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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly period ended June 30, 2000
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-14007
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SONIC FOUNDRY, INC.
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(Exact name of registrant as specified in its charter)
MARYLAND 39-1783372
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1617 Sherman Avenue, Madison, WI 53704
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(Address of principal executive offices)
(608)256-3133
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(Registrant's telephone
number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes X No
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State the number of shares outstanding of each of the issuer's common equity as
of the last practicable date:
Outstanding
Class August 11, 2000
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Common Stock, $0.01 par value 21,656,894
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SONIC FOUNDRY, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
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PAGE NO.
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PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
Balance Sheets - June 30, 2000 (Unaudited) and
September 30, 1999.......................................................... 3
Statements of Operations (Unaudited) - Nine months ended
June 30, 2000 and 1999, three months ended
June 30, 2000 and 1999...................................................... 5
Statements of Cash Flows (Unaudited) - Nine months ended
June 30, 2000 and 1999...................................................... 6
Notes to Financial Statements (Unaudited)................................... 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................... 12
Item 3 Quantitative and Qualitative Disclosures
About Market Risk........................................................... 17
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................................... 18
Item 6. Exhibits and Reports on Form 8-K............................................ 18
</TABLE>
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Sonic Foundry, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands except per share data)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
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(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 36,528 $ 5,889
Accounts receivable, net of allowances of $1,240 and $1,315
at June 30, 2000 and September 30, 1999, respectively 9,337 3,704
Accounts receivable - other 366 57
Revenues in excess of billings 389 -
Inventories 1,701 1,041
Prepaid expenses and other current assets 2,155 880
Prepaid advertising 2,000 -
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Total current assets 52,476 11,571
Property and equipment:
Land 95 190
Buildings and improvements 2,630 1,738
Equipment 12,791 2,218
Furniture and fixtures 398 202
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Total property and equipment 15,914 4,348
Less accumulated depreciation 2,033 923
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Net property and equipment 13,881 3,425
Other assets:
Goodwill and other purchase intangibles, net 79,079 -
Capitalized software development costs, net 640 643
Long term investment 514 514
Other assets 678 556
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Total other assets 80,911 1,713
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Total assets $147,268 $16,709
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</TABLE>
See accompanying notes.
These financial statements reflect adjustments for a 2-for-1 stock split.
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Sonic Foundry, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands except for per share data)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
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<S> <C> <C>
Liabilities and stockholders' equity (Unaudited)
Current liabilities:
Accounts payable $ 3,553 $ 1,867
Accrued liabilities 10,178 812
Current portion of long-term obligations 5,008 49
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Total current liabilities 18,739 2,728
Long-term obligations, net of current portion 2,754 654
Subordinated debt - 4,580
Other liabilities 158 -
Stockholders' equity:
Preferred Stock, $.01 par value, authorized 5,000,000 - -
shares; none issued and outstanding
5% preferred stock, Series B, voting, cumulative, - -
convertible, $.01 par value (liquidation preference at
par), authorized 10,000,000 shares; none issued and
outstanding
Common stock, $.01 par value, authorized 100,000,000 shares;
21,654 and 12,994 shares issued and outstanding at June 30,
2000 and September 30, 1999 217 130
Common stock to be issued 6,900 -
Common stock warrants and options 8,882 1,012
Treasury stock (150) -
Additional paid-in capital 141,152 15,271
Currency translations (14) -
Accumulated deficit (26,441) (7,466)
Unearned compensation (4,929) (200)
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Total stockholders' equity 125,617 8,747
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Total liabilities and stockholders' equity $147,268 $16,709
========================================
</TABLE>
See accompanying notes.
These financial statements reflect adjustments for a 2-for-1 stock split.
