Financial Statements
4
MakeMusic, Inc.
Condensed Statements of Cash Flows
(In thousands of U.S. dollars)
(Unaudited)
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6 Months |
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Ended June 30, |
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2011 |
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2010 |
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Cash flows from operating activities |
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Net loss |
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($486 |
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($165 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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548 |
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508 |
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Deferred income taxes, net |
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(153 |
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(148 |
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Share based compensation |
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247 |
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270 |
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Net changes in operating assets and liabilities: |
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Accounts receivable |
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41 |
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88 |
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Inventories |
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41 |
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104 |
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Prepaid expenses and other current assets |
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(171 |
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(49 |
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Accounts payable |
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(196 |
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(410 |
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Accrued expenses and product returns |
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(652 |
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(209 |
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Deferred revenue |
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(876 |
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(722 |
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Net cash used in operating activities |
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(1,657 |
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(733 |
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Cash flows from investing activities |
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Purchases of property and equipment |
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(96 |
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(72 |
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Capitalized development and other intangibles |
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(299 |
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(224 |
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Net cash used in investing activities |
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(395 |
) |
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(296 |
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Cash flows from financing activities |
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Proceeds from stock options exercised |
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28 |
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102 |
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Payments on redemption of stock options |
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(18 |
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0 |
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Repurchase of common stock |
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(291 |
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0 |
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Principal payments on capital leases |
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(22 |
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(30 |
) |
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Net cash (used in) provided by financing activities |
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(303 |
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72 |
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Net decrease in cash and cash equivalents |
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(2,355 |
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(957 |
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Cash and cash equivalents, beginning of period |
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11,532 |
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8,943 |
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Cash and cash equivalents, end of period |
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$ |
9,177 |
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$ |
7,986 |
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Supplemental disclosure of cash flow information |
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Interest paid |
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$ |
1 |
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$ |
4 |
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Income taxes paid |
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1 |
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99 |
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See Notes to Condensed Financial Statements
5
Make
Music, Inc.
Notes to Condensed Financial Statements
(Unaudited)
Note 1 Accounting Policies |
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Accounting Policies. The information
furnished in this report is unaudited but reflects all adjustments
that are necessary, in the opinion of management, for a fair
statement of the results for the interim period. The operating
results for three and six months ended June 30, 2011 are not
necessarily indicative of the operating results to be expected for
the full fiscal year. In preparing the accompanying financial
statements, management has evaluated subsequent events and has
determined no additional events have occurred that require
disclosure. The Company believes that although the disclosures
contained herein are adequate to prevent the information presented
from being misleading, these statements should be read in
conjunction with the Companys most recent Form 10-K. |
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Accounting Pronouncements. In September 2009, the FASB issued ASU No.
2009-13, Revenue Recognition (ASC 605): Multiple-Deliverable
Revenue Arrangements a consensus of the FASB Emerging Issues
Task Force, which addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for
products or services separately rather than as a combined unit and
requires expanded revenue recognition policy disclosures. This
amendment addresses how to separate deliverables and how to measure
and allocate arrangement consideration to one or more units of
accounting. Our adoption of ASU No. 2009-13, effective January 1,
2011, had no impact on our consolidated financial condition or
results of operations. |
Note 2 Net Loss Per Share |
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Net Loss Per Share.
Net loss per share was calculated by dividing
the net loss by the weighted average number of shares outstanding
during the period. The effect of options and warrants of 226,739
and 215,974, respectively, for the three and six-month periods
ended June 30, 2011 are excluded because the effect is
anti-dilutive. The effect of options and warrants of 411,025 and
385,722, respectively, for the three and six-month periods ended
June 30, 2010 are excluded because the effect is anti-dilutive. |
Note 3 Income Tax Expense |
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Income Tax Expense.
We account for income taxes using the asset
and liability method. 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. |
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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. |
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As of June 30, 2011 and June 30, 2010, 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 major state
agencies as of June 30, 2011 are 2006-2010. |
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As of December 31, 2010, we had U.S. net operating loss carry-forwards of approximately
$15,771,000, Minnesota net operating loss carry-forwards of $5,946,000, and research and
development tax credits of $1,164,000 and Minnesota research and development tax credits of
$490,000. The losses and tax credits are carried forward for federal and state corporate
income taxes and may be used to reduce future taxes. |
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We have maintained our policy of recording a deferred tax asset representing tax on three
years of forecasted income. We continue to believe that this policy is prudent, as the
likelihood of technological and industry developments limit our ability to forecast income
beyond three years. Due to uncertainties related to our ability to utilize the balance of
our deferred tax assets, as of June 30, 2011 we have maintained a valuation allowance of
$5,690,000. 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 our future
profitability. |
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Should the remaining $5,690,000 valuation allowance be reversed in the future, a liability of
$3,175,000 would have to be established for uncertain tax positions. |
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We recorded federal tax expense of $20,000 for the three months ended June 30, 2011 and
a benefit for federal income taxes of $153,000 for the six months ended June 30, 2011. We
recorded a benefit for federal income taxes of $50,000 and $148,000, respectively, for the
three and six-month periods ended June 30, 2010. The effective tax rate through the period
June 30, 2011 is 24.0%. |
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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. |
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Note 4 Stock-Based Compensation |
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Stock-Based Compensation.
