##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
  þ
    
    Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2005
 o
    
    Transition report under Section 13 or 15(d) of the Exchange Act
 For
the transition period from
 To
 Commission
file number 0-26192
 MakeMusic! Inc.
  Minnesota
    
    41-1716250(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 
 
   
   
    þ o
   o þ




---



MakeMusic! Inc.
 INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1
    
    Condensed Consolidated Financial Statements
    
    
    3Condensed
Consolidated Balance Sheets
June 30, 2005 and December 31, 2004
    
    
    3Condensed
Consolidated Statement of Operations
Three and six-month periods ended June 30, 2005 and 2004
    
    
    4Condensed
Consolidated Statement of Cash Flows
Three and six-month periods ended June 30, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis or Plan of Operation.
    
    
    7Item 3
    
    Controls and Procedures
    
    
    12PART II. OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    13Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    13Item 3
    
    Defaults Upon Senior Securities
    
    
    13Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    14Item 5
    
    Other Information
    
    
    14Item 6
    
    Exhibits
    
    
    14Signatures
    
    
    15Exhibit Index
    
    
    16Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  2




---



##### Table of Contents



PART I
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MakeMusic! Inc.
 
 Condensed Consolidated Balance Sheets  (In thousands of U.S. dollars)
 June 30,
    
    December 31,2005
    
    2004(unaudited)
    
    (Note)AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,215
    
    
    $
    2,215Accounts receivable, net
    
    
    583
    
    
    
    830Inventories, net of reserves
    
    
    597
    
    
    
    332Prepaid expenses and other current assets
    
    
    156
    
    
    
    241Total current assets
    
    
    2,551
    
    
    
    3,618Property and equipment, net
    
    
    313
    
    
    
    250Goodwill, net
    
    
    3,630
    
    
    
    3,630Capitalized software products
    
    
    383
    
    
    
    347Intangible assets, net
    
    
    273
    
    
    
    725Other non-current assets
    
    
    104
    
    
    
    83Total assets
    
    $
    7,254
    
    
    $
    8,653Liabilities and shareholders equityCurrent liabilities:Current portion of long-term debt and capital
lease obligations
    
    $
    6
    
    
    $
    6Accounts payable
    
    
    504
    
    
    
    494Accrued compensation
    
    
    682
    
    
    
    1,024Accrued expenses and other current liabilities
    
    
    499
    
    
    
    402Reserve for product returns
    
    
    323
    
    
    
    203Deferred revenue
    
    
    750
    
    
    
    697Total current liabilities
    
    
    2,764
    
    
    
    2,826Capital lease obligations, net of current portion
    
    
    12
    
    
    
    16Shareholders equity:Common stock
    
    
    35
    
    
    
    34Additional paid-in capital
    
    
    61,792
    
    
    
    61,626Accumulated deficit
    
    
    (57,349
    )
    
    
    (55,849
    )Total shareholders equity
    
    
    4,478
    
    
    
    5,811Total liabilities and shareholders equity
    
    $
    7,254
    
    
    $
    8,653
 3




---



##### Table of Contents



MakeMusic! Inc.
 
 Condensed Consolidated Statements of Operations  (In thousands of U.S. dollars, except share and per share data)
 3 Months
    
    6 MonthsEnded June 30,
    
    Ended June 30,2005
    
    2004
    
    2005
    
    2004Notation Revenue
    
    
    1,626
    
    
    
    2,057
    
    
    
    3,699
    
    
    
    4,940Smart Music Revenue
    
    
    324
    
    
    
    240
    
    
    
    669
    
    
    
    441Other Revenue
    
    
    73
    
    
    
    106
    
    
    
    179
    
    
    
    217NET REVENUE
    
    
    2,023
    
    
    
    2,403
    
    
    
    4,547
    
    
    
    5,598COST OF REVENUES
    
    
    376
    
    
    
    510
    
    
    
    845
    
    
    
    1,024GROSS PROFIT
    
    
    1,647
    
    
    
    1,893
    
    
    
    3,702
    
    
    
    4,574OPERATING EXPENSES:Development expenses
    
    
    914
    
    
    
    637
    
    
    
    1,726
    
    
    
    1,312Selling and marketing expenses
    
    
    787
    
    
    
    910
    
    
    
    1,811
    
    
    
    1,815General and administrative
expenses
    
    
    837
    
    
    
    875
    
    
    
    1,687
    
    
    
    1,633Total operating expenses
    
    
    2,538
    
    
    
    2,422
    
    
    
    5,224
    
    
    
    4,760LOSS FROM OPERATIONS
    
    
    (891
    )
    
    
    (529
    )
    
    
    (1,522
    )
    
    
    (186
    )Interest income, net
    
    
    1
    
    
    
    3
    
    
    
    3
    
    
    
    2Other income (expense)
    
    
    (1
    )
    