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Sonic Foundry, Inc. and Subsidiaries
Consolidated Statement of Operations
(in thousands except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenue:
Software license fees $ 5,247 $ 4,223 $ 15,976 $ 9,739
Media services 1,627 - 2,030 -
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Total revenue 6,874 4,223 18,006 9,739
Cost of revenue:
Cost of software license fees 1,220 993 3,424 2,514
Cost of media services 1,773 - 2,247 -
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Total cost of revenue 2,993 993 5,671 2,514
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Gross margin 3,881 3,230 12,335 7,225
Operating expenses:
Selling and marketing expenses 5,843 3,175 13,954 7,218
General and administrative expenses 3,864 833 7,039 2,595
Product development expenses 2,238 544 4,950 1,760
Amortization of goodwill and other
purchase intangibles 6,793 - 6,793 -
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Total operating expenses 18,738 4,552 32,736 11,573
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Loss from operations (14,857) (1,322) (20,401) (4,348)
Other income (expense):
Interest expense (45) (14) (270) (19)
Interest and other income 593 50 1,688 192
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Total other income 548 36 1,418 173
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Net loss before taxes (14,309) - (18,983) -
Income tax benefit 8 - 8 -
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Net loss $(14,301) $(1,286) $(18,975) $(4,175)
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Loss per common share -
Basic and diluted $ ( .66) $ (0.24) $ (1.10) $(0.78)
============================================================
</TABLE>
See accompanying notes.
These financial statements reflect adjustments for a 2-for-1 stock split.
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Sonic Foundry, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended June 30,
2000 1999
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<S> <C> <C>
Operating activities
Net loss $(18,975) $(4,175)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of goodwill and other purchase intangibles 6,793 -
Depreciation and amortization 1,528 376
Amortization of capitalized software development costs 442 199
Noncash charge for common stock warrants 343 74
Amortization of debt discount and debt issuance costs 163 -
Amortization of unearned compensation unrelated to purchases 50 -
(Gain)/loss on sale of assets and investments (650) 5
Income tax benefit (8) -
Changes in operating assets and liabilities:
Accounts receivable (3,250) (1,071)
Accounts receivable-other (254) -
Revenues in excess of billings (389) -
Inventories (921) (491)
Prepaid expenses and other assets (462) (106)
Accounts payable and accrued liabilities 1,029 108
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Total adjustments 4,414 (906)
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Net cash used in operating activities (14,561) (5,081)
Investing activities
Purchases of property and equipment (4,927) (1,000)
Purchases of other investments - (514)
Acquisition, net of cash acquired (4,042) -
Proceeds from sale of marketable securities - 3,000
Proceeds from disposals of property and equipment 1,000 4
Capitalized software development costs - (439)
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Net cash provided by (used in) investing activities (7,969) 1,051
Financing activities
Proceeds from sale of common stock, net of issuance costs 53,381 1
Proceeds from long-term debt - 632
Payments on long-term debt and capital leases (212) (632)
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Net cash provided by financing activities 53,169 1
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Net increase (decrease) in cash 30,639 (4,029)
</TABLE>
See accompanying notes.
6
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<TABLE>
<CAPTION>
<S> <C> <C>
Cash and cash equivalents at beginning of period 5,889 6,940
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Cash and cash equivalents at end of period $36,528 $2,911
===========================
Supplemental cash flow information:
Interest paid 76 20
Noncash transactions -
Capital lease acquisitions 1,365 -
Preferred stock dividend - 4
Issuance of stock in exchange for future advertising 2,500 -
Issuance of stock for acquisition of Jedor 300 -
Issuance of stock and stock options for STV 72,480 -
Stock to be issued for International Image 6,900 -
Cash to be paid for International Image at close 8,000 -
Issuance of warrants 696 -
Conversion of subordinated debt and associated debt issuance
costs and accrued interest into common stock 2,890 -
</TABLE>
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Note 1: Summary of Significant Accounting Policies
(a) Basis of Presentation for Interim Financial Data
The accompanying unaudited, consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements and
should be read in conjunction with the Company's annual report filed on Form
10-K for the fiscal year ended September 30, 1999. These statements reflect all
adjustments, consisting only of normal, recurring adjustments that, in the
opinion of the Company's management, are necessary for a fair presentation of
the results of operations for the periods presented. Operating results for the
quarter and the nine months ended June 30, 2000 are not necessarily indicative
of the results that might be expected for any subsequent quarter or the year
ended September 30, 2000.
On March 24, 2000, the board of directors declared a 2-for-1 stock split of the
Company's common stock. The shares were distributed on April 28, 2000 to
shareholders of record on April 7, 2000. Accordingly, the accompanying
consolidated financial statements and notes thereto have been retroactively
restated to reflect the stock split.
Certain amounts in the prior period's financial statements have been
reclassified to conform to the current period's presentation.