The MakeMusic, Inc. 2003 Equity Incentive Plan (the 2003 Plan),
as amended, reserves a total of 1,500,000 shares of our common stock for issuance under stock
options, restricted stock, performance awards and stock appreciation rights. The 2003 Plan is
administered by the Compensation Committee of the Board of Directors, which recommends to the
Board 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 of our financial statements on Form 10-K for the fiscal year
ended December 31, 2010 for additional information related to our stock-based compensation
plans. |
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We measure stock-based compensation cost at the grant date based on the fair value of the
award and recognize the compensation expense over the requisite service period, which is
generally the vesting period. For the three months ended June 30, 2011 and 2010, we
recognized $114,000 and $109,000, respectively, and for the six months ended June 30, 2011
and 2010, we recognized $184,000 and $217,000, respectively, of expense related to stock
based compensation. |
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Stock Options |
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We use 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. |
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June 30, |
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June 30, |
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2011 |
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2010 |
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Black-Scholes Model: |
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Risk-free interest rate |
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1.21 |
% |
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1.98 |
% |
Expected life, in years |
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4.2 |
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4.4 |
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Expected volatility |
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70.51 |
% |
|
|
79.30 |
% |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
Expected volatility is based on the historical volatility of our share price in 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. |
7
|
|
Equity Award Activity |
|
|
|
The following table represents stock option and restricted stock activity under the 2003
Plan for the six months ended June 30, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
Shares |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
Reserved |
|
|
|
|
|
|
|
|
|
|
Option |
|
|
Remaining |
|
|
|
for Future |
|
|
2003 Plan |
|
|
Plan Option |
|
|
Exercise |
|
|
Contract |
|
|
|
Grant |
|
|
Restricted Shares |
|
|
Shares |
|
|
Price |
|
|
Life |
|
At December 31, 2010 |
|
|
361,103 |
|
|
|
80,049 |
|
|
|
504,536 |
|
|
$ |
5.51 |
|
|
|
|
|
|
Authorized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
(183,714 |
) |
|
|
15,381 |
|
|
|
168,333 |
|
|
$ |
4.94 |
|
|
|
|
|
Expired |
|
|
101,664 |
|
|
|
|
|
|
|
(101,664 |
) |
|
$ |
6.00 |
|
|
|
|
|
Cancelled |
|
|
16,320 |
|
|
|
|
|
|
|
(16,320 |
) |
|
$ |
4.27 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
(23,954 |
) |
|
$ |
4.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011 |
|
|
295,373 |
|
|
|
95,430 |
|
|
|
530,931 |
|
|
$ |
5.34 |
|
|
4.7 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Exercisable at June
30, 2011 |
|
|
|
|
|
|
|
|
|
|
280,463 |
|
|
$ |
5.81 |
|
|
3.2 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011 the aggregate intrinsic value of options outstanding was $158,000, and
the aggregate intrinsic value of options exercisable was $95,000. |
|
|
|
At June 30, 2011 there was $451,000 of unrecognized compensation cost related to unvested
share-based option payments which is expected to be recognized over a weighted-average
period of 2.1 years. At June 30, 2011 there was $279,000 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. |
Note 5 Segment Reporting |
|
Segment Reporting.
|
|
|
|
MakeMusic reports results of operations by two unique reportable segments, Notation and
SmartMusic. |
|
|
|
The Notation segment includes the design, development and sales and marketing of music
notation software in the Finale family of 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. |
|
|
|
The remaining activities are included in Other. These are unallocated expenses which
include costs related to business systems, marketing and general and administrative that are
not directly attributable to a particular segment. Unallocated expenses are reported in the
reconciliation of the segment totals to consolidated totals as Other items. |
|
|
|
Segment assets or other balance sheet information are not prepared or presented to
management. Therefore, information relating to segment assets is not presented. |
8
|
|
The following table presents results of operations by reportable segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 3 Months Ended June 30, 2011 |
|
|
For the 6 Months Ended June 30, 2011 |
|
|
|
Notation |
|
|
SmartMusic |
|
|
Other |
|
|
Total |
|
|
Notation |
|
|
SmartMusic |
|
|
Other |
|
|
Total |
|
NET REVENUE |
|
$ |
1,672 |
|
|
$ |
1,641 |
|
|
$ |
0 |
|
|
$ |
3,313 |
|
|
$ |
4,006 |
|
|
$ |
3,301 |
|
|
$ |
0 |
|
|
$ |
7,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES |
|
|
119 |
|
|
|
415 |
|
|
|
0 |
|
|
|
534 |
|
|
|
267 |
|
|
|
861 |
|
|
|
0 |
|
|
|
1,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
1,553 |
|
|
|
1,226 |
|
|
|
0 |
|
|
|
2,779 |
|
|
|
3,739 |
|
|
|
2,440 |
|
|
|
0 |
|
|
|
6,179 |
|
Percentage of Net Revenue |
|
|
93 |
% |
|
|
75 |
% |
|
|
0 |
% |
|
|
84 |
% |
|
|
93 |
% |
|
|
74 |
% |
|
|
0 |
% |
|
|
85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development expenses |
|
|
460 |
|
|
|
337 |
|
|
|
288 |
|
|
|
1,085 |
|
|
|
977 |
|
|
|
763 |
|
|
|
560 |
|
|
|
2,300 |
|
Selling and marketing expenses |
|
|
365 |
|
|
|
429 |
|
|
|
221 |
|
|
|
1,015 |
|
|
|
809 |
|
|
|
985 |
|
|
|
454 |
|
|
|
2,248 |
|
General and administrative expenses |
|
|
24 |
|
|
|
15 |
|
|
|
950 |
|
|
|
989 |
|
|
|
43 |
|
|
|
34 |
|
|
|
2,020 |
|
|
|
2,097 |
|
Patent litigation expense |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
225 |
|
|
|
225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
849 |
|
|
|
781 |
|
|
|
1,459 |
|
|
|
3,089 |
|
|
|
1,829 |
|
|
|
1,782 |
|
|
|
3,259 |
|
|
|
6,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(Loss) from Operations |
|
|
704 |
|
|
|
445 |
|
|
|
(1,459 |
) |
|
|
(310 |
) |
|
|
1,910 |
|
|
|
658 |
|
|
|
(3,259 |
) |
|
|
(691 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income/(Expense) |
|
|
0 |
|
|
|
0 |
|
|
|
25 |
|
|
|
25 |
|
|
|
0 |
|
|
|
0 |
|
|
|
