SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
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þ
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Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended September 30, 2007
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o
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Transition report under Section 13 or 15(d) of the Exchange Act
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For the transition period from
To
Commission file number
0-26192
MakeMusic, Inc.
(Exact Name of Small Business Issuer 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
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(I.R.S. Employer
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Incorporation or Organization)
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Identification No.)
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7615 Golden Triangle Drive, Suite M
Eden Prairie, Minnesota 55344-3848
(Address of Principal Executive Offices)
(952) 937-9611
(Issuers Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d)
of the Exchange Act during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
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As of October 31, 2007 there were 4,148,047 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes
o
No
þ
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements.
MakeMusic, Inc.
Condensed Balance Sheets
(In thousands of U.S. dollars, except for share data)
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September 30,
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2007
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December 31,
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(Unaudited)
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2006
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Assets
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Current assets:
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Cash
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$
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4,094
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$
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3,130
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Accounts receivable (net of allowance of $29
and $149 as of September 30, 2007 and December
31, 2006, respectively)
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1,483
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1,664
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Inventories
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370
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347
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Prepaid expenses and other current assets
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135
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199
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Total current assets
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6,082
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5,340
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Property and equipment, net
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787
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663
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Capitalized software products, net
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1,253
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954
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Goodwill, net
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3,630
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3,630
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Other non-current assets
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35
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39
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Total assets
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11,787
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10,626
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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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56
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10
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Accounts payable
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486
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507
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Accrued compensation
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1,020
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1,066
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Other accrued liabilities
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159
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254
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Post contract support
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181
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181
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Reserve for product returns
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330
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429
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Current portion of deferred rent
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26
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25
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Deferred revenue
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1,484
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1,199
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Total current liabilities
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3,742
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3,671
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Capital lease obligations, net of current portion
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147
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15
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Deferred rent, net of current portion
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76
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96
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Shareholders equity:
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Common stock, $0.01 par value:
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Authorized shares 10,000,000
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Issued and outstanding shares 4,148,047 and 3,971,229
as of September 30, 2007 and December 31, 2006,
respectively
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41
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40
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Additional paid-in capital
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63,712
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62,896
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Accumulated deficit
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(55,931
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)
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(56,092
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)
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Total shareholders equity
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7,822
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6,844
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Total liabilities and shareholders equity
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$
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11,787
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$
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10,626
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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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9 Months
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Ended September 30,
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Ended September 30,
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2007
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2006
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2007
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2006
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Notation Revenue
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3,514
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3,208
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7,816
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7,312
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Smart Music Revenue
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822
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621
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1,980
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1,558
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Other Revenue
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285
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196
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499
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389
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NET REVENUE
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4,621
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4,025
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10,295
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9,259
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COST OF REVENUES
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737
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540
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1,544
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1,307
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GROSS PROFIT
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3,884
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3,485
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8,751
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7,952
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OPERATING EXPENSES:
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Development expenses
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1,012
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901
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3,017
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2,623
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Selling and marketing expenses
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1,054
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1,051
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3,014
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3,088
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General and administrative expenses
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815
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720
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2,642
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2,497
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Total operating expenses
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2,881
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2,672
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8,673
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8,208
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INCOME/(LOSS) FROM OPERATIONS
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1,003
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813
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78
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(256
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)
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Interest Income
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33
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17
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99
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68
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Interest Expense
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(4
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)
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0
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(13
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)
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0
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Other income (expense), net
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(1
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)
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14
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(1
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16
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Net income/(loss) before income tax
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1,031
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844
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163
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(172
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Income tax
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(1
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(1
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(2
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(9
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Net Income/(Loss)
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1,030
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843
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161
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(181
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)
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Income/(Loss) per common share:
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Basic
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0.25
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0.22
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0.04
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(0.05
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Diluted
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0.22
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0.19
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0.04
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(0.05
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Weighted average common shares
outstanding:
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Basic
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4,134,706
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3,913,251
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4,095,096
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3,904,041
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Diluted
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4,597,155
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4,411,458
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4,537,427
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3,904,041
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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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9 Months Ended
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September
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September
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2007
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2006
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Operating activities
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Net income (loss)
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161
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(181
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)
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Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
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Depreciation and amortization of property,
equipment and capitalized software
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462
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299
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Issuance of options and warrants for services
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247
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239
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Net change in assets and liabilities:
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Accounts receivable
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181
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(488
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)
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Inventories
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(23
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)
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51
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Prepaid expenses and other assets
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68
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66
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Accounts payable
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(21
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)
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(164
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)
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Accrued liabilities and product returns
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(259
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)
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327
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Deferred revenue
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285
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157
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Net cash provided by operating activities
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1,101
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306
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Net cash used in investing activities
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Purchases of property & equipment
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(172
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)
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(463
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)
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Capitalized software and other intangibles
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(510
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)
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(389
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)
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Net cash used in investing activities
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(682
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)
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(852
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)
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Net cash provided by financing activities
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Proceeds from stock options & warrants exercised
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570
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134
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Payments on long-term debt and capital leases
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(25
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)
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(16
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)
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Net cash provided by financing activities
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545
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118
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Net increase (decrease) in cash
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964
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(428
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)
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Cash, beginning of period
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3,130
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2,952
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Cash, end of period
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4,094
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2,524
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Supplemental disclosure of cash flow information
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Interest paid
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13
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0
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Income taxes paid
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|
2
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9
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Other non-cash investment and financing activities
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Equipment acquired under capital lease
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|
203
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|
29
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See Notes to Condensed Financial Statements
5
MakeMusic, Inc.
