Makemusic!, Inc (MMUS) - Description of business
MakeMusic, Inc., a Minnesota corporation, is a world leader in music education technology whose mission is to enhance and transform the experience of making, teaching, and learning music. The Companys predecessor corporations, which merged to form the current entity in1992, were incorporated in Minnesota in 1990. Among the Companys leading products are SmartMusic ® music learning software, Finale ® , music notation software, and SmartMusic Impact, the web-based solution that will allow music educators to easily guide, motivate, grade, and document individual student progress.
SmartMusic is a complete teaching and learning tool for band, jazz band, orchestra, and choir. SmartMusic enhances and transforms the process of practicing music by providing students with professional accompaniment and a variety of built-in practice tools. Practicing with SmartMusic is more fun than practicing alone, and as a result students practice longer and more effectively. This leads to increased confidence, higher retention, and stronger music programs. Offered through subscription, SmartMusic gives musicians access to a library of more than 30,000 professionally performed and recorded accompaniments and more than 50,000 exercises.
The introduction of SmartMusic 10.0 in the first half of 2007 will provide music educators with exciting new tools to help develop strong music programs and comply with todays accountability requirements. SmartMusic now provides access to an ever-increasing library of full ensemble literature. Each title includes individual assignments for every part, all of which are authored by respected educators. These pre-authored assignments offer music teachers a great savings in time as they prepare for their next public performance.
When educators distribute SmartMusic assignments to their students, the students respond by practicing the assignments in SmartMusic and receiving real-time feedback from SmartMusics assessment and recording features. Students immediately see their assessment scores and hear their recordings and are then motivated to improve prior to submitting the assignment to their teacher. This combined visual and aural feedback helps students improve on their own and understand how they are progressing.
SmartMusic Impact will fully automate the administrative process of sending SmartMusic assignments between educators and students. It manages audio recordings and practice reports, tracks assignments, and provides educators with on-line libraries that make it easy to share assignments with colleagues. Students complete assignments 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. SmartMusic Impact provides educators the means to guide, motivate, grade, and document the progress of every student.
For more than fifteen years, Finale has been the best-selling music notation software. It 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 InDesign® it is what musicians use for page layout of sheet music. An additional feature of Finale is its ability to make SmartMusic files so that an educator/composer can create customized practice assignments for their students. MakeMusic has continued to expand its leadership through developing and marketing a family of notation products with reduced features and pricing which appeals to new market sectors and distribution channels.
MakeMusic works with teachers, suppliers, associations, and publishers in a proactive collaboration to meet the needs of active music-makers and to develop products for them. The long-term and global leadership that our Finale software has established with music educators and publishers provides MakeMusic with credibility and development opportunities for SmartMusic and other new products.
The worldwide market for products and services sold to educators, students, hobbyists, and professional musicians is estimated by the Company to be approximately $15.5 billion, with music software as one of its fastest-growing segments. This estimate is based on data contained in the Music Products Association 2006 Music USA NAMM® Global Report. As music educators search for time-saving solutions in motivating students and complying with accountability requirements, MakeMusic is building on its leadership position to become a key driver in the future of music education. According to polls sponsored by the American Music Conference, the public understands the importance and benefits of arts in education. Parents expect access to student assignments and the grading process. We believe that MakeMusic is uniquely posed to offer continuous innovation to music educators, music students and parents. Additionally, as accountability for individual student progress becomes more and more important, SmartMusic may be the best, if not the only, solution in the market today for educators to easily and objectively document individual student progress.
MakeMusics business strategy is characterized by the following principles:
Focus on meeting the needs of a highly influential niche market. By focusing on providing superior, long-lasting solutions for music educators, MakeMusic gains exceptional access to the larger market of student and hobbyist musicians at the lowest possible cost.
Deliver high-quality patented technologies and licensed content. The complexity of the notation and Intelligent Accompaniment ® technologies at the core of MakeMusics products represent a significant barrier to entry to competition. Furthermore, we hold licenses to a major library of music, adding significantly to this barrier.
Capitalize on fundamental shifts in the marketplace. MakeMusics products support two shifts that are leading to long-term growth opportunities: its products support the adoption of the digital lifestyle in which music is a market driver; and its products provide the building blocks that meet the demand for quantification and assessment in education.
Leverage an extensive customer database for targeted direct marketing. With an active database of nearly a half-million musicians, MakeMusic is able to target, personalize and develop each customers buying potential in an optimal fashion. Supporting this initiative, MakeMusics management has significant operational experience in customer relationship management businesses.