(b) Revenue Recognition
Software License Fees: Revenues from software license fees consist of fees
charged for the licensing of Windows based software products that are built on
the principle of "Create" (ACID, Loop Libraries, Audio Anywhere), "Edit" (Sound
Forge, Sound Forge XP, Vegas Audio, Viscosity, Vegas Video) and "Deliver" (CD
Architect, Siren, Stream Anywhere, Soft Encode). Software license fees are
recognized upon delivery, net of allowances for estimated returns, provided that
no significant obligations of the Company remain and collection of the resulting
receivable is deemed probable. Revenues from software license agreements with
OEMs are recognized when persuasive evidence of an arrangement exists, the
software product has been delivered to the OEM, the fee to the Company is fixed
and determinable, and collectibility is probable. Additionally, revenues include
fees recorded pursuant to long-term contracts, using the percentage of
completion method of accounting, when significant customization or modification
is required.
Media Services: Revenues from media services include duplication for broadcast
distribution, broadcast standard conversions, audio and video encoding,
webcasting, production, hosting and streaming as well as fees for consulting
services. Both are recognized upon completion of the service, provided that no
significant obligations of the Company remain and collection of the resulting
receivable is deemed probable. In the case of long-term contracts, which are
defined as
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those projects extending longer than one month, revenues are recognized using
the percentage of completion method.
In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial
Statements. The accounting impact of SAB 101 is required to be adopted by the
Company no later than October 1, 2000. If the Company determines that its
revenue recognition policies must change to be in compliance with SAB 101, the
implementation of SAB 101 will require the Company to reflect a cumulative
effect of a change in accounting principle as if SAB 101 had been implemented on
October 1, 1999.
The Company is currently reviewing SAB 101 to determine what impact, if any, the
adoption of SAB 101 will have on its financial position and results of
operations. The Company believes its current revenue recognition policies and
practices are consistent with the provisions of SOP 97-2, as amended by SOP 98-4
and SOP 98-9, which were issued by the American Institute of Certified Public
Accountants as well as other authoritative literature. Implementation guidelines
for these standards, as well as potential new standards, including SAB 101,
could lead to unanticipated changes in the Company's current revenue recognition
policies. Such changes could affect the timing of the Company's future revenue
and results of operations.
(c) Net Loss Per Share (in thousands)
The following table sets forth the computation of basic and diluted loss per
share, adjusted for a 2-for-1 stock split:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Denominator
Denominator for basic and diluted loss per
share - weighted average common shares 21,557 5,332 17,313 5,332
==================================================
Securities that could potentially dilute
basic earnings per share in the future that
are not included in the computation of
diluted loss per share as their impact is
antidilutive (treasury stock method)
Options and warrants 606 1,340 2,839 1,340
Convertible Series B Preferred Stock - 7,584 - 7,584
Common stock to be issued 600 - 600 -
</TABLE>
Note 2: Inventories
Inventory consists of the following:
<TABLE>
<CAPTION>
June 30, 2000 September 30, 1999
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<S> <C> <C>
Raw materials and supplies $ 1,154 $ 437
Work-in-process 365 578
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Finished goods 182 26
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$ 1,701 $ 1,041
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</TABLE>
Note 3: Equity Transactions
On January 20, 2000 the Company called all of its outstanding publicly traded
common stock purchase warrants for redemption. Accordingly, the Company issued
2,189,244 shares of common stock in January and February 2000.
During the quarter ended March 31, 2000, the Company issued 1,818,676 shares of
common stock to institutional and strategic investors including Warner Brothers
On-line (Warner Brothers) and Sony Pictures Digital Entertainment (Sony
Pictures). In conjunction with the Warner Brothers and Sony Pictures
transactions, a portion of the shares were issued in exchange for advertising
consideration to be used on various Warner Brothers and Sony Pictures web sites
and resulted in the Company recording of $2.5 million of prepaid advertising,
$500,000 of which was utilized in the June 2000 quarter.
Proceeds, net of issuance costs, for the above transactions amounted to
approximately $48 million.