Notes to Condensed Financial Statements
(Unaudited)
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Note 1
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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 the three and nine months ended September 30, 2007 are
not necessarily indicative of the operating results to be expected
for the full fiscal year. These statements should be read in
conjunction with our most recent Annual Report on Form 10-KSB.
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Note 2
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Net Income/
(
Loss) Per Share.
Net income/(loss) per share was
calculated by dividing the net income/(loss) by the weighted
average number of shares outstanding during the period. The
following table summarizes the shares of stock included in
calculating earnings per share for the three and nine months ended
September 30, 2007 and 2006 respectively, in accordance with FASB
Statement 128 (SFAS 128),
Earnings per Share
:
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Three Months Ended
|
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Nine Months Ended
|
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September 30
|
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September 30
|
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2007
|
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2006
|
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2007
|
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2006
|
Weighted-average
common shares
outstanding
|
|
|
4,134,706
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3,913,251
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4,095,096
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3,904,041
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Dilutive effect of
stock options and
warrants
|
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462,449
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498,207
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442,331
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Equivalent average
common shares
outstanding
diluted
|
|
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4,597,155
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4,411,458
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4,537,427
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3,904,041
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The effect of options and warrants are excluded for nine-month period ended September 30,
2006 because the effect is anti-dilutive.
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Note 3
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Income Tax Expense.
We did not record a provision for income tax in the three- and
nine-month periods ended September 30, 2007 and 2006 as the provision is offset by a reduction
in the deferred tax valuation allowance. The only income tax expense recorded during the three
and nine months ended September 30, 2007 and 2006 was for minimum state income tax payments.
Due to the uncertainty regarding the realization of our deferred income tax assets and
specifically net operating loss carry-forwards, we have recorded a valuation allowance against
our deferred income tax assets for 2007 and 2006.
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On January 1, 2007, we implemented FASB Interpretation No. 48,
Accounting for Uncertainty
in Income Taxesan Interpretation of FASB Statement 109 (FIN 48)
, which clarifies the
accounting for uncertainty in tax positions. This Interpretation provides that the tax
effects from an uncertain tax position can be recognized in our financial statements only
if the position is more likely than not of being sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 were effective as of the
beginning of fiscal 2007, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. We completed our review of
uncertain tax positions during the quarter ended March 31, 2007 and recorded a FIN 48
reserve and corresponding reduction in our valuation allowance of approximately
$2,962,000. Due to the reduction in our valuation allowance, the adoption of FIN 48 did
not have an effect on net income for the three- or nine-month periods ended September 30,
2007 and no adjustment was made to opening retained earnings.
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Interest and penalties related to any uncertain tax positions would be accounted for as a
long term liability with the corresponding expense being charged to current period
non-operating expense. As of September 30, 2007, we have recognized no liability related
to interest or penalties. The total amount of
|
6
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|
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unrecognized tax benefits that, if recognized, would affect our effective tax rate is zero
based on the fact that we currently have a full reserve against our unrecognized tax
benefits.
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|
|
The following table summarizes the effect on our deferred tax asset for uncertain tax
positions which we have taken:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
FIN 48
|
|
|
September 30,
|
|
|
|
2007
|
|
|
Reserve
|
|
|
2007
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance January 1, 2007 Deferred
Tax Asset
|
|
$
|
9,066
|
|
|
$
|
(2,962
|
)
|
|
$
|
6,104
|
|
Valuation allowance for deferred tax assets
|
|
$
|
(9,066
|
)
|
|
$
|
2,962
|
|
|
$
|
(6,104
|
)
|
|
|
|
|
|
|
|
|
|
|
Ending balance September 30, 2007 Deferred
Tax Asset
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
As of September 30, 2007, 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 September 30, 2007 are 2003-2006.
|
|
|
|
Note 4
|
|
Stock-Based Compensation.