Grow the SmartMusic business by leveraging support of music educators. MakeMusic introduced an annual subscription for teachers late in 2001 and a monthly subscription for home users in the spring of 2002. In October 2002, we launched the school-sponsored student subscription program, allowing schools to sponsor their students home use of SmartMusic at substantial discounts. Teachers using SmartMusic report students have more fun, practice longer, and improve technical skills faster. With the introduction of SmartMusic Impact in 2007 and an ever-expanding library of repertoire, we will provide teachers more efficient tools to assist every student practicing for the next performance while also complying with assessment requirements. Teachers using SmartMusic are our most effective advocates, and we continue to expand marketing activities based on viral marketing tactics. Today over 40% of teachers subscribing to SmartMusic report that they first heard about SmartMusic from a colleague.
Build visibility and credibility by partnering with industry suppliers and associations. MakeMusic has initiated relationships with several leading instrument and education member associations. These partnerships enable each association to promote SmartMusic discounts as an important member benefit. MakeMusic benefits from the visibility and credibility through the implied endorsement of our software. Examples of these associations include the Suzuki Association of the Americas, the International Association of Jazz Education, the Associated Board of the Royal Schools of Music, the International Trumpet Guild, the International Trombone Association, and the North American Saxophone Alliance. In addition, music publishers are placing more importance on having their titles supported with SmartMusic.
Publishers are demonstrating this importance through SmartMusic licensing, authoring SmartMusic assignments, and by featuring the SmartMusic logo with new education releases as a means of providing market differentiation.
Maintain and strengthen Finale market leadership and revenues. Finale music notation software is accepted worldwide as the industry standard. We will seek to maintain Finale revenues by continuing to introduce innovative upgrades and expanding the line of Finale branded products. MakeMusic intends to grow revenues by expanding marketing throughout the world and expanding our distribution into underserved markets.
Partner with leading industry players. MakeMusic is continuing to pursue and expand strategic alliances with entities that have the marketing power and capital resources to fully exploit our products potential around the world. We will also pursue alliances that enhance our technology base into complementary music and educational markets. Already, we have forged key strategic relationships with: McGraw-Hill, the largest music textbook publisher; Hal Leonard Corporation, the largest sheet music publishing company; Conn-Selmer, the largest manufacturer of band and orchestral instruments and accessories in the United States; and Berklee College of Music, the worlds premier learning lab for the music of today.
Grow the business step by step. MakeMusic currently has sufficient capital necessary to continue the product development and marketing efforts necessary to grow our business. We are planning to continue business development with careful attention to cash management while continuing to grow revenues with a view toward profitability.
SmartMusic®. SmartMusic is a complete, interactive, computer-based music system that transforms and modernizes the way a musician practices by providing human-like accompaniment in a wide range of musical styles performed by orchestras, concert bands, jazz trios, and other musical ensembles. Its key innovation, Intelligent Accompaniment ® , enables SmartMusic to listen to a musician as they sing or play and follow their spontaneous tempo changes. In addition, SmartMusic allows the user to start playing at any point in a musical piece, repeat difficult-to-play segments, change instrumentation, adjust the degree to which the accompaniment follows the musician, control tempo, transpose the music into any key, play with or without repeats or designate sections of the music to cut. The software also includes self-assessment features and allows the user to record their performance, e-mail to friends and relatives, or submit the performance to their teacher. The prototype technology upon which the SmartMusic system is based was patented by Carnegie Mellon University and licensed to us. The patent expired in 2005. We then significantly enhanced the prototype technology with our own proprietary technology and additional patented features, producing a marketable product. SmartMusic is a unique product that has won numerous awards as well as the support of world-class musicians such as Wynton Marsalis, James Galway, Dawn Upshaw and others.
Schools, students and other musicians have access, via subscription, to over 30,000 licensed accompaniments including elementary band methods and classical, jazz, pop, rock, movie, theater, and holiday titles. Starting in 2007 the SmartMusic subscription will also provide access to an increasing library of full concert band, jazz band, and orchestra ensemble repertoire. With SmartMusic Impact, teachers will be able to select pre-authored assignments for every part and guide students as they prepare for their next performance. MakeMusic has entered into license agreements with top music publishers to produce musical arrangements for use with SmartMusic. We have also obtained exclusive rights from major publishers of solo classical works for voice, woodwinds, brass, percussion, strings, and keyboard. These licenses are for the purpose of musical accompaniment, which responds in real-time to the musician. We have developed our accompaniment selections based upon a review of the most frequently performed titles in American academic solo contests as well as popular titles of sheet music sold in the United States. The Company is expanding the library of accompaniments with the primary and immediate focus on repertoire that is most often performed by middle school and high school students participating in concert band, jazz band, orchestra, and choir. In the future, we plan to
continue expansion of our library of accompaniments to cover a broad spectrum of musical genres, instruments and skill levels as well as providing publishers of select institutions to develop content ready for use with SmartMusic. Further, users of our Finale notation software can create their own SmartMusic accompaniments, which can then be played by the SmartMusic software.