Note 4: Acquisitions
On April 3, 2000, the Company completed its acquisition of STV Communications, a
premier media convergence company offering webcasting, syndication and
production, and post-production services. Pursuant to the Merger Agreement, an
aggregate of $1,222,000 in cash was paid and 2,107,096 shares of the Company's
common stock at $30.75 per share were issued in exchange for all of the issued
and outstanding capital stock of STV. In addition 485,584 options to purchase
Sonic Foundry common stock were issued to replace existing STV options and
warrants. As part of the acquisition, the Company also capitalized $1,628,000
of transaction costs and a $2,000,000 note receivable froM STV. The acquisition
was accounted for as a purchase and, accordingly, the results of operations have
been included in the consolidated financial statements from April 3, 2000, the
effective date of the acquisition. The purchase price has been allocated to the
acquired assets and assumed liabilities on the basis of their estimated fair
values as of the date of the acquisition, with intangible assets determined by
an independent appraisal. The useful lives of the assembled workforce and
goodwill are 3 years and 1 year, respectively. Unearned compensation of
$5,307,000 resulted from the valuation of the converted options and is being
amortized over 3.5 years.
Effective June 1, 2000, the Company acquired all of the capital stock of
International Image, a leading developer and marketer of Internet software
tools, services, and systems. The purchase consideration consists of 600,000
shares of the Company's common stock at $11.50 per share, $4,000,000 of short-
term notes payable and approximately $8,000,000 in cash and debt assumed. The
acquisition was accounted for as a purchase and, accordingly, the results of
operations have been included in the consolidated financial statements from June
1, 2000, the effective date of the acquisition. The purchase price will be
allocated to the acquired assets and assumed liabilities on the basis of their
estimated fair values as of the date of the acquisition, with intangible assets
determined by an independent appraisal. The portion of the purchase price to be
allocated to intangible assets is expected to be over $15.5 million and will be
amortized based
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upon the useful lives determined in the appraisal, which is expected to be 3
years. Formalization of the closing is expected in mid-August, pending approval
from Canadian authorities.
Based on unaudited data, the following table presents selected financial
information for the Company on a pro forma basis, assuming International Image
and STV had been consolidated since October 1, 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
June 30 June 30
(In Thousands except per share data) (In Thousands except per share data)
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net revenues $ 8,598 $ 7,115 $ 25,583 $ 18,432
Net loss (15,163) (9,491) (38,589) (28,574)
Net loss per share $ (.68) $ (1.18) $ (1.99) $ (3.55)
</TABLE>
The pro forma net loss includes the additional amortization of goodwill that
would have been expensed had the transaction taken place at the beginning of the
period being reported.
The pro forma results are not necessarily indicative of future operations or the
actual results that would have occurred had the acquisition been made as of
October 1, 1999.
Note 5: Contingencies
In June 1998, the Board of Directors approved the issuance of guarantees of
certain obligations of certain officers of the Company. The guarantees were
executed in June and July of 1998 to a bank in order to facilitate the issuance
of loans to the officers. The guarantees carry an aggregate maximum limit of
approximately $375,000.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations of
the Company should be read in conjunction with the financial statements and
notes thereto included elsewhere in this form 10-Q and our annual report filed
on form 10-K for the fiscal year ended September 30, 1999. In addition to
historical information, this discussion contains forward-looking statements such
as statements of our expectations, plans, objectives and beliefs. These
statements use such words as "may", "will", "expect", "anticipate", "believe",
"plan", and other similar terminology. Actual results could differ materially
due to changes in the market acceptance of our products, market introduction or
product development delays, our ability to effectively integrate acquired
businesses, global and local business conditions, legislation and governmental
regulations, competition, our ability to effectively maintain and update our
product portfolio, shifts in technology, political or economic instability in
local markets, and currency and exchange rates.
OVERVIEW
Background
Founded in 1991, Sonic Foundry is a leading developer and marketer of digital
media and Internet software tools, services, and systems. Sonic Foundry's award-
winning products and services are used worldwide for multimedia and Internet
applications, music and audio post-production, broadcast production, and digital
content creation. Built on the principle of Create, Edit, and Deliver, Sonic
Foundry's products and services offer media consumers at all levels the ability
to create and capture media, edit the content, and deliver the information via
fixed media channels or electronic distribution. With the recent acquisitions of
STV Communications and International Image, the newly developed media services
division is poised to offer premium solutions for delivering audio and video
content online along with duplication and broadcast conversion services. The
division provides a combination of proprietary technologies, blending
traditional duplication and conversion services with high-end encoding,
webcasting, syndication systems, content and digital rights management, and
consulting services.
RESULTS OF OPERATIONS (dollars in thousands)
Total Net Revenues
Total net revenues increased 84.9% to $18,006 for the nine months ended June 30,
2000 from $9,739 in the comparable period of 1999.