52 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income/(Loss) Before Income Tax |
|
|
704 |
|
|
|
445 |
|
|
|
(1,434 |
) |
|
|
(285 |
) |
|
|
1,910 |
|
|
|
658 |
|
|
|
(3,207 |
) |
|
|
(639 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense/(benefit) |
|
|
0 |
|
|
|
0 |
|
|
|
20 |
|
|
|
20 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(153 |
) |
|
|
(153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS) |
|
$ |
704 |
|
|
$ |
445 |
|
|
|
($1,454 |
) |
|
|
($305 |
) |
|
$ |
1,910 |
|
|
$ |
658 |
|
|
|
($3,054 |
) |
|
|
($486 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 3 Months Ended June 30, 2010 |
|
|
For the 6 Months Ended June 30, 2010 |
|
|
|
Notation |
|
|
SmartMusic |
|
|
Other |
|
|
Total |
|
|
Notation |
|
|
SmartMusic |
|
|
Other |
|
|
Total |
|
NET REVENUE |
|
$ |
2,462 |
|
|
$ |
1,315 |
|
|
$ |
0 |
|
|
$ |
3,777 |
|
|
$ |
5,030 |
|
|
$ |
2,747 |
|
|
$ |
0 |
|
|
$ |
7,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES |
|
|
210 |
|
|
|
361 |
|
|
|
0 |
|
|
|
571 |
|
|
|
424 |
|
|
|
798 |
|
|
|
0 |
|
|
|
1,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
2,252 |
|
|
|
954 |
|
|
|
0 |
|
|
|
3,206 |
|
|
|
4,606 |
|
|
|
1,949 |
|
|
|
0 |
|
|
|
6,555 |
|
Percentage of Net Revenue |
|
|
91 |
% |
|
|
73 |
% |
|
|
0 |
% |
|
|
85 |
% |
|
|
92 |
% |
|
|
71 |
% |
|
|
0 |
% |
|
|
84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development expenses |
|
|
620 |
|
|
|
517 |
|
|
|
265 |
|
|
|
1,402 |
|
|
|
1,156 |
|
|
|
1,050 |
|
|
|
518 |
|
|
|
2,724 |
|
Selling and marketing expenses |
|
|
424 |
|
|
|
367 |
|
|
|
244 |
|
|
|
1,035 |
|
|
|
927 |
|
|
|
826 |
|
|
|
481 |
|
|
|
2,234 |
|
General and administrative expenses |
|
|
28 |
|
|
|
9 |
|
|
|
840 |
|
|
|
877 |
|
|
|
46 |
|
|
|
26 |
|
|
|
1,844 |
|
|
|
1,916 |
|
Patent litigation expense |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
1,072 |
|
|
|
893 |
|
|
|
1,349 |
|
|
|
3,314 |
|
|
|
2,129 |
|
|
|
1,902 |
|
|
|
2,843 |
|
|
|
6,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(Loss) from Operations |
|
|
1,180 |
|
|
|
61 |
|
|
|
(1,349 |
) |
|
|
(108 |
) |
|
|
2,477 |
|
|
|
47 |
|
|
|
(2,843 |
) |
|
|
(319 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income/(Expense) |
|
|
0 |
|
|
|
0 |
|
|
|
13 |
|
|
|
13 |
|
|
|
0 |
|
|
|
0 |
|
|
|
40 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income/(Loss) Before Income Tax |
|
|
1,180 |
|
|
|
61 |
|
|
|
(1,336 |
) |
|
|
(95 |
) |
|
|
2,477 |
|
|
|
47 |
|
|
|
(2,803 |
) |
|
|
(279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense/(benefit) |
|
|
0 |
|
|
|
0 |
|
|
|
(47 |
) |
|
|
(47 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
(114 |
) |
|
|
(114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS) |
|
$ |
1,180 |
|
|
$ |
61 |
|
|
|
($1,289 |
) |
|
|
($48 |
) |
|
$ |
2,477 |
|
|
$ |
47 |
|
|
|
($2,689 |
) |
|
|
($165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Note 6 Goodwill |
|
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. |
Note 7 Subsequent Events |
|
Subsequent Events.
|
|
|
|
On June 13, 2011, MakeMusic, Inc. entered into an employment agreement with Karen van Lith
as the companys Chief Executive Officer. On that same day, the Company ceased the
employment agreement with Jeffrey A. Koch, the companys interim Chief Executive Officer.
Terms of Mr. Kochs separation agreement were finalized on July 11, 2011. |
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Item 2. |
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Managements Discussion and Analysis of Financial Condition and Results of Operations. |
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. 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. Our innovative technology enables the creation, learning and performance of
music and our unparalleled products makes us the leader in our industry.
For the first six months of 2011, net revenues for MakeMusic were $7,307,000 which was
$470,000 less than revenue of $7,777,000 reported in the first six months 2010. SmartMusic revenue
grew 20% due to our year-over-year subscription growth from 143,095 to 173,295 and price increases
implemented in the third quarter of 2010, from $130 to $140 for teacher subscriptions and from $30
to $36 for student subscriptions. Notation revenue decreased 20% due to reductions in both our
sales to distribution partners and our direct sales. We attribute these decreases to the timing of
our annual Finale update release. Due to the extent of the updates to the technical infrastructure
for Finale 2012, this years update will be released in the fall, as compared to last years
release of Finale 2011 in June 2010. We anticipate further reductions into the third quarter of
2011 on a year-over-year basis on our Finale sales. Gross margin percentages were comparable at 85%
in 2011 and 84% in 2010. Operating expenses
increased in 2011. General and administrative expenses increased primarily due to recruiting
initiatives for our Chief Executive Officer position, which was completed with the appointment of
Karen van Lith on June 13, 2011, and accrued severance expenses relating to the departure of our
former interim Chief Executive Officer. Selling and marketing expenses increased due to expansion
in our direct educational sales force, which were offset by reductions in direct marketing expenses
relating to the later timing of our Finale 2012 release. We also incurred expenses of approximately
$225,000 relating to a patent infringement settlement, which were accrued in the first quarter of
2011 and paid in the second quarter of 2011. Development expenses decreased primarily because our
open Chief Technology Officer position and other open development positions resulted in lower
personnel costs. We anticipate finalizing the selection of the Chief Technology Officer position
and filling the open development positions in the third and fourth quarters of 2011. Our net loss
before taxes in the first six months of 2011 was $639,000 compared to $279,000 in 2010. The tax
benefit in first six months of 2011 was $153,000 compared to $114,000 in the first six months of
2010. As a result of the factors mentioned, we reported net loss of approximately $486,000 in the
first six months of 2011 compared to net loss of $165,000 in the first six months of 2010.
10
Looking forward, we are evaluating opportunities to expand our distribution, improve
marketing programs, enhance the underlying technology we use to deliver our products and better
monetize our established brands.
We believe there is sizeable growth potential 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,
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 2012 provides vocal
assessment for the first time and site-singing exercises are assessed for both pitch and rhythm.