In addition, SmartMusic subscribers have access to a selection of accompaniments to more than 50,000 skill-development exercises based on scales, intervals, arpeggios, and twisters. The product also features warm-up exercises for vocalists, the ability to insert tempo changes with variations in speed and the ability to insert breath marks and cues to wait for a particular tone. These variables can be saved with the music, creating a personally customized version of the accompaniment. SmartMusic provides accompaniments for band and string instruments as well as for vocalists.
The individual subscription program, currently priced at $9.95 per month or $100 per year, was launched in 2002. In response to teachers requests to have an offer which would encourage all their students to use SmartMusic at home, we developed and launched a school-sponsored student subscription program which currently allows participating students to buy a subscription for $25 per year. The students may purchase their subscription from the school or may purchase directly from the SmartMusic website (www.smartmusic.com) using a code generated by their teacher. In 2005, we introduced the ability to sponsor members and to generate codes for organizations of musicians. We believe that the SmartMusic subscription-based revenue model, with its recurring revenue stream, offers a significant opportunity to increase profitability. MakeMusic also sells a packaged SmartMusic Starter Kit through dealers, for a suggested retail price of $129.95 that includes a one-year subscription plus a vocal and instrumental microphone. In early 2006 we authorized a select group of dealers that specialize in selling to music educators, to offer SmartMusic subscriptions to schools and sponsored students.
SmartMusic Impact. Music teachers typically focus on rehearsing students for the next performance. With the expanding library of SmartMusic accompaniments teachers are able to guide and motivate students by requiring completion of any of the pre-authored SmartMusic assignments. SmartMusic Impact will be a web service included with SmartMusic educator subscriptions. This service allows teachers to select and send assignments in less than a minute. Students automatically receive assignments when they log-in to SmartMusic and submit assignments to their teachers with one click. SmartMusic assessment assignments are automatically graded and are entered into the teachers SmartMusic Impact Gradebook while audio recordings, which require educator feedback, are indicated as waiting for evaluation. SmartMusic Impact provides a way of guiding student development and moreover provides teachers with a means to easily and objectively measure student progress in a way that complies with current assessment standards.
Finale notation family. We are a market leader in music notation software with our Finale family of products for use with Macintosh ® and Windows® PC operating systems. Music notation software enables a musician to enter musical data into a computer using either the computer keyboard, a MIDI- (Musical Instrument Digital Interface) equipped electronic music keyboard or other MIDI-equipped instruments and contemporaneously display the data on a computer screen as a musical score. The dramatic improvements in speed and flexibility provided by software programs like Finale have made such software the dominant method for composers, arrangers, publishers and music teachers to create printed music.
The Finale product is a powerful and comprehensive notation software product which is sold worldwide. Finale music notation software has a suggested retail price of $600. Finale software is differentiated from other music notation software by its breadth and depth of features, including patented capabilities such as its hyperscribe feature. HyperScribe® allows users to freely play music with varying tempos via a MIDI keyboard while the software interpolates the rhythms and accurately notates the music in real time.
We also produce an Academic/Theological Edition of the Finale product that is sold exclusively to schools, teachers, college students and religious organizations at a suggested retail price of $350. This edition has been a key source of revenue and registered user base growth. In addition, it reaches a market that is continuously being replenished with new student users.
The Finale product is currently translated into German, French, Italian, and Japanese. We believe the international market is a key growth opportunity as computer penetration increases worldwide.
The Finale Allegro® product, a value-priced version of the powerful Finale music notation software product, was introduced in 1993. The Allegro music notation software product currently retails for $199 and contains a subset of the notation tools contained in the Finale product. With extensive MIDI capabilities, Allegro is targeted to an audience that may not read music but needs to create lead sheets for other musicians.