We currently offer a stock-based compensation plan to our
employees, directors and consultants. The Compensation Committee of the Board of Directors
administers these plans, and determines the persons eligible to receive awards and the number
of shares and/or options subject to each award, as well as the terms, conditions, performance
measures, and other provisions of the award. Readers should refer to Note 5 of our financial
statements in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006 for
additional information related to our stock-based compensation plans.
|
|
|
|
|
|
We account for stock-based compensation arrangements with our employees and directors in
accordance with SFAS No. 123 (revised), Share-Based Payment (SFAS No. 123R). Under the
fair value recognition provisions of SFAS No. 123R 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 September 30, 2007 and 2006, we recognized $86,000 and $66,000,
respectively, and for the nine months ended September 30, 2007 and 2006, we recognized
$247,000 and $231,000, respectively, of expense related to stock-based compensation.
|
7
|
|
|
|
|
Stock Options
|
|
|
|
|
|
During 2006 and 2007 we used the Black-Scholes option pricing model to estimate the fair
value of stock-based awards with the weighted average assumptions noted in the following
table.
|
|
|
|
|
|
|
|
|
|
|
|
September 30
|
|
September 30,
|
|
|
2007
|
|
2006
|
Risk-free interest rate
|
|
|
4.6
|
%
|
|
|
3.2
|
%
|
Expected life, in years
|
|
|
2.6
|
|
|
|
3.8
|
|
Expected volatility
|
|
|
78.8
|
%
|
|
|
87.7
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
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.
|
|
|
|
|
|
The following table represents stock option activity for the nine months ended September 30,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
|
|
|
|
Average
|
|
|
|
Reserved
|
|
|
Plan
|
|
|
Exercise
|
|
|
|
for Grant
|
|
|
Options
|
|
|
Price
|
|
Outstanding at December 31, 2006
|
|
|
208,819
|
|
|
|
671,495
|
|
|
$
|
3.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(263,833
|
)
|
|
|
263,833
|
|
|
$
|
6.03
|
|
Expired
|
|
|
|
|
|
|
(7,800
|
)
|
|
$
|
29.87
|
|
Cancelled
|
|
|
112,505
|
|
|
|
(112,505
|
)
|
|
$
|
4.15
|
|
Exercised
|
|
|
|
|
|
|
(101,917
|
)
|
|
$
|
3.53
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007
|
|
|
57,491
|
|
|
|
713,106
|
|
|
$
|
4.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Exercisable at September 30, 2007
|
|
|
|
|
|
|
287,365
|
|
|
$
|
3.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007 the aggregate intrinsic value of options outstanding was $2,113,000,
and the aggregate intrinsic value of options exercisable was $1,165,000. Total intrinsic
value of options exercised was $360,000 for the nine months ended September 30, 2007.
|
|
|
|
|
|
At September 30, 2007 there was $471,000 of unrecognized compensation cost related to
nonvested share-based payments which is expected to be recognized over a weighted-average
period of 2.24 years.
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
At September 30, 2007 there were a total of 554,328 warrants to purchase common stock
outstanding at a weighted average exercise price of $2.92; the warrants expire between 2008
and 2011.
|
|
|
|
Note 5
|
|
New and Pending Accounting Pronouncements.
|
|
|
|
|
|
In September 2006, FASB issued Statement 157,
Fair Value Measurements
. This statement
defines fair value and establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP). More precisely, this statement sets forth a standard
definition of fair value as it applies to assets or liabilities, the principal market (or
most advantageous market) for determining fair value (price), the market
|
8
|
|
|
|
|
participants, inputs and the application of the derived fair value to those assets and
liabilities. The effective date of this pronouncement is for all full fiscal and interim
periods beginning after November 15, 2007. We are currently evaluating the impact of
adopting FASB Statement 157 on our financial statements.
|
|
|
|
|
|
In February 2007, FASB issued Statement 159,
The Fair Value Option for Financial Assets and
Financial Liabilities
. This statement allows all entities to choose, at specified election
dates, to measure eligible items at fair value. Under this option, an entity will report
unrealized gains and losses on items for which the fair value option has been elected in
earnings. This statement is effective as of the beginning of the first fiscal year which
begins after November 15, 2007. Early adoption is permitted as of the beginning of the
fiscal year that begins on or before November 15, 2007 provided the company has also elected
to apply the provisions of FASB Statement No. 157, Fair Value Measurements. We are currently
evaluating the impact of adopting FASB Statement 159 on our financial statements.