    
    98
    
    
    
    20
    
    
    
    108Net loss before income tax
    
    
    (891
    )
    
    
    (428
    )
    
    
    (1,499
    )
    
    
    (76
    )Income tax
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    2Net loss
    
    
    (891
    )
    
    
    (428
    )
    
    
    (1,500
    )
    
    
    (78
    )Loss per common share:Basic
    
    
    (0.26
    )
    
    
    (0.13
    )
    
    
    (0.44
    )
    
    
    (0.02
    )Diluted
    
    
    (0.26
    )
    
    
    (0.13
    )
    
    
    (0.44
    )
    
    
    (0.02
    )Weighted average common shares
outstanding:Basic
    
    
    3,448,132
    
    
    
    3,366,297
    
    
    
    3,436,695
    
    
    
    3,361,368Diluted
    
    
    3,448,132
    
    
    
    3,366,297
    
    
    
    3,436,695
    
    
    
    3,361,368
 4




---



##### Table of Contents



MakeMusic! Inc.
 
 Condensed Consolidated Statements of Cash Flows  (In thousands of U.S. dollars)
 3 Months
    
    3 Months
    
    6 Months
    
    6 MonthsEnded
    
    Ended
    
    Ended
    
    Ended2005
    
    2004
    
    2005
    
    2004Operating activitiesNet loss
    
    
    (891
    )
    
    
    (428
    )
    
    
    (1,500
    )
    
    
    (78
    )Adjustments to reconcile net loss to net cash used in
operating activities:Amortization of intangible assets
    
    
    272
    
    
    
    320
    
    
    
    542
    
    
    
    672Depreciation and amortization of property and
equipment
    
    
    40
    
    
    
    47
    
    
    
    78
    
    
    
    99Amortization of deferred compensation
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    75Issuance of stock options and warrants for services
    
    
    3
    
    
    
    3
    
    
    
    6
    
    
    
    5Increase (decrease) in cash from:Accounts receivable
    
    
    196
    
    
    
    (127
    )
    
    
    247
    
    
    
    (288
    )Inventories
    
    
    (136
    )
    
    
    (23
    )
    
    
    (266
    )
    
    
    11Prepaid expenses and other current assets
    
    
    60
    
    
    
    7
    
    
    
    63
    
    
    
    3Accounts payable
    
    
    (65
    )
    
    
    167
    
    
    
    10
    
    
    
    (22
    )Accrued liabilities and product returns
    
    
    264
    
    
    
    264
    
    
    
    (125
    )
    
    
    103Deferred revenue
    
    
    (35
    )
    
    
    33
    
    
    
    53
    
    
    
    (53
    )Net cash (used in) provided by operating activities
    
    
    (292
    )
    
    
    299
    
    
    
    (892
    )
    
    
    525Net cash used by investing activitiesPurchases of property and equipment
    
    
    (91
    )
    
    
    (38
    )
    
    
    (141
    )
    
    
    (63
    )Capitalized development and other intangibles
    
    
    (72
    )
    
    
    (57
    )
    
    
    (124
    )
    
    
    (104
    )Net cash used by investing activities
    
    
    (163
    )
    
    
    (95
    )
    
    
    (265
    )
    
    
    (167
    )Net cash provided by (used in) financing activitiesProceeds from stock options and warrants exercised
    
    
    94
    
    
    
    12
    
    
    
    160
    
    
    
    12Payments on long-term debt and capital leases
    
    
    (1
    )
    
    
    4
    
    
    
    (3
    )
    
    
    (53
    )Net cash provided by (used in) financing activities
    
    
    93
    
    
    
    16
    
    
    
    157
    
    
    
    (41
    )Net (decrease) increase in cash and cash equivalents
    
    
    (362
    )
    
    
    220
    
    
    
    (1,000
    )
    
    
    317Cash and cash equivalents, beginning of period
    
    
    1,577
    
    
    
    1,564
    
    
    
    2,215
    
    
    
    1,467Cash and cash equivalents, end of period
    
    
    1,215
    
    
    
    1,784
    
    
    
    1,215
    
    
    
    1,784Supplemental disclosure of cash flow informationInterest paid
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    2Income taxes paid
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    2
 5




---



##### Table of Contents



MakeMusic! Inc.
 