Finale PrintMusic® and Finale SongWriter are entry-level, yet powerful music notation software products, retailing for $99.95 and $49.95 respectively. Each contains a subset of the notation tools contained in the Finale and Finale Allegro products. These products allow us to offer entry-level products to the retail customer, thereby expanding the base of registered users and increasing the potential for sales of notation software upgrades. These products are targeted to a broad audience in the education and general consumer marketplace.
Finale NotePad® is a downloadable freeware introduction to the Finale notation family. As of December 31, 2006, there were approximately 1.5 million unique users of NotePad with approximately 2.9 million total downloads of NotePad.
Synergy between Product Lines
From a technology perspective, there are considerable synergies between the SmartMusic business and the Finale notation business because the products benefit from shared technologies. The Finale notation technology, for example, is used within SmartMusic to display, among other things, sheet music, exercises, and beginning band method songs. It is this technology that puts red and green notes on the screen to show SmartMusic students what they did wrong and how to do it right. Similarly, the SmartMusic pitch recognition technology is used within Finale in its MicNotator® feature, which allows Finale users to enter notes by simply playing an acoustic instrument into a microphone. Indeed, the synergistic integration between SmartMusic and Finale notation products represents a significant differentiator for our notation products and provides a significant barrier to entry into the marketplace. Likewise, the ability to effortlessly create SmartMusic repertoire using the Finale product is a major benefit for SmartMusic customers.
More important than the technology synergies, however, are the market and customer synergies. We estimate that Finale is well-established in over 30,000 schools, all of which are targets for SmartMusic. The school teachers/decision-makers know and respect Finale and are willing to consider new products from MakeMusic. Similarly, the Finale channels of distribution are anxious to build upon their continuing Finale sales with new products from MakeMusic.
The MakeMusic® data center is operated internally, offering extensive uptime and connectivity to the Internet backbone via fiber-optic connections. For maximum reliability, all our servers utilize redundant arrays of independent discs for information backup as well as redundant power. We are currently utilizing state-of -the-art hardware and software platforms. Web services are run on Microsoft IIS ® and Apache ® servers. A combination of Microsoft SQL® and Oracle® are used for database applications. Our network is monitored twenty-four hours a day, seven days a week, and is scalable and upgradeable for future growth.
www.smartmusic.com . The SmartMusic website promotes our SmartMusic subscriptions and SmartMusic accessories.
www.finalemusic.com . The Finale website promotes notation products and e-commerce with mail-order fulfillment and also downloads of Finale NotePad.
www.makemusic.com . The MakeMusic website includes information on the Company and its products. It also provides links to www.smartmusic.com and www.finalemusic.com for people wanting to make purchases of the Companys products.
Marketing, Sales and Distribution
SmartMusic. MakeMusic believes its future revenue growth will be primarily driven by its revolutionary product SmartMusic, which is computer software that incorporates complete music practice system. SmartMusic features award-winning Intelligent Accompaniment technology and the worlds largest library of interactive music accompaniments.
The market for SmartMusic is large, with student use being the biggest potential market. There are over 100,000 school buildings in the U.S. that have approximately 15 million students enrolled in band, orchestra, and choir programs. The school-sponsored student subscription offering encourages teachers to be advocates to students and parents for SmartMusic at home. We believe the key to expanding the number of subscriptions for students is in producing a compelling reason for educators to make SmartMusic an integral part of how they deliver lesson plans and to make assignments given through SmartMusic a necessary part of their curriculum. We believe that SmartMusic Impact will break down many of the barriers that have previously limited our reach.
We expect that our expanding subscription sales model, if accomplished, will increase gross profit by creating a recurring stream of revenues and cash flow. The success of our sales model is dependent on the rate at which schools adopt the SmartMusic system and on our ability to establish long-term customer relationships with SmartMusic subscribers. We plan to focus on adoption and customer satisfaction to leverage the school-sponsored student subscription model.
MakeMusic currently utilizes a variety of marketing channels to achieve the best mix for profitable growth. In the United States, Canada and United Kingdom, SmartMusic is being marketed by e-marketing, music association membership, trade shows, exposure at music educator conferences, and advertising in targeted print media. We also place considerable emphasis in viral marketing activities that include utilizing experienced music educators in our educator support system (ESS), to help us reach their fellow music educators.