|
|
|
|
Note 6
|
|
Subsequent Event.
|
|
|
|
|
|
On November 2, 2007, LaunchEquity Acquisition Partners, LLC Education Partners acquired
312,500 shares of common stock of the Company pursuant to the exercise of a warrant at an
exercise price of $3.20. The Company received a total of $1,000,000 in connection with this
warrant exercise.
|
9
Item 2. Managements Discussion and Analysis or Plan of Operation.
Executive Overview
Our mission is to enhance and transform the experience of making, teaching and learning music
and we intend to achieve significant growth as a worldwide leader in music education software.
Among our leading products are SmartMusic
®
, a complete music education software for band, jazz
band, orchestra and choir, and Finale
®
music notation software.
For more than nineteen years, Finale has transformed the process by which composers,
arrangers, musicians, teachers, students and publishers create, edit, audition, print and publish
musical scores. In the world of music software, Finale is the equivalent of Adobe
®
PageMaker
®
or
Adobe
®
Illustrator
®
it is what musicians use for page layout of sheet music. An additional
feature of Finale is its ability to create SmartMusic files so that an educator/composer can create
customized practice assignments for his or her students. We have traditionally derived revenue
through the sales of our notation software products, which continue to grow through regular upgrade
releases, extension into a suite of notation products with reduced features and appropriate pricing
to appeal to new market segments and distribution channels and natural renewal in the education
market.
We launched Finale 2008 on July 2, 2007. This was one month earlier than last years launch
of Finale 2007 which occurred in August 2006 and the earlier launch resulted in stronger third
quarter notation sales for 2007 as compared to 2006. Sales growth occurred in our other notation
products with both Allegro and SongWriter experiencing revenue increases over the prior year as
well.
SmartMusic is a complete, interactive, computer-based practice system for woodwind, string and
brass players and vocalists. SmartMusic enhances and transforms the process of practicing music by
accompanying musicians and students while they practice following their spontaneous tempo changes
like a human accompanist. SmartMusic is a complete teaching and learning tool for band, orchestra
and choir. Offered through subscription, SmartMusic gives musicians access to a library of more
than 30,000 professionally performed and recorded accompaniments, more than 50,000 exercises, over
400 large ensemble titles and the ability to receive and submit assignments received from their
instructor.
The SmartMusic assessment and recording features allow real-time feedback for students of all
ages. These features allow music educators the ability to create SmartMusic assignments and have
students submit an assessment of their assignment complete with a recording of the performance.
Students see their assessment scores immediately and are motivated to improve their performance
prior to submitting the assignment. Similarly students can make as many recordings of their
performance as desired prior to submitting their assignments. This combined feedback helps students
improve on their own and understand how they are progressing.
SmartMusic is becoming a very important part of our business with recurring revenue from the
subscription-based model that leverages our relationships with music educators and their students.
We continue to fine-tune the model to ensure strong acceptance of the SmartMusic subscription
service and have experienced consistent annual increases in subscriptions and revenue.
We released SmartMusic 10.0 in April of this year. Offering titles for band, and jazz ensemble
and in the future, orchestra and choir as well as pre-authored assignments for every title,
SmartMusic 10.0 represents a complete solution for music educators.
SmartMusic 10.0 also includes SmartMusic Impact, a web-based service designed to manage
student assignments, grades and recordings while documenting the progress of each student. The
introduction of SmartMusic 10.0 and SmartMusic Impact in 2007 is providing music educators and
students with exciting new possibilities to assist in developing strong music programs and
complying with accountability requirements. SmartMusic 10.0 will provide access to an ever
increasing library of band, and orchestra literature. Each title includes individual part
assignments authored by respected educators thereby providing music teachers a time saving solution
for preparing selections for the next public performance. SmartMusic Impact will enable 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
Impact Gradebook. We will continue to increase our
10
investment in repertoire
development to have the content music educators require in their band programs and build a
persuasive band solution. Significant choral and orchestra titles will then be added.
With Finale and SmartMusic, we believe we have the platforms for building continued growth in
the music education software industry. We are exploring opportunities to introduce our existing
products into new geographic markets through existing distribution partners and new relationships.
We are also exploring opportunities to develop and launch new products based on our core music
education technologies: the editing, display, printing and playback of music notation, pitch
recognition, assessment, recording and Intelligent Accompaniment.