Choral directors and general music teachers now have access to the same award-winning interactive
technology that has been available to band and orchestra directors.
SmartMusic Gradebook 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 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.
In July of 2011, we completed development on a mobile application called SmartMusic
InboxTM. SmartMusic Inbox is a free application for both Android and Apple smart
phones, and can also be used with Apples iPad® and iPod touch®. SmartMusic
Inbox was announced on July 21, 2011 and SmartMusic teachers can now listen to and grade
assignments at any time and at any place. Additionally, in the second quarter of 2011, development
was completed on SmartMusic 2012 which includes vocal assessment as well as other product
enhancements. We announced the release of SmartMusic 2012 on August 1, 2011.
We believe that our technological investments in SmartMusic have created a digital pipeline
between our growing subscriber base of more than 173,000 and the music publishers who provide
SmartMusic content. This growing platform is a strategic asset for MakeMusic and we are focusing on
finding additional ways to monetize it.
The following table illustrates our quarterly SmartMusic metrics:
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Jun-10 |
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Sep-10 |
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Dec-10 |
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Mar-11 |
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Jun-11 |
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Total Subscriptions |
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143,095 |
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158,574 |
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162,189 |
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164,836 |
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173,295 |
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Educator Accounts |
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9,073 |
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9,312 |
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9,402 |
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9,727 |
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9,633 |
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Educators who have issued
assignments* |
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2,379 |
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1,085 |
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2,040 |
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2,680 |
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2,814 |
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Gradebook Teachers * |
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1,172 |
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415 |
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1,019 |
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1,416 |
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1,458 |
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Site Agreements |
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372 |
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466 |
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485 |
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506 |
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541 |
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Site Agreement Educator Subscriptions |
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2,532 |
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3,403 |
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3,343 |
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3,537 |
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4,181 |
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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, 2,814, or 29%, of
the teachers who have purchased SmartMusic
11
have utilized SmartMusic Gradebook. 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 (Gradebook Teachers). As of June 30, 2011, we reported 1,458 Gradebook teachers compared
to 1,172 Gradebook teachers as of June 30, 2010.
Our educational sales organization focuses on direct school district sales aimed at the 17,000
schools who match our ideal demographic profile. We sell site agreements that provide discounts
for volume purchases. We increased the size of our educational sales force from 5 to 7 and our
marketing staff from 8 to 9 in 2010 to strengthen our strategic sales and marketing initiatives. In
the first six months of 2011, we increased our education sales force to 12 and expect to expand to
13 in the third quarter of 2011. We are aggressively expanding our sales force to increase the
penetration level of our target market. In addition, we have engaged in development efforts focused
on improving and simplifying the SmartMusic purchase process, 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. As a result of the increased focus of our direct sales
force and product enhancements, site agreement educator subscriptions increased 65%, from 2,532 at
June 30, 2010, to 4,181 at June 30, 2011.
The following tables illustrate the total net new SmartMusic subscriptions and educator net
new subscriptions for each quarter during the year ended December 31, 2010 and for the quarters
ended March 31, 2011 and June 30, 2011:
All Subscribers:
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Quarterly |
Quarter End |
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Beginning |
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New |
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Renewed |
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Renewal |
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Subscriptions |
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Quarter End |
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Net New |
Date |
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Subscriptions |
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Subscriptions |
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Subscriptions |
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Rate |
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Ended |
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Subscriptions |
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Subscriptions |
3/31/2010 |
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133,782 |
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11,590 |
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15,330 |
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72% |
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21,339 |
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139,363 |
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5,581 |
6/30/2010 |
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139,363 |
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5,391 |
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14,069 |
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89% |
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15,728 |
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143,095 |
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3,732 |
9/30/2010 |
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143,095 |
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23,826 |
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47,383 |
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85% |
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55,730 |
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158,574 |
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15,479 |
12/31/2010 |
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158,574 |
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20,453 |
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29,065 |
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63% |
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45,903 |
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162,189 |
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3,615 |
3/31/2011 |
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162,189 |
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13,322 |
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14,579 |
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58% |
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25,254 |
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164,836 |
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2,647 |
6/30/2011 |
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164,836 |
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11,766 |
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14,016 |
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81% |
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17,323 |
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173,295 |
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8,459 |
Educators:
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Quarterly |
Quarter End |
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Beginning |
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New |
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Renewed |
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Renewal |
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Subscriptions |
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Quarter End |
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Net New |
Date |
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Subscriptions |
|
Subscriptions |
|
Subscriptions |
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Rate |
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Ended |
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Subscriptions |
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Subscriptions |
3/31/2010 |
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11,667 |
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728 |
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2,087 |
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80% |
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2,606 |
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11,876 |
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209 |
6/30/2010 |
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11,876 |
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500 |
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1,837 |
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72% |
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2,561 |
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11,652 |
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(224) |
9/30/2010 |
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11,652 |
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1,434 |
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3,440 |
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87% |
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3,932 |
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12,594 |
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942 |
12/31/2010 |
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12,594 |
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873 |
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2,192 |
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66% |
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3,299 |
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12,360 |
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(234) |
3/31/2011 |
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12,360 |
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741 |
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2,026 |
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77% |
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2,618 |
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12,509 |
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149 |
6/30/2011 |
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12,509 |
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742 |
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2,232 |
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86% |
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2,591 |
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12,892 |
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383 |
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.
In the second quarter of 2011, the total SmartMusic renewal rate improved when compared to the
first quarter of 2011. The educator renewal rate also improved to 86% in the second quarter from
77% in the first quarter of 2011. We believe that the educator renewal rate is a better indicator
of renewal patterns than student renewal rates since some students leave music programs every year
and many of the students who are continuing in the music program transition from one grade level to
the next (e.g. from middle school programs to high school programs). During the second quarter of
2011, we implemented a subscription promotion for our site agreement customers that provides for a
15-month subscription for the price of 12 months. We believe that some SmartMusic site agreement
customers not only renewed early as a result of this promotion but also increased the number of
subscriptions purchased. Additionally, we have a large collegiate site agreement that renews
annually in the second quarter which contributes to our improved renewal rates during that period.