In addition, we have developed SmartMusic Intelligent Accompaniment software for Hal Leonards Essential Elements ® , the worlds best-selling method books for beginning band and strings students. This is part of a strategic partnership with Hal Leonard Corporation, the worlds largest sheet music publisher. This relationship is very important because students usually start to play in a school band in the fifth grade. In the United States alone, there are approximately 2.5 million students starting band every year. If many of these students have a successful experience starting out with SmartMusic, they will likely continue with SmartMusic and become users of other MakeMusic products, including Finale software and new products introduced in the future. As a result of a special marketing and licensing agreement, Hal Leonard offers SmartMusic in its Essential Elements Book One for both band and orchestra students, reaching approximately 1 million students per year. Students receive a free trial offer giving them access to accompaniments to the first half of the book; and they may acquire access to the second half of the book at a discounted price as well as become regular subscribers thereafter.
Though the primary distribution for SmartMusic subscriptions is via the www.smartmusic.com website (linked with www.makemusic.com and www.finalemusic.com ), we also have a network of education dealers and distributors supporting the SmartMusic Starter Kit designed for sale at retail. Distributors service the music instrument retailers, college bookstore and educational software markets. We are also working with key dealers to implement a beginning band instrument rental opportunity that includes SmartMusic software in the rental package.
Additionally, we market SmartMusic by deploying the program at key partner sites that our current and potential customers may frequent. SmartMusic creates the opportunity to strengthen their music-makers community while sharing in the revenues from recurring SmartMusic subscription fees.
Offering SmartMusic is extremely easy for a partner site since we project SmartMusic onto their site from our own servers and handle all transactions including back office functions.
The international marketplace in Europe, Latin/South America and Asia is large but, due to vast differences in the way music is taught in those countries, its potential for SmartMusic is currently unknown. Although we have authorized distributors in the United Kingdom and Australia, our primary focus remains on the K-12 market in the United States.
Finale notation family. In the United States and Canada, the Finale family of notation products is sold by a group of channel-specific distributors in the musical instrument and educational channels. Finale is also marketed to educational institutions and specialty retailers on a direct basis. Repeat business is driven by direct marketing to registered users for product upgrades and trade-ups. In early 2006 we signed a domestic distribution agreement with Hal Leonard Corporation, the largest music publisher in the world and, arguably, the largest distributor of music products in North America. We believe this will give us a significant advantage in the highly competitive market for notation software by increasing our visibility to customers.
Internationally, Finale notation products are represented by key distributors in many overseas territories, primarily in Europe and Japan. Finale is translated into German, French, Japanese, and Italian. We believe the international markets present an additional opportunity for future growth.
Music makers can also utilize Finale software to create accompaniments for use with SmartMusic. A Finale file is simply saved as a SmartMusic accompaniment and becomes part of the Intelligent Accompaniment system. This interplay provides MakeMusic with cross-marketing opportunities between Finale and SmartMusic users and products as well as providing a unique differentiator in the marketplace.
We believe we can significantly build on our Finale notation software business by continuously expanding the installed base of users, regularly providing them with upgrades, broadening distribution, producing additional international versions of the products, and establishing the products as a means for electronic transmission of music. Finale upgrades were introduced on both the Windows platform and Macintosh platform in each of the last several years. All Finale products operate on both Windows and Macintosh platforms.
At December 31, 2006, 41 employees were involved in product development at MakeMusic. This staff engages in research and development of new products, enhancements to existing products, business systems support, repertoire development and quality assurance testing.
MakeMusics non-capitalized expenditures for product development were $3,474,000 and $3,279,000 in 2006 and 2005, representing 26.8% and 27.7% of revenues, respectively.
We intend to continue to expand our current product offerings by developing products for new applications and markets.
Website. Website development expense consists of expenses required for design and development of the MakeMusic, SmartMusic and Finale websites and underlying technology infrastructure. This primarily includes personnel costs and payments to third-party service vendors. All of our websites are maintained and updated on a regular basis.
In addition, we continue to refine the SmartMusic Internet subscription model and to further develop its distribution capabilities on other Internet websites.
Content and product. Content and product development consists primarily of internal payroll and payments to third parties for the development and ongoing maintenance of notation products and the SmartMusic subscription software.
We continue to license and create additional SmartMusic accompaniments to be included with our subscriptions. The Company has developed processes for creating individual part assignments for every ensemble title. We have also recently developed CD-quality accompaniments that sync with on-screen notation providing an even richer student experience. Additionally, we have automated some of the processes and have developed a technical specification that is used to standardize both quality and process.