In our Form 10-KSB filed with the Securities and Exchange Commission for the year ended
December 31, 2006, we identified critical accounting policies and estimates for our business that
we are incorporating herein by reference.
Results of Operations
The following table summarizes key operating information for the three and nine months ended
September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended September 30,
|
|
|
|
|
|
|
9 Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
Incr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incr
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decr)
|
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
(Decr)
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In $ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notation revenue
|
|
$
|
3,514
|
|
|
$
|
3,208
|
|
|
$
|
306
|
|
|
|
10
|
%
|
|
$
|
7,816
|
|
|
$
|
7,312
|
|
|
$
|
504
|
|
|
|
7
|
%
|
SmartMusic revenue
|
|
|
822
|
|
|
|
621
|
|
|
|
201
|
|
|
|
32
|
%
|
|
|
1,980
|
|
|
|
1,558
|
|
|
|
422
|
|
|
|
27
|
%
|
Other revenue
|
|
|
285
|
|
|
|
196
|
|
|
|
89
|
|
|
|
45
|
%
|
|
|
499
|
|
|
|
389
|
|
|
|
110
|
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
4,621
|
|
|
|
4,025
|
|
|
|
596
|
|
|
|
15
|
%
|
|
|
10,295
|
|
|
|
9,259
|
|
|
|
1,036
|
|
|
|
11
|
%
|
Cost of revenues
|
|
|
737
|
|
|
|
540
|
|
|
|
197
|
|
|
|
37
|
%
|
|
|
1,544
|
|
|
|
1,307
|
|
|
|
237
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,884
|
|
|
|
3,485
|
|
|
|
399
|
|
|
|
11
|
%
|
|
|
8,751
|
|
|
|
7,952
|
|
|
|
799
|
|
|
|
10
|
%
|
Percentage of net sales
|
|
|
84
|
%
|
|
|
87
|
%
|
|
|
|
|
|
|
|
|
|
|
85
|
%
|
|
|
86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development expense
|
|
|
1,012
|
|
|
|
901
|
|
|
|
111
|
|
|
|
12
|
%
|
|
|
3,017
|
|
|
|
2,623
|
|
|
|
394
|
|
|
|
15
|
%
|
Selling and marketing
|
|
|
1,054
|
|
|
|
1,051
|
|
|
|
3
|
|
|
|
0
|
%
|
|
|
3,014
|
|
|
|
3,088
|
|
|
|
(74
|
)
|
|
|
(2
|
)%
|
General administrative
|
|
|
815
|
|
|
|
720
|
|
|
|
95
|
|
|
|
13
|
%
|
|
|
2,642
|
|
|
|
2,497
|
|
|
|
145
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
2,881
|
|
|
|
2,672
|
|
|
|
209
|
|
|
|
8
|
%
|
|
|
8,673
|
|
|
|
8,208
|
|
|
|
465
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
1,003
|
|
|
|
813
|
|
|
|
190
|
|
|
|
23
|
%
|
|
|
78
|
|
|
|
(256
|
)
|
|
|
334
|
|
|
|
130
|
%
|
Other income
|
|
|
28
|
|
|
|
31
|
|
|
|
(3
|
)
|
|
|
(10
|
)%
|
|
|
85
|
|
|
|
84
|
|
|
|
1
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
before taxes
|
|
$
|
1,031
|
|
|
$
|
844
|
|
|
$
|
187
|
|
|
|
22
|
%
|
|
$
|
163
|
|
|
|
($172
|
)
|
|
$
|
335
|
|
|
|
195
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
0
|
|
|
|
0
|
%
|
|
|
(2
|
)
|
|
|
(9
|
)
|
|
|
7
|
|
|
|
77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
1,030
|
|
|
$
|
843
|
|
|
$
|
187
|
|
|
|
22
|
%
|
|
$
|
161
|
|
|
|
($181
|
)
|
|
$
|
342
|
|
|
|
189
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the three-month and nine-month periods ended September 30, 2007 to the three-month
and nine-month periods ended September 30, 2006
Net Revenues.
Notation revenue increased by $306,000 to $3,514,000 when comparing the
three-month periods ended September 30, 2007 and 2006 and increased by $504,000 to $7,816,000 when
comparing the nine-month periods ended September 30, 2007 and 2006. The increases in revenue during
the three and nine-month periods are primarily due to the release of Finale 2008 in July 2007 as
compared to last years release of Finale 2007 which occurred one month later in August 2006. Also
contributing to the increase in notation sales was the bi-annual
11
release
of Allegro
®
2007 early in 2007, as well as stronger results from SongWriter when compared to
the same periods last year.