12
We have achieved positive cash flow from operations for the last six years, including the most
recent year ended December 31, 2010. Our quarterly results will fluctuate as a result of the
seasonality of the education market
and timing of our product releases. Our operating cash flow was negatively impacted in the
second quarter of 2011 as compared to the second quarter of 2010 due to the delay of our Finale
2012 release. Due to current economic conditions and concerns over school budgets, we remain
cautious regarding our future financial projections. However, we expect that upon release of Finale
2012 and with continued growth in SmartMusic subscriptions, we will achieve positive operating cash
flow in 2011.
In our Form 10-K filed with the Securities and Exchange Commission for the year ended December
31, 2010, we identified critical accounting policies and estimates for our business that we are
incorporating herein by reference.
Results of Operations
Comparison of the three- and six-month periods ended June 30, 2011 to the three- and six-month
periods ended June 30, 2010
Net Revenue ($ in thousands)
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3 Months Ended June 30, |
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6 Months Ended June 30, |
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Incr |
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Incr |
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2011 |
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2010 |
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(Decr) |
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% |
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2011 |
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2010 |
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(Decr) |
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% |
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Notation |
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$ |
1,672 |
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$ |
2,462 |
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($790 |
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-32 |
% |
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$ |
4,006 |
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$ |
5,030 |
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($1,024 |
) |
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-20 |
% |
SmartMusic |
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1,641 |
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1,315 |
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|
326 |
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25 |
% |
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3,301 |
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2,747 |
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554 |
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20 |
% |
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Total |
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$ |
3,313 |
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$ |
3,777 |
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($464 |
) |
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-12 |
% |
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$ |
7,307 |
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$ |
7,777 |
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($470 |
) |
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-6 |
% |
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Net revenue decreased 12% when comparing the three months ended June 30, 2011 and 2010 and
decreased 6% when comparing the six months ended June 30, 2011 and 2010.
Notation revenue decreased by $790,000, to $1,672,000, when comparing the three months ended
June 30, 2011 and 2010 and by $1,024,000, to $4,006,000, when comparing the six months ended June
30, 2011 and 2010. Decreases during the comparative results for the quarter and for the six months
ended June 30, 2011 were due to the timing of our annual Finale update release. Due to the extent
of the updates to the technical infrastructure for Finale 2012, we expect to release this years
update in the fall, as compared to the release of Finale 2011 in June 2010.
SmartMusic revenue for the three months ended June 30, 2011 was $1,641,000, an increase of
$326,000, or 25%, over the three months ended June 30, 2010 and an increase of $554,000, or 20% to
$3,301,000, when comparing the six months ended June 30, 2011 and 2010. The increase in revenue is
due to the growth of total SmartMusic subscriptions and price increases implemented in the third
quarter of 2010, offset by a decrease in accessory and CD revenue. SmartMusic subscriptions have
increased due in part to higher adoption rates at the district level, which we attribute to the
success of our site agreement program, which encourages school district deployment of SmartMusic
student subscriptions, and the expansion of our direct sales force, which focuses on district level
sales. Additionally, we implemented a 15 for 12 month promotion in the second quarter of 2011,
which resulted in new site agreements as well as early renewals. As of June 30, 2011, there were
541 site agreements for SmartMusic.
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 three-month period ended
June 30, 2011 was $1,490,000, an increase of $314,000, or 27%, over the three-month period ended
June 30, 2010. Total earned SmartMusic subscription revenue for the six-month period ended June 30,
2011 was $2,920,000, an increase of $613,000, or 27%, over the six-month period ended June 30,
2010. The increases for the three and six-month periods ended June 30, 2011 compared to the same
periods in 2010 were due to the increase in the total number of subscriptions and the 2010 price
increases. Total unearned SmartMusic subscription revenue (deferred revenue) was $2,699,000 as of
June 30, 2011, an increase of $603,000, or 29%, over the balance at June 30, 2010 and a decrease of
$934,000, or 26%, compared to the balance of $3,633,000 at December 31, 2010. The decline from
year-end 2010 is due to our historical trend where the
13
majority of subscriptions purchases and renewals typically occur in the fall back-to-school
season. Deferred SmartMusic
revenue represents the future revenue to be recorded on current subscriptions and fluctuates
based on new subscription sales, the total number of subscriptions and the remaining life of those
subscriptions.
SmartMusic has shown sustained growth since its launch. More than 9,633 educators have
purchased SmartMusic, an increase of 6% over the 9,073 educators that had purchased it as of June
30, 2010. Total SmartMusic subscriptions as of June 30, 2011 number 173,295, representing a net
gain of 30,200, or 21%, over the June 30, 2010 subscription count of 143,095.
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 teachers that use SmartMusic as well as the number of those teachers who are
using SmartMusic Gradebook to deliver and manage student assignments to 50 or more students
(Gradebook teachers). As of June 30, 2011, we had 1,458 SmartMusic Gradebook teachers compared to
1,172 Gradebook teachers at June 30, 2010. 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) that are used with the software. This revenue is included in the SmartMusic category.
We recorded $112,000 of revenue for the sales of accessories for the three months ended June 30,
2011, which was an increase of $18,000, or 19%, from the revenue of $94,000 for SmartMusic
accessories for the three months ended June 30, 2010. Revenue for the sales of SmartMusic
accessories for the six months ended June 30, 2011 was $270,000, which was an increase of $4,000,
or 2%, from $266,000 of SmartMusic accessories revenue in the six months ended June 30, 2010.