We have maintained our competitive position in the music notation marketplace, in part, by focusing our improvement efforts over the past several years on developing upgrades of the Finale product on a regular basis for the Macintosh and Windows platforms. We plan to make annual releases of such upgrades and to continue developing music education products with our proprietary music technologies.
We believe we are well positioned in music technology markets and benefit from strong barriers to entry for new competitors in our business niches due to our 1) proprietary music notation, Intelligent Accompaniment, and music education software; 2) extensive library of licensed content; 3) credibility in the music education marketplace; and 4) relationships with major industry partners. One competitor is offering a product that is similar to SmartMusic in that it provides accompaniments, on-screen music notation, and assessment. This product, In the Chair, presently offers a limited amount of repertoire and does not offer any assignment measurement or grading solutions. We know of no other musical accompaniment product for band instruments, string instruments and vocalists that responds to the musician. Several years ago Cakewalk released In Concert, an interactive accompaniment product limited to MIDI keyboards, but today we are unable to find any mention of In Concert on the current Cakewalk web-site.
We expect that SmartMusic products will also compete with conventional music accompaniment products by Music Minus One by MMO Music Group, Inc. and MTS 120 by Roland Corporation. These products offer students the ability to play along with prerecorded songs. They differ from the SmartMusic product in that they do not automatically adjust in real time to the musicians changes in tempo, they do not provide graphical and numerical assessment, and do not include the ability to receive and submit assignments. We believe SmartMusic is unique because it listens to the musician and adjusts accordingly. We also believe that the synergies between Finale and SmartMusic technologies create feature sets that are difficult for a competitor to replicate.
The notation market is highly competitive and continues to have competitors such as Steinberg Media Technologies GmbH, Sibelius Software, NOTION Music, Inc., and Voyeur Turtle Beach, Inc.
Competitive factors in marketing the SmartMusic and Finale products include product features, quality, brand recognition, ease of use, merchandising, access to distribution channels, retail shelf space, and price. We believe we compete effectively in these areas. In addition, a competitive advantage is that both product lines benefit from shared technologies. For example, the SmartMusic pitch recognition technology is used within Finale in its MicNotator feature, allowing Finale users to enter notes by simply playing an acoustic instrument into a microphone.
We licensed, from Carnegie Mellon University (CMU) on a worldwide basis for the life of the patent which expired in 2005, the use of the U.S. patent that covers the automated accompaniment that listens to and follows tempo changes from a live performance. We have further developed this technology and patented additional features. We have obtained five additional patents that protect improvements to the user control of the software and that contain certain aspects of the repertoire file which expand the following capabilities of the software:
enhancements to the algorithms, accompaniment controls, and repertoire data files and miscellaneous interface features of the product. As a result of the additional patented features we have developed, strong synergy with our Finale notation product and continuing development of an extensive library of licensed repertoire, we do not believe that SmartMusic is materially affected by the expiration in 2005 of the CMU patent.
Our Finale product is covered by three separate patents, which protect the data structure, the ability to enter music into the product by tapping tempo with a pedal device or computer keyboard, and the method of automatically assigning guitar fingerboards to a notated chord. These patents are licensed from Wenger Corporation on a royalty-free, exclusive, worldwide basis for the life of the patents.
We own the registered trademarks in the United States for Allegro®, Coda®, Finale Allegro®, Finale NotePad®, Finale Performance Assessment®, Finale PrintMusic®, Finale SongWriter®, Finale®, FinaleScript®,HumanPlayback®, HyperScribe®, Intelligent Accompaniment®, Intonation Trainer®, M!®, MakeMusic®, MicNotator®, SmartMusic®, and The Art of Music Notation®. In addition, the names Coda®, Finale SongWriter®, Finale®, Intelligent Accompaniment®, MakeMusic®, SmartMusic®, and The Art of Music Notation® have been protected in some foreign countries and we have applied for protection in foreign countries for Finale NotePad®, Finale PrintMusic®, Finale Viewer, and SmartMusic Impact. We have applied for trademark registration in the United States for Finale Viewer, FPA, SmartFind and Paint, SmartMusic GradeBook, SmartMusic Impact, Studio View, and TempoTap. In addition to our own registered trademarks listed above, this report also contains references to trademarks owned by third parties.
Printing of user manuals, packaging, and the manufacture of related materials are performed to our specifications by outside subcontractors. We currently use one subcontractor to perform standard copying and assembling services, including copying software DVD and CD-ROM disks, and assembling the product manuals, disks and other product literature into packages. If this subcontractor is unable to perform, there are alternative vendors that we could use for this service.