Total net revenues increased 62.8% to $6,874 for the three months ended June 30,
2000 from $4,223 in the comparable period of 1999.
For both the three and nine month periods presented, revenues from new products
such as Siren,Vegas Audio and Vegas Video as well as increases from the enhanced
versions of ACID, continue to be the major drivers of product revenue growth,
while encoding, tape duplication and consulting services drove increases in our
new media services business. In the three month
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period ended June 30, 2000, ACID and related creation products accounted for 24%
of total revenues, while editing products contributed 29%, delivery products
accounted for 23% and our new media services offering amounted to 24% of total
revenues.
Revenue from Software License Fees
Software license fees increased 64.0% to $15,976 for the nine months ended June
30, 2000 from $9,739 in the comparable period of 1999 and represented 88.7% of
total net revenues.
Software license fees increased 24.2% to $5,247 for the three months ended June
30, 2000 from $4,223 in the comparable period of 1999.
The increases for both periods were due primarily to:
. New product introduction. Sales of Siren, Stream Anywhere, Vegas Audio,
Vegas Video and Viscosity accounted for 26.4% of software license fees
for the nine months ended June 30, 2000.
. Increased sales from the ACID family of products. ACID sales increased
123.9% for the nine months ended June 30, 2000.
. Strong growth in the OEM channel. Ongoing relationships with partners
such as Hewlett Packard, Macromedia and Creative Labs, as well as newly
enhanced relationships with Sony Pictures and Pinnacle Systems, helped
drive OEM growth of 290.6% to $4,515 for the nine months ended June 30,
2000.
. An increase in the direct channel from 10.0% to 13.2% of total revenues
for the nine months ended June 30, 1999 and June 30, 2000, respectively,
which resulted from a significant spending on catalog and email campaign.
. Despite strong sales from new products and the ACID product line,
domestic retail sales and sales from the "Create" line of products
decreased from sales recorded in the quarter ended June 30, 1999. The
decrease was primarily attributable to strong sales from the release of
Audio Anywhere and a related rebate program in May 1999.
Revenues from retail international customers accounted for 13.0% and 12.9% of
total net revenues for the nine months ended June 30, 2000 and 1999,
respectively and were comprised completely of revenue from software license
fees. Revenues from international sales increased 86.3% for the nine months
ended June 30, 2000 from the comparable period in 1999.
Revenue from Media Services
Revenue from our media services division consists of fees charged for broadcast
conversion services, audio and video encoding, webcasting, streaming, hosting
and consulting services. The addition of International Image contributed nearly
half of total revenue from media services for the three months ended June 30,
2000. With the acquisitions of STV and International Image,
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and the continued growth from the media services division, revenue from media
services is expected to increase as a percentage of total net revenue.
Cost of Software License Fees
Costs of software license fees include product material costs, contracted and
internal assembly labor, freight, royalties on third party technology or
intellectual content, and amortization of previously capitalized product
development costs. Cost of software license fees increased by $910 or 36.2% to
$3,424 for the nine months ended June 30, 2000 from $2,514 in the comparable
period of 1999. However, for the same timeframe, costs as a percentage of net
revenues from software license fees decreased from 25.8% in 1999 to 21.4% in
2000. Cost of software license fees increased by $227 or 22.9% to $1,220 for
the three months ended June 30, 2000 from $993 in the comparable period of 1999.
For the same timeframe, costs as a percentage of net revenues from software
license fees remained flat at 23.5% in 1999 to 23.3% in 2000.
For both periods, the increases in absolute dollars were due primarily to higher
sales volume. The decreases as a percentage of software license fees were due
to growth in OEM sales as well as an increase in the number of downloadable
products being sold from our web site. We have experienced wide fluctuations in
costs of software license fees as a percentage of revenue from software license
fees due to variations in product and product delivery mix. We incur virtually
no cost of revenues in connection with OEM sales where our customers bundle our
software products with their hardware.
Costs of Media Services
Costs of media services include direct labor, depreciation on production
equipment, and other general expenses associated with personnel. Costs of media
services totaled $2,247 for the nine months ended June 30, 2000, which is 110.7%
of net revenue from media services. Costs of media services totaled $1,773 for
the three months ended June 30, 2000, which is 109.0% of net revenue from media
services.