 Notes to Condensed Consolidated Financial Statements
  Note 1
    
    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 six months ended June
30, 2005 are not necessarily indicative of the operating results to be expected for the full
fiscal year. These statements should be read in conjunction with the Companys most recent
Annual Report on Form 10-KSB.Certain amounts as presented in the 2004 financial statements, as previously reported,
have been reclassified to conform to the 2005 presentation.Note 2
    
    Net Loss Per Share.Net loss per share was calculated by dividing the net loss by the
weighted average number of shares outstanding during the period. The following table
summarizes the shares of stock included in calculating earnings per share for the three and
six months ended June 30, 2005 and 2004 in accordance with FASB Statement 128 (FAS 128),
Earnings per Share:
 3 Months Ended June 30,
    
    6 Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Weighted-average
common shares
outstanding
    
    
    3,448,132
    
    
    
    3,366,297
    
    
    
    3,436,695
    
    
    
    3,361,368Dilutive effect of
stock options and
warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equivalent average
common shares
outstanding 
diluted
    
    
    3,448,132
    
    
    
    3,366,297
    
    
    
    3,436,695
    
    
    
    3,361,368
 The effect of options and warrants are excluded for 2005 and 2004 because the effect is
anti-dilutive.Note 3
    
    Income Tax (Expense) Benefit.The Company did not record a
provision for income tax in the three and six months ended June 30,
2005 and 2004 due to the fact the Company recorded a net loss for
the periods respectively. The only income tax expense recorded in
the three and six months ended June 30, 2005 and 2004 was for
minimum state income tax payments. Due to the uncertainty regarding
the realization of our Federal deferred income tax assets and
specifically the net operating loss carry-forwards, we have
recorded a valuation allowance against our income tax benefit for
2004 and 2005.
 6




---



##### Table of Contents



Note 4
    
    Stock Options and Warrants.The Company accounts for stock options
under Accounting Principles Board Opinion No. 25, under which the
excess, if any, of the quoted market price at the date of grant
over the amount an employee must pay to acquire the stock is
recognized as compensation expense. The following table displays
pro forma net income and earnings per share as if the fair value
based method of accounting had been applied, as required by
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensationand Statement of Accounting Standards No.
148, Accounting for Stock-Based Compensation  Transition and
Disclosure:
 3 Months Ended June 30,
    
    6 Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(In thousands, except per share data)Net income (loss):Net income (loss)
as reported
    
    
    (891
    )
    
    
    (428
    )
    
    
    (1,500
    )
    
    
    (78
    )Stock compensation
recorded under APB
25
    
    
    2
    
    
    
    36
    
    
    
    6
    
    
    
    75Stock compensation
(expense) credit
under FAS 123
    
    
    89
    
    
    
    (118
    )
    
    
    3
    
    
    
    (214
    )Pro forma net loss
    
    
    (800
    )
    
    
    (510
    )
    
    
    (1,491
    )
    
    
    (217
    )Loss per share:Basic and DilutedAs reported
    
    
    (0.26
    )
    
    
    (0.13
    )
    
    
    (0.44
    )
    
    
    (0.02
    )Pro forma
    
    
    (0.23
    )
    
    
    (0.15
    )
    
    
    (0.43
    )
    
    
    (0.06
    )
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Executive Overview
  ®
  7




---



##### Table of Contents



® ® ® ®
  ®
    8




---



##### Table of Contents



Results of Operations
  3 Months Ended June 30,
    
    6 Months Ended June 30,Incr.
    
    
    
    
    
    
    
    
    
    
    
    
    
    Incr.2005
    
    2004
    
    (Decr)

    %
    
    2005
    
    2004
    
    (Decr)
    
    %Notation revenue
    
    $
    1,626
    
    
    $
    2,057
    
    
    ($
    431
    )
    
    
    -21
    %
    
    $
    3,699
    
    
    $
    4,940
    
    
    ($
    1,241
    )
    
    
    -25
    %SmartMusic revenue
    
    
    324
    
    
    
    240
    
    
    
    84
    
    
    
    35
    
    
    
    669
    
    
    
    441
    
    
    
    228
    
    
    
    52Other revenue
    
    
    73
    
    
    
    106
    
    
    
    (33
    )
    
    
    n/a
    
    
    
    179
    
    
    
    217
    
    
    
    (38
    )
    
    
    n/aNet revenue
    
    
    2,023
    
    
    
    2,403
    
    
    
    (380
    )
    
    
    -16
    
    
    
    4,547
    
    
    
    5,598
    
    
    
    (1,051
    )
    
    
    -19Cost of revenues
    
    
    376
    
    
    
    510
    
    
    
    (134
    )
    
    
    -26
    
    
    
    845
    
    
    
    1,024
    
    
    
    (179
    )
    
    
    -17Gross profit
    
    
    1,647
    
    
    
    1,893
    
    
    
    (246
    )
    
    
    -13
    
    
    
    3,702
    
    
    
    4,574
    
    
    
    (872
    )
    
    
    -19Percentage of net
sales
    
    
    81
    %
    
    
    79
    %
    
    
    
    
    
    
    
    
    
    
    81
    %
    
    
    82
    %Development expenses
    
    
    914
    
    
    
    637
    
    
    
    277
    
    
    
    43
    
    
    
    1,725
    
    
    
    1,312
    
    
    
    413
    
    
    
    31Selling and
marketing expense
    
    
    787
    
    
    