Revenue for SmartMusic continues to grow. SmartMusic revenue increased by $201,000, or 32%,
to $822,000 in the three months ended September 30, 2007 over the revenue for the same period in
2006. Revenue for the nine-month period ended September 30, 2007 increased by $422,000, or 27%,
compared to the first nine months in 2006. Total SmartMusic revenue includes revenue from the
subscription service as well as the sale of accessories such as microphones and foot pedals.
Subscription revenue was $536,000 for the three months ended September 30, 2007, a 23% increase
over subscription revenue of $435,000 during the same period in 2006. Subscription revenue was
$1,473,000 for the nine months ended September 30, 2007, a 25% increase over subscription revenue
of $1,179,000 during the same period in 2006.
As disclosed in our Annual Report on Form 10-KSB, we were anticipating the release of
SmartMusic 10.0 and SmartMusic Impact in early 2007. We released these products in April and
experienced growth in revenue beginning in fall of 2007 with back-to-school teacher and student
purchases as well as strong microphone sales. As of September 30, 2007, we had 75,741 active
SmartMusic subscriptions, a 38% increase over the 54,821 active subscriptions as of September 30,
2006. Total schools using SmartMusic reached 6,901 as of September 30, 2007 compared to 5,507 as of
September 30, 2006. The combination of students sponsored by schools and individuals sponsored by
associations grew to 51,361 as of September 30, 2007 compared to 34,922 as of September 30, 2006.
Additionally, with the release of SmartMusic 10.0 and SmartMusic Impact in April 2007, we began
tracking and reporting Impact Teachers. Impact Teachers are teachers using SmartMusic who have
issued assignments to 50 or more students. As of September 30, 2007, there were 159 Impact
Teachers and the average number of student subscriptions per Impact Teacher was 44. This compares
to 26 Impact Teachers with 29 average student subscriptions as of June 30, 2007.
During the third quarter of 2007, we implemented a direct sales strategy for SmartMusic.
Salespeople were hired to focus on school district sales activities and site licenses were
introduced offering quantity level pricing. Expenses for our sales staff and related marketing
efforts will be expanded in the future to support this initiative. A total of fifteen school
district site licenses were signed in the third quarter with average initial subscriptions per
license of 202 and average potential of 526 subscriptions per license.
Deferred SmartMusic subscription revenue increased $401,000, or 42%, to $1,367,000 when
comparing the nine-month periods ended September 30, 2007 and 2006. Deferred SmartMusic revenue
represents the future revenue to be recorded on current subscriptions.
Gross Profit.
Gross profit for the three-month period ended September 30, 2007 increased by
$400,000 to $3,884,000 compared to the three months ended September 30, 2006, and improved by
$799,000 to $8,751,000 in the nine months ended September 30, 2007 compared to the same period in
2006. The increase in gross profit dollars for the three and nine months ended September 30, 2007
is due to the increase in revenues. During the three months ended September 30, 2007, we had strong
microphone accessory sales which carry a lower gross margin percentage and we incurred higher
amortization costs for repertoire and SmartMusic Impact development due to the product being
released in April 2007. This increase in microphone sales and amortization caused our gross margin
percentage during the three-month period ended September 30, 2007 to decrease to 84% from 87% when
compared to the same period last year. Our gross margin percentage for the nine months ended
September 30, 2007 decreased to 85% from 86% during the same period last year. We expect
amortization related to repertoire and other capitalized development to increase as we continue to
add additional methods, repertoire and assignments to SmartMusic.
Development Expenses.
Development expenses increased 12% to $1,012,000 and 15% to $3,017,000
when comparing the three and nine months ended September 30, 2007 and 2006, respectively.
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 Impact products as well as SmartMusic repertoire development, business systems and
quality assurance. The increase in development expense is due primarily to increased costs related
to expanded SmartMusic repertoire development and increased business systems costs in support of
SmartMusic Impact. These costs were offset in part by the capitalization of software development
expense during the three- and nine-month periods ended September 30, 2007. This software
development expense related to the SmartMusic Impact product released in April of this year. We
released 186 new SmartMusic band titles with assignments in the third quarter of 2007 bringing the
total to 396 and anticipate continued releases in the
12
future. Total capitalized repertoire
development costs for the nine months ended September 30, 2007 were $391,000
compared to $172,000 during the comparable period in 2006. Total capitalized software
development costs were $119,000 for the nine months ending September 30, 2007 and $217,000 for the
comparable period in 2006. We anticipate increased development costs as we continue to expand the
methods, repertoire and assignments included in SmartMusic.