Increasing costs of media services have been driven primarily by the investment
in the infrastructure necessary to support a continued focus on providing
digital solutions in media capture, archiving and distribution. An increase in
compensation, benefits and related expenses for additional direct and indirect
labor personnel and depreciation on capital investments are major components of
that infrastructure.
Operating Expenses
Selling and marketing expenses include wages for sales, marketing and technical
support personnel, as well as advertising, commissions, direct mail, trade show
and various promotional expenses. Selling and marketing expenses increased by
$6,736 or 93.3% to $13,954 during the nine months ended June 30, 2000 from
$7,218 during the comparable period in 1999. Selling and marketing expenses as
a percentage of total revenues were 77.5% and 74.1% for the 2000 and 1999
periods, respectively.
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Selling and marketing expenses increased by $2,668 or 84.0% to $5,843 during the
three months ended June 30, 2000 from $3,175 during the comparable period in
1999. For the same timeframe, selling and marketing expenses as a percentage of
total revenues were 85.0% and 75.2% for the 2000 and 1999 periods,
respectively.
Nearly all of the increase in absolute dollars for the quarter ended June 30,
2000 resulted from: 1.) utilization of the Warner Brothers prepaid advertising;
2.) expenditures to increase our tradeshow presence; 3.) increased advertising
to drive the Vegas Video launch; and 4.) a continued focus on our direct sales
effort, which included expenditures for the development and distribution of a
software product catalog targeting over three million consumers. Other selling
and marketing expenses were related to developing our media services campaign,
establishing marketing promotions with major retailers such as Best Buy and
raising brand awareness through advertisements on Internet sites as well as with
major publications such as Fortune and Rolling Stone. Timing of these costs
varies greatly depending on introduction of new products or entrance into new
markets. Accordingly, we expect selling and marketing costs to increase in the
near future as we continue to expand our media services division, introduce new
products into the market, and utilize our prepaid advertising.
General and administrative expenses consist of costs associated with facilities,
finance, legal, management information systems and various employee benefits not
fully allocated to functional areas. General and administrative expenses
increased by $4,444 or 171.3% to $7,039 during the nine months ended June 30,
2000 from $2,595 during the comparable period in 1999. General and
administrative expenses as a percentage of total revenues were 39.1% and 26.6%
for the 2000 and 1999 periods, respectively.
General and administrative expenses increased by $3,031 or 363.9% to $3,864
during the three months ended June 30, 2000 from $833 during the comparable
period in 1999. General and administrative expenses as a percentage of total
revenues were 56.2% and 19.7% for the 2000 and 1999 periods, respectively.
The increases in absolute dollars related mainly to the additional personnel
assumed in conjunction with the acquisition of STV Communications and
International Image, as well as continued internal growth. G&A personnel
increased 183.3% to 68 employees at June 30, 2000 from 24 employees at June 30,
1999. Costs include wages and related recruitment and benefit costs,
professional fees, facilities costs, depreciation, and other expenses required
to build and maintain the infrastructure necessary to support current and future
products and services.
Product development expenses include salaries and wages of the software research
and development staff and an allocation of benefits, facility and administrative
expenses, net of product development expenses capitalized pursuant to SFAS No.
86, "Accounting for the Cost of Computer Software to be Sold, Leased, or
Otherwise Marketed." Product development expenses increased by $3,190 or 181.3%
to $4,950 during the nine months ended June 30, 2000 from $1,760 during the
comparable period in 1999. Product development expenses as a percentage of total
revenues were 27.5% and 18.1% for the 2000 and 1999 periods, respectively.
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Product development expenses increased by $1,694 or 311.4% to $2,238 during the
three months ended June 30, 2000 from $544 during the comparable period in 1999.
Product development expenses as a percentage of total revenues were 32.6% and
12.9% for the 2000 and 1999 periods, respectively.
In accordance with SFAS Number 86, the Company capitalizes the cost of
development of software products that have reached technological feasibility.
No development costs were capitalized during the nine month period ended June
30, 2000 and $438 Vegas Audio costs were capitalized in the nine month period
ended June 30, 1999. The majority of the purchase price for Jedor, Inc., which
was completed in February 2000, was allocated to the capitalized software
development of Viscosity and will be amortized over two years. As the pace of
our recent software development activity has increased and as our product line
has expanded, the period between the initial achievement of technological
feasibility and the general availability of the software to our customers has
contracted. Accordingly, software development costs qualifying for
capitalization will be less significant in the future, and, as such, we expect
that we will expense most or all research and development costs, as incurred, in
the future.