As of December 31, 2006, MakeMusic employed 79 full-time employees. We believe our relations with employees are good. None of our employees are covered by a collective bargaining agreement. In addition, we rely on select independent contractors to help write software and to develop our repertoire or products. We have little difficulty contracting with these individuals and believe that our relationships with them are good. Should we have difficulty securing the services of such persons in the future, it could adversely affect operations.
All reports filed electronically by MakeMusic with the Securities and Exchange Commission (SEC), including its annual reports on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, proxy and information statements, other information and amendments to those reports filed (if applicable), are accessible at no cost by contacting the Investor Relations department at MakeMusic. These filings are also accessible on the SECs website at www.sec.gov . The public may read and copy any materials filed by the Company with the SEC at the SECs Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may also obtain information for the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a safe harbor for forward-looking statements made by us or on our behalf. We have made, and may continue to make, various written or verbal forward-looking statements with respect to business and financial matters, including statements contained in this document, other filings with the SEC and reports to shareholders. Forward-looking statements provide current expectations or forecasts of future events and can be identified by the use of terminology such as believe, estimate, expect, intend, may, could, will and similar words or expressions.
Our forward-looking statements generally relate to our growth strategy (particularly related to SmartMusic), financial results, product development and market introduction and sales efforts. Forward-looking statements cannot be guaranteed and actual results may vary materially due to the uncertainties and risks, known and unknown, associated with such statements. We undertake no obligation to update any forward-looking statements. We wish to caution investors that the following important factors, among others, in some cases have affected and in the future could affect our actual results of operations and cause such results to differ materially from those anticipated in forward-looking statements made in this document and elsewhere by or on our behalf. It is not possible to foresee or identify all factors that could cause actual results to differ from expected or historic results. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions.
While we currently believe that we have sufficient capital, we may have other capital needs. We again achieved positive operating cash flow in 2006 and expect it to continue to be positive in the future, provided we continue to increase revenue and manage expenses. We believe our cash reserves are sufficient to execute our strategies and are likely to increase as investor warrants are exercised. If we do not maintain positive cash flow, we may need additional capital in the form of debt or equity financing to continue to operate the business. Additional capital may be needed if there is a significant change in our business plan or operating results. There is no assurance that additional debt or equity financing will be available to us on favorable terms or at all.
We are dependent upon our new product development efforts. Additional development work is required to increase the breadth of our SmartMusic and Finale businesses and the accompaniment repertoire for SmartMusic. There can be no assurance that our timetable for any of our development plans will be achieved, that sufficient development resources will be available or that development efforts will be successful.
We are dependent upon the Internet in our business. We are dependent on the Internet to activate our SmartMusic subscriptions and secure our licensed content. We also utilize the Internet as one of our order-processing channels. Critical issues concerning the commercial use of the Internet, including security, cost, ease of use and access, intellectual property ownership and other legal liability issues, remain unresolved and could materially and adversely affect both the growth of Internet usage generally and our business in particular. If we experience problems developing and maintaining our Internet operations, our sales, operating results and financial condition could be adversely affected.
We are dependent upon obtaining and maintaining license agreements with music publishers, of which there are a limited number. The world market for music license rights is highly concentrated among a limited number of publishers. We have entered into license agreements with leading music publishers that provide access to certain musical titles for accompaniment development. Many of our contracts with major publishers are not exclusive, which means that similar agreements may be made with competitors or that the publishers themselves may sell the same titles. While we believe that our relationships with these publishers are good, there can be no assurance that we will be able to maintain or expand these relationships. The lack of a sufficient number and variety of musical arrangements would greatly limit the ability to market our products and services.
Certain of our products have limited and fluctuating sales. Sales of our SmartMusic subscription products have not achieved, and may not achieve, significant levels. Further, Internet sales have fluctuated, as have sales of Finale products, which are historically higher following
the release of product upgrades. We believe that results of operations may fluctuate as a result of, among other things, the purchasing cycle of the education market and the timing of releases of new products and product upgrades. Certain states have had education funding cuts, which could negatively impact sales of products to the education market.
We have incurred operating losses in the past and may incur losses in the near future. We have incurred losses from operations and may continue to incur such losses in the near future. In order to continue to develop our business and planned product and service offerings, we will be required to devote additional amounts of capital to development and marketing efforts, among other things. There can be no assurance that we will operate profitably or provide an economic return to the investors.