Sales and Marketing Expenses.
Sales and marketing expenses primarily consist of marketing,
advertising and promotion expenses, business development and customer service activities and
payroll. Sales and marketing expenses remained relatively constant at $1,054,000 and decreased 2%
to $3,014,000 in the three and nine months ended September 30, 2007, respectively when compared to
the same periods last year. The nine-month decrease in expenses is primarily due to the timing of
product promotions and collateral when compared to the previous year partially offset by increased
customer support costs as a result of our expanded subscription base. We anticipate sales and
marketing expenses to increase due to the promotion of SmartMusic 10.0 and SmartMusic Impact,
implementation of our site subscription process and increases in our direct sales staff to focus on
district sales. Additionally, we expect marketing expenses to increase as we promote our July 2,
2007 release of Finale 2008 and October 9, 2007 release of PrintMusic 2008.
General and Administrative Expenses.
General and administrative expenses consist primarily of
payroll and related expenses for executive and administrative personnel, professional services,
facility costs, bad debt and other general corporate expenses. General and administrative expenses
increased 13% to $815,000 and increased 6% to $2,642,000 in the three and nine months ended
September 30, 2007, respectively, when compared to the same periods last year. General and
administrative costs increased during the third quarter when compared to the same period last year
primarily as a result of an increase in consulting expenses for our Sarbanes Oxley 404
implementation and legal expenses relating to our Form S-3 registration statement. Costs increased
during the first nine months of 2007 when compared to the same period of 2006 as a result of
consulting expenses for our Sarbanes Oxley 404 implementation and our assessment of tax positions
due to the adoption of FIN48 and legal expenses relating to our Form S-3 registration statement,
partially offset by a reduction in bad debt.
Net Income (Loss) from Operations
. Net income from operations improved to $1,003,000 for the
three months ended September 30, 2007 compared to a net income from operations of $813,000 in the
three months ended September 30, 2006. Net income from operations improved to $78,000 in the nine
months ended September 30, 2007 compared to a loss of $256,000 in the nine months ended September
30, 2006. The improvement in operating performance during the three and nine months ended
September 30, 2007 was due mainly to increased sales of both our Finale and SmartMusic products
when compared to the same periods last year.
Net Income (Loss)
. Net income in the third quarter of 2007 increased to $1,030,000, or $0.25
per basic and $0.22 per diluted share, compared to net income of $843,000, or $0.22 per basic and
$0.19 per diluted share, in the third quarter of 2006. Net income in the first nine months of 2007
increased to $161,000, or $0.04 per basic and $0.04 per diluted share, compared to a loss of
$181,000, or $0.05 per basic and diluted share, in the first nine months of 2006. The increase in
net income during the third quarter was due mainly to the same factors noted above in Net Income
(Loss) from Operations.
Liquidity and Capital Resources
Our primary liquidity and capital requirements have been for development expenses for
maintenance and expansion of our products, as well as expenses and investments related to our
general business needs. Our main sources of liquidity and capital have been cash from operations
and cash from financing activities.
Net cash provided by operating activities was $1,101,000 for the nine-month period ended
September 30, 2007, compared to $306,000 of cash provided by operating activities in the nine-month
period ended September 30, 2006. The improvements in cash provided by operations for the first
nine months of 2007 compared to the same period in 2006 are primarily a result of the improvement
in year-to-date net income and an increase in SmartMusic subscriptions which increases deferred
revenue. Also contributing to the improvements in cash provided by operations are increased cash
collections, which reduced accounts receivable balances.
Net cash used in investing activities was $682,000 for the nine-month period ended September
30, 2007 and $852,000 for the nine-month period ended September 30, 2006. Purchases of property and
equipment were $170,000 lower for the first nine months of 2007 primarily due to implementation of
a new accounting system in the same
13
period of 2006. Capitalized development costs in support of
SmartMusic Impact and repertoire development were
$121,000 higher during the nine-month period ending September 30, 2007 when compared to the
same period in 2006.
Net cash provided from financing activities was $545,000 for the nine-month period ended
September 30, 2007 compared to $118,000 of cash provided in the nine-month period ended September
30, 2006. This increase is due to stock options and warrants exercised during the nine-month
period ended September 30, 2007.
Cash as of September 30, 2007 was $4,094,000 compared to $2,524,000 as of September 30, 2006.
We have significantly improved our operating cash flow over the last few years. With the increase
in revenue and higher gross margin dollars in the first nine months of 2007, we have been able to
improve our operating cash flow over comparable periods of 2006.