The addition of software engineers to accelerate development of the Company's
expanding line of software products, as well as efforts expended to establish
our media services division and add to a host of internally used filtering
algorithms, caused the increase in product development costs between the two
periods. We believe that continued investment in research and development is
critical to attaining our strategic objectives and, as a result, we expect
research and development expenses to continue to increase in future periods.
Interest and other income increased by $1,496 to $1,688 during the nine months
ended June 30, 2000 from $192 during the comparable period of 1999. The
majority of the increase is due to a first quarter gain on sale of real estate
no longer needed by the Company and a gain on the sale of stock from an
investment that was made in a company that develops high speed networking
products. The remaining increase is from interest earned on the proceeds
received from the sale of stock in the second quarter.
No U.S. Federal or State tax expense was recorded during either of the quarters
ended June 30, 2000 or 1999 due to the Company's Federal and State net operating
loss position. International Image's operations have had, and are expected to
continue to have, Canadian tax liabilities. In the current quarter, the Company
recognized a $8 tax benefit related to Canadian operations. The deferred tax
liability for International Image was $53 at June 30, 2000.
Liquidity and Capital Resources
Cash used in operating activities equaled $14,561 and $5,081 for the nine-month
periods ended June 30, 2000 and 1999, respectively. The increased use in cash
between the two periods is primarily due to (1) the net loss, which relates to
increased operating expenditures necessary to maintain our rapid growth and (2)
an increase in accounts receivable, which relates to increased revenue from
retail and OEM accounts.
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Cash used in investing activities of $7,969 for the nine-month period ended June
30, 2000 included purchases of fixed assets equal to $4,927, which is a 393%
increase from the $1,000 of fixed assets purchased in 1999. Equipment additions
including network, storage and production equipment for the expansion of Media
Services and purchases of computers, furniture and other assets necessary to
outfit the company-wide growth in employees drove the increase during the first
nine months of fiscal 2000. Cash used for the Jedor and STV-acquisitions, net of
cash acquired, amounted to $4,042. Approximately $8 million will be required
when the close of the International Image transaction is formalized in mid-
August. The above uses of cash were partially offset by the December 1999 sale
of real estate no longer needed for our operations and the sale of an investment
in stock.
The increase in cash provided by financing activities from $1,000 in 1999 to
$53,169 in 2000, relates to the exercise of public and private warrants during
the quarter ended March 31, 2000 as well as the sale of common stock through
private placements. Cash was also impacted in 2000 by payments made on capital
leases and other long-term debt.
We expect to experience significant growth in operating expenses, particularly
research and development and sales and marketing expenses, for the foreseeable
future in order to execute our business plan. As a result, we anticipate that
such operating expenses, as well as planned capital expenditures, will
constitute a material use of our cash resources. In addition, we may utilize
cash resources to fund acquisitions or investments in complementary businesses,
technologies or product lines. Management believes that the net proceeds
received in the quarter ended March 31, 2000 from the exercise of public and
private warrants, the private placement of common stock as well as the continued
utilization of lease and debt financing, will enable us to meet our operational
and capital requirements for at least the next 12 months.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Because our cash equivalents consist of overnight investments in money market
funds, we will not experience decreases in principal value associated with a
decline in interest rates. Although we license our software to customers
overseas in U.S. dollars, we have exposure to foreign currency fluctuations
associated with liabilities, bank accounts and other assets maintained by our
offices in Canada and the Netherlands. We currently do not hedge our exposure
to foreign currency fluctuations, which have historically been immaterial.
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PART II OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not Applicable.
(b) Not Applicable
(c) 1. Issuance of shares and options to former shareholders of STV
communications, Inc. (STV).
a. We issued 2,107,096 shares and 485,584 options to former employees
of STV pursuant to an agreement and plan of merger which closed on
April 18, 2000.
c. Consideration consisted of shares and options of STV.
d. The issuances of these shares and options were exempt from
registration pursuant to Section 4(2) of the Securities Act of
1933. The shares were subsequently registered on a Form S-3 dated
May 15, 2000.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: (see exhibit list)
(b) Reports on Form 8-K:
On April 18, 2000, the Company filed a report on Item 2 of Form 8-K that
announced the closing of an agreement and plan of merger with STV
Communications, Inc.