Gross Profit ($ in thousands)
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3 Months Ended June 30, |
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6 Months Ended June 30, |
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|
Incr |
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|
Incr |
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2011 |
|
|
2010 |
|
|
(Decr) |
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|
% |
|
|
2011 |
|
|
2010 |
|
|
(Decr) |
|
|
% |
|
Notation |
|
$ |
1,553 |
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|
$ |
2,252 |
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|
|
($699 |
) |
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|
-31 |
% |
|
$ |
3,739 |
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|
$ |
4,606 |
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|
|
($867 |
) |
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|
-19 |
% |
SmartMusic |
|
|
1,226 |
|
|
|
954 |
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|
|
272 |
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|
|
29 |
% |
|
|
2,440 |
|
|
|
1,949 |
|
|
|
491 |
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|
25 |
% |
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Total |
|
$ |
2,779 |
|
|
$ |
3,206 |
|
|
|
($427 |
) |
|
|
-13 |
% |
|
$ |
6,179 |
|
|
$ |
6,555 |
|
|
|
($376 |
) |
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|
-6 |
% |
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Gross profit in the three months ended June 30, 2011 decreased by $427,000, to $2,779,000,
compared to the three months ended June 30, 2010. Gross profit for notation decreased by $699,000,
to $1,553,000, for the three months ended June 30, 2011 compared to the three months ended June 30,
2010 due to the decrease in notation revenue attributed to the late release of Finale 2012. Gross
profit for SmartMusic increased by $272,000, to $1,226,000, for the three months ended June 30,
2011 compared to the three months ended June 30, 2010 due to the increase in SmartMusic revenue and
slightly improved accessory margins. Gross profit in the six months ended June 30, 2011 decreased
by $376,000, to $6,179,000, compared to the six months ended June 30, 2010. Gross profit for
notation decreased $867,000, to $3,739,000 for the six months ended June 30, 2011 compared to the
same period in 2010 due to the decrease in notation revenue. Gross profit for SmartMusic increased
$491,000, to $2,440,000 for the six months ended June 30, 2011 compared to the same period in 2010
due to the increase in SmartMusic revenue and slightly improved accessory margins.
Cost of revenue includes product costs, royalties paid to publishers, amortization of
capitalized software development costs for repertoire and SmartMusic Gradebook software development
costs, shipping, and credit card fees. Capitalized SmartMusic repertoire added into SmartMusic is
amortized over a five-year period and repertoire development amortization as a percentage of
SmartMusic revenue was 12% for each of the six month periods ended June 30, 2011 and 2010. We
expect amortization related to repertoire development to increase as we continue to add repertoire
to SmartMusic. Gross margins as a percentage of sales were generally comparable at 84% and 85%,
respectively, for the three months ended June 30, 2011 and 2010 and 85% and 84%, respectively, for
the six months ended June 30, 2011 and 2010.
14
Development expense ($ in thousands)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
6 Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incr |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incr |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
(Decr) |
|
|
% |
|
|
2011 |
|
|
2010 |
|
|
(Decr) |
|
|
% |
|
Notation |
|
$ |
460 |
|
|
$ |
620 |
|
|
|
($160 |
) |
|
|
-26 |
% |
|
$ |
977 |
|
|
$ |
1,156 |
|
|
|
($179 |
) |
|
|
-15 |
% |
SmartMusic |
|
|
337 |
|
|
|
517 |
|
|
|
(180 |
) |
|
|
-35 |
% |
|
|
763 |
|
|
|
1,050 |
|
|
|
(287 |
) |
|
|
-27 |
% |
Other |
|
|
288 |
|
|
|
265 |
|
|
|
23 |
|
|
|
9 |
% |
|
|
560 |
|
|
|
518 |
|
|
|
42 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,085 |
|
|
$ |
1,402 |
|
|
|
($317 |
) |
|
|
-23 |
% |
|
$ |
2,300 |
|
|
$ |
2,724 |
|
|
|
($424 |
) |
|
|
-16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development expenses decreased 23% to $1,085,000, from $1,402,000, when comparing the three
months ended June 30, 2011 and 2010. Development expenses decreased 16% to $2,300,000, from
$2,724,000, when comparing the six months ended June 30, 2011 and 2010. Development expenses
consist primarily of internal payroll, payments to independent contractors and related expenses for
the development and maintenance of our Finale notation, SmartMusic and SmartMusic Gradebook
products as well as non-capitalized SmartMusic repertoire development, business systems and quality
assurance. The decrease in development expenses for Notation and SmartMusic was primarily due to
reduced personnel costs relating to the open Chief Technology Officer position and other open
development positions. SmartMusic also experienced reductions in consulting expenses due to
completion in 2010 of upgrades to the SmartMusic user-interface design. During the six months ended
June 30, 2011, 193 new SmartMusic large ensemble band, jazz ensemble, and orchestra titles with
pre-authored assignments were released, compared to 48 new titles in the six months ended June 30,
2010. There were 119 new titles released during the three months ended June 30, 2011 and no titles
released during the quarter ended June 30, 2010.
Selling and marketing expense ($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
6 Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incr |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incr |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
(Decr) |
|
|
% |
|
|
2011 |
|
|
2010 |
|
|
(Decr) |
|
|
% |
|
Notation |
|
$ |
365 |
|
|
$ |
424 |
|
|
|
($59 |
) |
|
|
-14 |
% |
|
$ |
809 |
|
|
$ |
927 |
|
|
|
($118 |
) |
|
|
-13 |
% |
SmartMusic |
|
|
429 |
|
|
|
367 |
|
|
|
62 |
|
|
|
17 |
% |
|
|
985 |
|
|
|
826 |
|
|
|
159 |
|
|
|
19 |
% |
Other |
|
|
221 |
|
|
|
244 |
|
|
|
(23 |
) |
|
|
-9 |
% |
|
|
454 |
|
|
|
481 |
|
|
|
(27 |
) |
|
|
-6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,015 |
|
|
$ |
1,035 |
|
|
|
($20 |
) |
|
|
-2 |
% |
|
$ |
2,248 |
|
|
$ |
2,234 |
|
|
$ |
14 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses primarily consist of marketing, advertising and promotion
expenses, business development and customer service activities and payroll. Sales and marketing
expenses decreased 2% to $1,015,000 for the three months ended June 30, 2011 compared to $1,035,000
for the three months ended June 30, 2010. Selling and marketing expenses increased 1%, to
$2,248,000, during the six months ended June 30, 2011, compared to $2,234,000 for the six months
ended June 30, 2010. Notation selling and marketing expenses decreased primarily due to reduced
personnel costs, mainly incentive compensation allocated to notation and delayed direct marketing
expenses due to the delay of Finale 2012. SmartMusic selling and marketing expenses increased due
to increases to our educational sales force to achieve our strategic sales and marketing
initiatives for SmartMusic.