    910
    
    
    
    (123
    )
    
    
    -14
    
    
    
    1,812
    
    
    
    1,815
    
    
    
    (3
    )
    
    
    0General and
administrative expense
    
    
    837
    
    
    
    875
    
    
    
    (38
    )
    
    
    -4
    
    
    
    1,687
    
    
    
    1,634
    
    
    
    53
    
    
    
    3Total operating
expense
    
    
    2,538
    
    
    
    2,422
    
    
    
    116
    
    
    
    5
    
    
    
    5,224
    
    
    
    4,761
    
    
    
    463
    
    
    
    10Operating loss
    
    
    (891
    )
    
    
    (529
    )
    
    
    (362
    )
    
    
    68
    
    
    
    (1,522
    )
    
    
    (187
    )
    
    
    (1,335
    )
    
    
    714Other income
(expense)
    
    
    0
    
    
    
    101
    
    
    
    (101
    )
    
    
    -100
    
    
    
    23
    
    
    
    111
    
    
    
    (88
    )
    
    
    -79Net loss before taxes
    
    
    (891
    )
    
    
    (428
    )
    
    
    (463
    )
    
    
    -108
    
    
    
    (1,499
    )
    
    
    (76
    )
    
    
    (1,423
    )
    
    
    -1,872Income tax provision
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    
    
    
    
    (1
    )
    
    
    (2
    )
    
    
    1
    
    
    
    -50Net Loss
    
    ($
    891
    )
    
    ($
    428
    )
    
    ($
    463
    )
    
    
    -108
    
    
    ($
    1,500
    )
    
    ($
    78
    )
    
    ($
    1,422
    )
    
    
    -1,823
 For the quarter and six-month periods ended June 30, 2005 compared to the quarter and
six-month periods ended June 30, 2004.
 Net Revenues.
 9




---



##### Table of Contents



Subscription Type
    
    30-Jun-05
    
    31-Mar-05
    
    31-Dec-04
    
    30-Jun-04School Subscriptions
    
    
    12,074
    
    
    
    11,166
    
    
    
    9,646
    
    
    
    7,633School-Sponsored Home
Subscriptions
    
    
    24,793
    
    
    
    23,839
    
    
    
    22,757
    
    
    
    16,767Home Subscriptions
    
    
    2,473
    
    
    
    2,423
    
    
    
    2,083
    
    
    
    1,607Total Subscriptions
    
    
    39,340
    
    
    
    37,428
    
    
    
    34,486
    
    
    
    26,007
  Gross Profit.
 10




---



##### Table of Contents



Development Expenses.
   Sales and Marketing Expenses.
  General and Administrative Expenses.
  Net Loss from Operations
 11




---



##### Table of Contents



Net Loss
 Liquidity and Capital Resources .
   
 ITEM 3. CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures
 Changes in internal controls
 12




---



##### Table of Contents



Cautionary Statements
 This report 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, and similar words or expressions. Our forward-looking
statements in this report generally relate to our ability to generate positive cash flow, our
expectations regarding increasing sales, the impact of strategic alliances, the timing of product
updates, sufficiency of and ability to obtain additional capital, product development, 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 caution 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 us or on our
behalf. These factors include, but are not limited to, our possible need for and ability to obtain
additional capital; the market acceptance of our products; our dependence upon new product
development effort; our dependence on releasing annual Finale upgrades; the maintenance of
strategic relationships; the success of our 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 we face; the rapid technological changes and obsolescence in our
industry; our 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 our
reports to the Securities and Exchange Commission (including our 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. We undertake no obligation to update publicly or revise any
forward-looking statements.
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  13




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
    Nominee
    
    Number of Votes For
    
    Number of Votes WithheldJohn W. Paulson
    

    1,904,219
    
    
    
    6,904William R. Wolff
    

    1,872,196
    
    
    
    38,927John C. Bergstrom

    
    1,904,219
    
    
    
    6,904John R. Whisnant

    
    1,904,219
    
    
    
    6,904Ronald B. Raup
    

    1,904,019
    
    
    
    7,114Philippe H. Aubert

    
    1,904,219
    
    
    
    6,904Benson K. Whitney
    

    1,904,219
    
    
    
    6,904
   
 Item 5. Other Information
  
 Item 6. Exhibits.
 Exhibits:
 14




---



##### Table of Contents



SIGNATURES
  Date: August 10, 2005
    
    MAKEMUSIC! INC.By:
    
    /s/ William R. WolffWilliam R. Wolff, Chief Executive Officer(Principal Executive Officer)And:

    /s/ Alan G. ShulerAlan G. Shuler, Chief Financial Officer(Principal Financial and Accounting Officer)
 15




---



##### Table of Contents



EXHIBIT INDEX
 Form 10-QSB
 Three and six months ended June 30, 2005
 Exhibit No.
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 16