The Piano Man

The Piano Man

By Jean Gruss | Editor/Lee-Collier

Pianos aren't exactly a booming industry in the United States.

But a small company called QRS Music Technologies in Naples has found a way to boost their appeal with sophisticated electronic equipment that can transform almost any ordinary piano into an entertainment center. In its last full fiscal year, which ended June 30, the company's sales rose 9% to $20.2 million.

Through a network of piano dealers, QRS Music sells electronic devices that turn ordinary pianos into player pianos. Consumers can buy a player piano from QRS' Story & Clark brand for about $10,000 or pay from $5,000 to $8,000 for a dealer to install player technology called Pianomation on a piano they already own.

These aren't your grandfather's player pianos. For example, you can listen to a CD from your favorite artist and the system will "play" the accompanying piano keys.

And attention Piano Man fans: you can watch Billy Joel Live at Yankee Stadium on your television set while the device plays the same keys on your piano.

To remain on the leading edge of this technology and stay ahead of competitors such as Yamaha, QRS Music has doubled research and development spending.

What's more, delays in getting the newest technology to market hurt the company's bottom line as net income in the last fiscal year dropped 25%.

But Thomas Dolan, the company's president and chief executive officer, is confident that the investment in technology will eventually yield better results in the years ahead.

Dolan, an electrical engineer who formerly worked for Motorola and Johnson Controls, says the new technology has other applications, though he declines to elaborate.

In a move that might indicate the future direction of the company, QRS Music says it may acquire New Jersey-based National Educational Music Co., a company that rents and sells musical instruments to schools.

QRS Music says in securities filings that it has signed a letter of intent that grants it exclusive rights to negotiate the purchase of the company over the next three months. Dolan declines to comment further.

Technology boosts sales

Thomas Dolan's father, Richard Dolan, bought the company more than 20 years ago. At the time, the company sold paper player-piano rolls, which dominated the playback technology since the beginning of the 20th century.

Today, QRS is still the only major manufacturer of these rolls, with 5,000 master recordings and 45,000 music rolls at its Buffalo facility. The company has rolls from performances by Liberace, Scott Joplin, Fats Waller and George Gershwin, among others.

But paper player-piano rolls represent only about 3% of the company's total sales. In 1992, QRS developed its own player-piano technology, called Pianomation. This and other sophisticated technology now makes up for about half the company's sales, with another 40% of the company's sales coming from its Story & Clark acoustic piano brand.

The Pianomation system consists of an electronic processor the size of a paperback novel, which sends signals to small levers inside the piano that strike the keys. The Pianomation system is unique in that it can synchronize with music recorded on CDs. For example, you can insert the latest CD from pop star Christina Aguilera into the processor and the piano keys start to play by themselves while Aguilera's voice soars and her band kicks in. A new system called Qsync does the same thing, except that your piano can play along with a DVD concert playing on a television screen.

QRS Music sells CDs and DVDs that guarantee a piano will play perfectly in sync with the music or film recording. Although you can buy your own CDs or DVDs, recording companies may make several imprints that may not match with the Pianomation's commands. A new service called NetPiano also lets subscribers download songs to newer Pianomation systems. Together, music sales accounted for about 5% of total sales in 2005.

The company sells its pianos and playback technology through about 400 dealers. Dolan says dealers like the technology because they can add features to any acoustic or digital pianos and reap extra commissions. The company controls about one-third of the player-piano market, with the rest controlled by Yamaha and PianoDisc. The company doesn't disclose how many pianos or Pianomations it sells.

To keep costs down and remain competitive, QRS Music buys and assembles the pianos in China. Then, the company ships the pianos to QRS' facility in Seneca, Pa., where employees inspect, tune and test them before they deliver them to dealers. The company delivers its own pianos to ensure that the instruments are in perfect condition once they reach the showroom floors.

Overseas and niche markets

Because piano prices have fallen in the last decade, the number of dealers has fallen too. There are about 800 piano dealers in the U.S. today, versus about 1,500 a decade ago, Dolan estimates.

But the Asian markets are fertile grounds for the company. The Chinese buy about 200,000 pianos a year, more than double the number sold in the U.S. "I believe sales overseas will increase. There is a market for our technology," Dolan says. With its manufacturing already in China, Dolan says the Asian market is primed for growth. The hard part will be establishing the logistics of delivery to a network of dealers, he says.

As a first step in that strategy, QRS Music recently opened an office in Australia, where it hopes to make inroads. "We felt there was a price point which we could deliver from China," Dolan says.

Meanwhile, the company started a new commercial line of pianos in 2004 marketed under the Gulbransen brand name. QRS Music sells these pianos and other specialty instruments such as nickelodeons directly to large customers, such as hotels and cruise lines. A nickelodeon, which costs $22,000, is a piano that plays itself and includes other self-playing instruments such as drums, castanets and a xylophone. Dolan declines to name those large customers, but he says the company is having success selling to them via the Internet.

To boost sales, QRS Music is working on new technology and adapting existing technology to other instruments. For example, it has created a self-playing violin that uses the same player-piano technology and costs $12,000. The company funds the growth with cash from operations and there are currently no plans to increase debt or sell more stock.

The company went public in 1996; the stock is thinly traded over-the-counter (symbol QRSM.OB, recent price $1.75). The Dolan family owns about 60% of the shares. Thomas Dolan's pay was $172,000 in 2005.

Dolan won't say what other instruments the company is working on now, but he also suggests that the technology his company has developed may be adaptable outside the realm of music. And the potential acquisition of National Educational Music Co. opens up a new sales avenue into the school-age market.

"We've got some fun, fun stuff," Dolan hints.

AT A GLANCE

QRS Music

Headquarters: Naples

President/CEO: Thomas Dolan

FY 2005 revenues: $20.2 million

Stock symbol: QRSM.OB

Recent stock price: $1.75

52-week stock-price range: $1.25 to $2.90

Price-earnings ratio: 34

Dividend: N/A

Market capitalization: $16.6 million

Sources: Securities and Exchange Commission, Yahoo Finance.

BY THE NUMBERS

QRS Music Technologies

For the fiscal year ended June 30,2005

Income Statement (dollars in thousands)

2004 2005 %Change

Net sales 18,513 20,247 9%

Cost of sales 12,503 14,065 12%

Selling, general and administrative 3,267 3,791 16%

Research and development 338 684 102%

Interest expense 23 33 43%

Income taxes 919 577 ?37%

Net income 1,463 1,098 ?25%

Balance Sheet

Assets 2004 2005 %Change

Cash 1,603 603 ?62%

Accounts receivable (net of doubtful accounts) 804 907 13%

Inventories 5,653 7,912 40%

Advances due from stockholder 18 0

Income taxes refundable 79 233 195%

Deferred income taxes 620 620 0%

Prepaid expenses and other current assets 89 182 104%

Property, plant and equipment 1,050 1,203 15%

Other assets 110 124 13%

Total assets 10,025 11,783 18%

Liabilities 2004 2005 %Change

Current portion of long-term debt 165 109 ?34%

Accounts payable 517 1,462 183%

Accrued expenses 414 536 29%

Note payable due to stockholder 0 250

Liability for preferential payment 478 0

Long-term debt 124 0

Total liabilities 1,697 2,357 39%

Total stockholders' equity 8,328 9,425 13%

Total liabilities and stockholders' equity 10,025 11,783 18%

Source: Securities and Exchange Commission