General and administrative expense ($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
6 Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incr |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incr |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
(Decr) |
|
|
% |
|
|
2011 |
|
|
2010 |
|
|
(Decr) |
|
|
% |
|
Notation |
|
$ |
24 |
|
|
$ |
28 |
|
|
|
($4 |
) |
|
|
-14 |
% |
|
$ |
43 |
|
|
$ |
46 |
|
|
|
($3 |
) |
|
|
-7 |
% |
SmartMusic |
|
|
15 |
|
|
|
9 |
|
|
|
6 |
|
|
|
67 |
% |
|
|
34 |
|
|
|
26 |
|
|
|
8 |
|
|
|
31 |
% |
Other |
|
|
950 |
|
|
|
840 |
|
|
|
110 |
|
|
|
13 |
% |
|
|
2,020 |
|
|
|
1,844 |
|
|
|
176 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
989 |
|
|
$ |
877 |
|
|
$ |
112 |
|
|
|
13 |
% |
|
$ |
2,097 |
|
|
$ |
1,916 |
|
|
$ |
181 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
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 13% to $989,000 during the three months ended June 30,
2011 compared to $877,000 for the same period of 2010. General and administrative expenses
increased by 9% to $2,097,000 during the six months ended June 30, 2011, compared to $1,916,000 for
the same period of 2010. The increase in other general and administrative costs primarily resulted
from recruiting our Chief Executive Officer. We also accrued severance costs relating to the
departure of the former interim Chief Executive Officer for which payments will be made through
November 2011.
Patent litigation expense
We reached a confidential settlement with Uniloc USA, Inc. and Uniloc Singapore Private
Limited in April 2011, which resulted in patent litigation costs of $225,000 during the six months
ended June 30, 2011. The circumstances related to the settlement are described in more detail in
this Quarterly Report under Part II, Item 1, Legal Proceedings. There were no comparable expenses
during the six months ended June 30, 2010.
Income/ (Loss) from operations ($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
6 Months Ended June 30, |
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
Incr (Decr) |
|
|
% |
|
|
2011 |
|
|
2010 |
|
|
Incr (Decr) |
|
|
% |
|
Notation |
|
$ |
704 |
|
|
$ |
1,180 |
|
|
|
($476 |
) |
|
|
-40 |
% |
|
$ |
1,910 |
|
|
$ |
2,477 |
|
|
|
($567 |
) |
|
|
-23 |
% |
SmartMusic |
|
|
445 |
|
|
|
61 |
|
|
|
384 |
|
|
|
630 |
% |
|
|
658 |
|
|
|
47 |
|
|
|
611 |
|
|
|
1300 |
% |
Other |
|
|
(1,459 |
) |
|
|
(1,349 |
) |
|
|
(110 |
) |
|
|
8 |
% |
|
|
(3,259 |
) |
|
|
(2,843 |
) |
|
|
(416 |
) |
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
($310 |
) |
|
|
($108 |
) |
|
|
($202 |
) |
|
|
187 |
% |
|
|
($691 |
) |
|
|
($319 |
) |
|
|
($372 |
) |
|
|
117 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from operations increased by $202,000 to $310,000 for the three months ended June 30,
2011 compared to $108,000 in the three months ended June 30, 2010. Net loss from operations
increased by $372,000 to $691,000 for the six months ended June 30, 2011 compared to $319,000 in
the six months ended June, 2010.
The notation segment operating results for the six months ended June 30, 2011 reflects a
decrease in income from operations due to the delay in releasing Finale 2012, offset by decreased
development and selling and marketing expenses. SmartMusic income from operations improved due to
increased SmartMusic revenue and lower expenses. The increased loss in other operations was
primarily due to expenses relating to our search and appointment of our Chief Executive Officer,
the April 2011 patent litigation settlement and the increase in unallocated sales and marketing
expenses.
Net Loss
Net loss in the three months ended June 30, 2011 was $305,000, or $0.06 per basic and diluted
share, compared to net loss of $48,000, or $0.01 per basic and diluted share, in the three months
ended June 30, 2010. Net loss for the six months ended June 30, 2011 was $486,000, or $0.10 per
basic and diluted share, compared to net loss of $165,000, or $0.03 per basic and diluted share, in
the same period of 2010. The increase in net loss in the six months ended June 30, 2011 was
primarily due to lower notation revenues, patent litigation expenses of $225,000 and increased
general and administrative fees related to recruiting our Chief Executive Officer. There were no
comparable legal accruals or settlements or recruiting expenses in the first six months of 2010.
The net tax expense was $20,000 in the three months ended June 30, 2011 and a net tax benefit of $153,000
for the six months ended June 30, 2011, compared to a net tax benefit of $47,000 and $114,000,
respectively, for the three and six months ended June 30, 2010.
Liquidity and capital resources
Net cash used in operating activities was $1,657,000 for the six months ended June 30, 2011,
compared to $733,000 of cash used in operating activities during the six months ended June 30,
2010. The increase in cash used in the first six months of 2011 compared to the same period in 2010
was primarily due to an increase in net loss due to lower Notation revenue and an increase in cash
used for working capital.
Net cash used in investing activities was $395,000 for the six months ended June 30, 2011,
compared to $296,000 cash used in investing activities for the comparable period in 2010. The
increase was primarily due to the
16
increase in capitalization of software development, primarily for
repertoire development. Our total spending on repertoire development increased only slightly from
$346,000 during the six months ended June 30, 2010 to $352,000
during the six months ended June 30, 2011. However, the amount capitalized increased from
$224,000 during the six months ended June 30, 2010 to $299,000 during the six months ended June 30,
2011 due to the overall number of titles being developed and less time spent on non-title related
activities.
Net cash used in financing activities was $303,000 in the six months ended June 30, 2011
compared to $72,000 of cash provided by financing activities during the six months ended June 30,
2010. The increase in cash used in financing primarily consisted of $291,000 used to repurchase
company shares under the Stock Repurchase Program which was announced in November 2010. The Stock
Repurchase Program was discontinued effective May 6, 2011.
Cash and cash equivalents as of June 30, 2011 was $9,177,000 compared to $7,986,000 as of June
30, 2010. The increase in cash is due to our net income reported for the year ended December 31,
2010. Our quarterly revenues and operating cash flows are typically seasonal, with the first and
second quarters being historically lower than the third and fourth quarters. This seasonal pattern
is primarily due to timing of the upgrade releases of Finale, which in recent years has occurred in
the second or third quarters, and school budget cycles and school calendars.