We face intense competition. While competition for SmartMusic is relatively limited, there can be no assurance that in spite of significant barriers to entry that others, such as large electronic and musical instrument manufacturers, will not enter this market. Competition for our notation products could potentially adversely impact future sales levels. Our ability to continue to compete effectively will be substantially dependent upon our ability to continue to improve our product offerings and Internet resources. If such improvements and development efforts do not materialize as intended, we may lose our ability to differentiate our products from those of our competitors. In addition, increasing competition in the music software market could cause prices to fall and the volume of transactions to decline, either of which could adversely affect our business, operating results and financial condition.
Rapid technological changes and obsolescence may adversely affect our business. We operate in an industry greatly affected by technological changes. While we are not currently aware of any significant technological changes that may affect our current technology base, continued advancements in computer software, hardware and network designs and formats may impact our ability to effectively maintain our Internet-based sales efforts in a workable and user-friendly format. The proprietary technology we use to protect access to our licensed files may be effective for only a limited period by reason of technological change. We must, therefore, devote new resources to improve or modify this security system, which is a critical aspect of our ability to establish and maintain relationships with music publishers. While we currently believe that we have sufficient resources to address technological changes that may affect our business, there can be no assurance that any such technological changes will not prove too much for us to overcome in a cost-effective manner.
Additional government regulation of the Internet may impair our ability to fully develop and utilize the Internet as a marketing and distribution medium. Today, there are relatively few enacted laws specifically directed toward on-line services, and the applicability and scope of such laws is still uncertain, as court interpretations are few. Currently, we do not believe their impact materially affects the nature of our Internet operations. Applicability to the Internet of existing laws governing issues such as property ownership, copyrights, and other intellectual property issues, taxation, libel, obscenity, and personal privacy is uncertain. In addition, because our services are accessible worldwide, foreign jurisdictions may claim that we are required to comply with their laws. Laws regulating Internet companies outside of the United States may be less favorable than those in the United States.
Compliance with foreign laws may require us to change our business practices or restrict our service offerings to an extent that may damage our financial results. Further, changes to existing laws or the passage of new laws affecting the Internet could directly affect the way we do business, create uncertainty on the Internet, reduce demand for our services, increase the cost of doing business or otherwise harm our business. Our failure to comply with domestic or foreign laws could also subject us to penalties ranging from fines to bans on our ability to offer our services.
We are dependent upon certain key personnel. We are highly dependent on a limited number of key management, including our chief executive officer, and our president and chief operating officer, as well as key technical personnel. The loss of key personnel, or our inability to hire and retain qualified personnel, could have an adverse effect on our business, financial condition and results of operations.
We are dependent upon proprietary technology and cannot assure protection of such technology. There can be no assurance that our proprietary technology will provide us with significant competitive advantages, that other companies will not develop substantially equivalent technology or that we will be able to protect our technologies. We could incur substantial costs in seeking enforcement of our patents or in defending ourselves against patent infringement claims by others. Further, there can be no assurance that we will be able to obtain or maintain patent protection in the markets in which we intend to offer products.
International development plans are subject to numerous risks. There can be no guarantee that our international expansion efforts will be successful or that we will be able to offset the cost of the resources allocated to such efforts. Moreover, we could be faced with the risks inherent in any international development, such as unpredictable changes in export restrictions, barriers and customs rates; currency risks; the difficulty of managing foreign operations; the differences in technological standards, payment terms and labor laws and practices among countries; collection problems; political instabilities; seasonal reductions in business; and unforeseen taxes. Such risk factors could harm our international operations and, therefore, our business, operating results and financial condition.
The market price of our stock may experience volatility. We cannot speculate as to the future market price of our common stock. Our common stock has experienced, and may continue to experience, significant price volatility due to a number of factors, including fluctuations in operating results, changes in market perspectives for our products, developments in our industry, and general market conditions that may be unrelated to our performance.
We will be exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and related regulations implemented by the SEC, are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. We will be evaluating our internal controls systems to allow management to report on, and our independent auditors to attest to, our internal controls. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. While we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 by our December 31, 2007 deadline, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, including the SEC. This type of action could adversely affect our financial results or investors confidence in our company and our ability to access capital markets and could cause our stock price to decline. In addition, the controls and procedures that we will implement may not comply with all of the relevant rules and regulations of the SEC. If we fail to develop and maintain effective controls and procedures, we may be unable to provide the required financial information in a timely and reliable manner. Further, if we acquire any company in the future, we may incur substantial additional costs to bring the acquired companys systems into compliance with Section 404.