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 cyclical nature
is primarily due to timing of the upgrade releases of Finale (which typically occur in the third
quarter) and school budget and purchasing cycles.
If we do not meet our anticipated future revenue levels, management is committed to taking
actions necessary to ensure the conservation of adequate cash to continue to finance our
operations. If expense reductions do not offset a decrease in revenue, we may have to seek
additional debt or equity financing. However, management believes that we currently have sufficient
cash to finance operations for the foreseeable future.
14
Item 3. Controls and Procedures.
(a)
Evaluation of disclosure controls and procedures
. Our Chief Executive Officer and Chief
Financial Officer evaluated the effectiveness of the Companys 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 by the Company in the reports that it files or submits
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 and the audited consolidated financial
statements and notes thereto and Managements Discussion and Analysis or Plan of Operation
contained in our annual report on Form 10-KSB for the fiscal year ended December 31, 2006.
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 intent to
achieve significant and continued growth in the music education software industry; our expectations
relating to SmartMusic 10.0, including expansion of the repertoire for that product and its ability
to facilitate the transfer of assignments from teachers to students; our intent to increase our
investment in repertoire development for SmartMusic 10.0; our intent to expand our sales and
marketing initiative and expectation that expenses related thereto will increase; our anticipated
expansion into new geographic markets; our anticipated launch of new products; our belief that cash
flows will remain sufficient to finance operations; and our expectation to conserve adequate cash
or seek additional debt or equity financing if cash flows do become insufficient to finance our
operations. 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: our possible need for and ability to obtain additional
capital; the market acceptance of Finale, SmartMusic, SmartMusic Impact and other products; our
ability to successfully identify, establish and maintain new strategic relationships that will
allow us to enter new geographic markets; the success of our sales and marketing initiatives; our
dependence upon new product development efforts, including repertoire development; our dependence
on releasing annual Finale upgrades; the maintenance of strategic relationships; the success of
MakeMusics SmartMusic subscription business; maintaining license agreements with a limited number
of publishers; the limited and fluctuating sales of certain of our products; the intense
competition MakeMusic faces; the rapid technological changes and obsolescence in software industry;
MakeMusics dependence on key personnel and the proprietary nature of our technology; other general
business and economic conditions; and those risks described from time to time in MakeMusics
reports to the Securities and Exchange Commission (including its Annual Report on Form 10-KSB). 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. MakeMusic undertakes no obligation to update publicly or
revise any forward-looking statements.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Pursuant to the exercise of warrants by two holders on July 12, 2007 and July 20,
2007, an aggregate of 17,188 shares were sold at $3.20 per share, and pursuant to the
exercise of warrants by one holder on September 20, 2007, an aggregate of 10, 837 shares
were sold at $0.05 per share. For these transactions, we relied upon Section 4(2) of the
Securities Act for an exemption for transactions not involving a public offering.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting held on May 23, 2007, sufficient proxies were not received
for the proposal to approve voting rights for shares held by LaunchEquity Acquisition
Partners, LLC Education Partners (LEAP) that represent 20% or more of MakeMusics
outstanding common stock. As previously disclosed on our quarterly report on form
10-QSB for the quarter ended June 30, 2007, the meeting was adjourned until Wednesday,
July 18, 2007 to provide additional time for the receipt of proxies. At the reconvened
meeting, the proposal was approved by 60.9% of the outstanding shares entitled to vote,
including shares held by LEAP, and by 51.4% of the outstanding shares entitled to vote,
excluding shares held by LEAP. Including LEAP, the voting results were 2,482,151 shares
in favor, with 147,498 shares opposed and 35,706 shares abstaining and 972,281 broker
non-votes. Excluding LEAP, the voting results were 1,680,155 shares in favor, 147,498
shares opposed, 35,706 shares abstaining and 972,281 broker non-votes.
Item 5. Other Information
None.
Item 6. Exhibits
See the attached exhibit index.
16
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.
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Date: November 9, 2007
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MAKEMUSIC, INC.
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By:
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/s/ John W. Paulson
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John W. Paulson, Chief Executive Officer
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(Principal Executive Officer)
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And:
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/s/ Karen L. VanDerBosch
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Karen L.VanDerBosch, Chief Financial Officer
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(Chief Financial Officer)
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17
EXHIBIT INDEX
Form 10-QSB
The quarterly period ended September 30, 2007
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Exhibit No.
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Description
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31.1*
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Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
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31.2*
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Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
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32.1*
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Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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32.2*
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Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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