Our cash flow was negatively impacted in the second quarter of 2011 due to the delay of our
Finale 2012 release until the fall. However, we expect that upon release of Finale 2012 and with
continued growth in SmartMusic subscriptions, we will achieve positive operating cash flow in 2011.
We expect that our revenues and, in particular, continued growth in SmartMusic subscriptions, plus
recent improvements in operational efficiency will yield sufficient cash to finance our operations
for the next twelve months.
17
Item 4. Controls and Procedures.
(a) Evaluation of disclosure 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-15(e) and 15d-15(e)) 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.
(b) Changes in internal controls. There were no changes in our internal controls over
financial reporting that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal controls over financial
reporting.
Forward Looking and Cautionary Statements
The preceding discussion and analysis should be read in conjunction with the financial statements
and notes thereto appearing elsewhere in this report. Managements Discussion and Analysis may
contain forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. 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, anticipate, and similar words or expressions. The forward-looking
statements in this report generally relate to: our expectations relating to the synergies that
exist between our two product lines, future operating results, cash flows from operations, revenue
growth from new SmartMusic subscriptions, and the anticipated impact of the delayed release of
Finale 2012 on our third quarter and fiscal year revenue; our expectations, including release
dates, regarding our future product offerings and recent product
enhancements; our evaluation of opportunities to expand our distribution, improve
marketing programs, enhance technology and better monetize our brands; our expectations
regarding recruiting and hiring a Chief Technology Officer and other development staff; our
expectations regarding our target business model, future subscription growth for SmartMusic and our
ability to leverage the SmartMusic platform; our intent to expand SmartMusic repertoire; our plans
relating to marketing and sales efforts, including staff increases; our expectations regarding
the impact of our patent litigation settlement; our beliefs relating to adequacy of capital
resources; and our beliefs relating to the sufficiency of managements contingency plans.
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. MakeMusic cautions
investors that many important factors 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 release and elsewhere by MakeMusic or on its behalf. These
factors include, but are not limited to: unforeseen capital demands; the market acceptance of
Finale, SmartMusic, SmartMusic Gradebook and other products; the success of our direct sales
efforts; the success of our product development efforts; the maintenance of strategic partnerships
and customer relationships; our ability to license titles from music publishers; the effectiveness
of, and our ability to implement, our target business model; our ability to execute strategic
development plans with respect to our notation and SmartMusic segments; our ability to attract and
integrate qualified personnel; the limited and fluctuating sales of certain of our products; the
intense competition that we face; the rapid technological changes and obsolescence in software
industry, including our ability to release timely product upgrades that are responsive to such
changes; our dependence on key personnel and the proprietary nature of our technology; other
general business and economic conditions (including changes to discretionary spending by schools
and students); and those factors described from time to time in our reports to the Securities and
Exchange Commission (including our Annual Report on Form 10-K). 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 of the risks, uncertainties or potentially inaccurate assumptions that investors should take
into account when making investment decisions. Shareholders and other readers are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the date on which they
are made. We do not intend to update publicly or revise any forward-looking statements.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
As previously disclosed, on September 14, 2010, a complaint was filed against us by Uniloc
USA, Inc. and Uniloc Singapore Private Limited (collectively Uniloc) in the United States
District Court for the Eastern District of Texas. The complaint alleged infringement of Unilocs
patent for securely registering software and other digital media to prevent illicit copying and
software piracy and seeks a permanent injunction. In addition, Uniloc sought compensatory damages
in an unspecified amount, and interest, costs and expenses associated with the litigation. We are
one of approximately 120 companies that have been similarly sued by Uniloc. We entered into a
confidential settlement with Uniloc on April 28, 2011, pursuant to which we incurred expenses of
approximately $225,000. As part of the settlement, we received a license to the patent in
question. We do not expect the settlement to have a material impact on our business, financial
condition, or results of operations.
In the ordinary course of business, we may be party to additional legal actions, proceedings,
or claims. Corresponding costs are accrued when it is reasonably possible 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 our financial condition or
results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities
There were no sales of unregistered equity securities during the quarter ended June 30,
2011.
Issuer Purchases of Equity Securities
On November 10, 2010 we announced our Boards approval of a Stock Repurchase Program,
which authorizes the repurchase up to $10 million of our common stock over a two-year
period through open market transactions (including through 10b5-1 plans) or private
transactions at the discretion of management. There were no stock repurchases during the
quarter ended June 30, 2011. The Stock Repurchase Program was discontinued effective May
6, 2011.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved).
Item 5. Other Information.
None.
Item 6. Exhibits.
See the attached exhibit index.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
Date: August 12, 2011 |
MAKEMUSIC, INC.
|
|
|
By: |
/s/ Karen T. van Lith
|
|
|
|
Karen T. van Lith, Chief Executive Officer |
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
By: |
/s/ Karen L. VanDerBosch
|
|
|
|
Karen L. VanDerBosch, Chief Financial Officer and
Chief Operating Officer |
|
|
|
(Principal Financial Officer and
Principal Operating
Officer) |
|
|
20
EXHIBIT INDEX
Form 10-Q
The quarterly period ended June 30, 2011
|
|
|
Exhibit No. |
|
Description |
10.1*
|
|
Form of Restricted Stock Agreement under the MakeMusic, Inc. 2003
Equity Incentive Plan |
|
|
|
10.2
|
|
Employment Agreement by and between MakeMusic, Inc. and Karen T. van
Lith dated June 13, 2011 incorporated by reference to Exhibit
10.1 to the Registrants Form 8-K filed June 15, 2011. |
|
|
|
31.1*
|
|
Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2*
|
|
Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1*
|
|
Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2*
|
|
Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
101**
|
|
The following materials from this report, formatted in XBRL (Extensible Business
Reporting Language): (i) condensed balance sheets, (ii) condensed statement of operations,
(iii) condensed statements of cash flows, and (iv) the notes to the condensed financial statements. |
|
|
|
* |
|
Filed herewith. |
|
** |
|
Pursuant to Rule 406T of Regulation S-T, the XBRL related
information in Exhibit 101 to this Quarterly Report on Form 10-Q
shall not be deemed to be filed for purposes of Section
18 of the Exchange Act, or otherwise subject to the liability of that
section, and shall not be deemed part of a registration statement,
prospectus or other document filed under the Securities Act or the
Exchange Act, except as shall be expressly set forth by specific
reference in such filings. |