On April 20, 2000, the Company filed a report on Item 5 of Form 8-K that
announced a two-for-one stock split on its shares of common stock.
On June 19, 2000, the Company filed a report on Item 7 of Form 8-K/A
including financial statements and pro-forma financial information from the
merger with STV Communications, Inc.
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ITEM 6(a) EXHIBIT LIST
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ ----------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated March 15, 2000, by and among the
Company, New Sonic, Inc. and STV Communications, Inc., filed as
Exhibit No. 2.1 to the Current Report on Form 8-K which was filed on
April 18, 2000 and hereby incorporated by reference.
2.2 Stock Purchase Agreement, dated January 18, 2000, by and among the
Company, Jedor, Inc., and certain principals of Jedor, Inc., filed as
Exhibit No. 2.2 to the S-3 registration statement, which was filed on
May 15, 2000 (the "S-3") and hereby incorporated by reference.
3.1 Amended and Restated Articles of Incorporation of the Company, filed
as Exhibit No. 3.1 to the Registration Statement, and hereby
incorporated by reference.
3.2 Amended and Restated By-Laws of the Company, filed as Exhibit No. 3.2
to the Registration Statement, and hereby incorporated by reference.
4.1 Specimen Common Stock Certificate, filed as Exhibit No. 4.1 to the
Registration Statement, and hereby incorporated by reference.
4.2 Form of Warrant Agreement, including Warrant Certificate, filed as
Exhibit No. 4.2 to the Registration Statement, and hereby incorporated
by reference.
4.3 Form of Representatives' Warrant Agreement, including Specimen
Representatives' Warrant Certificate, filed as Exhibit No. 4.3 to the
Registration Statement, and hereby incorporated by reference.
10.1 The Company's 1995 Stock Option Plan, filed as Exhibit No. 10.1 to the
Registration Statement, and hereby incorporated by reference.
10.2 The Company's Non-Employee Directors' Stock Option Plan, filed as
Exhibit No. 10.2 to the Registration Statement, and hereby
incorporated by reference.
10.3 Commercial Lease between the Company and The Williamson Center, LLC
regarding 740 and 744 Williamson Street, Madison, Wisconsin dated
January 20, 1998, filed as Exhibit No. 10.3 to the Registration
Statement, and hereby incorporated by reference.
10.4 Employment Agreement between the Company and Rimas Buinevicius dated
as of November 30, 1997 and effective as of January 1, 1997, filed as
Exhibit No. 10.4 to the Registration Statement, and hereby
incorporated by reference.
10.5 Employment Agreement between the Company and Monty R. Schmidt dated as
of November 30, 1997 and effective as of January 1, 1997, filed as
Exhibit No. 10.5 to the Registration Statement, and hereby
incorporated by reference.
10.6 Employment Agreement between the Company and Curtis J. Palmer dated as
of November 30, 1997 and effective as of January 1, 1997, filed as
Exhibit No. 10.6 to the Registration Statement, and hereby
incorporated by reference.
</TABLE>
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<TABLE>
<C> <S>
10.7 Digital Audio System License Agreement between the Company and Dolby
Laboratories Licensing Corporation dated July 28, 1997, filed as
Exhibit No. 10.7 to the Registration Statement, and hereby
incorporated by reference.
10.8 Digital Audio System License Agreement between Registrant and Dolby
Laboratories Licensing Corporation dated July 28, 1997, filed as
Exhibit No. 10.8 to the Registration Statement, and hereby
incorporated by reference.
10.9 Start-up Agreement between the Company and Ingram Micro Inc. dated
October 16, 1997, filed as Exhibit No. 10.9 to the Registration
Statement, and hereby incorporated by reference.
10.10 Software License Agreement, effective as of September 29, 1998,
between the Company and Hewlett-Packard Company - CONFIDENTIAL
MATERIAL FILED SEPARATELY
10.11 Commercial Lease between the Company and Seven J's, Inc. regarding 627
Williamson Street, Madison, Wisconsin dated March 26, 1999, filed as
Exhibit No. 10.13 to the Quarterly Report on form 10-QSB for the
period ended March 31, 1999, and hereby incorporated by reference.
10.12 Loan Agreement, dated March 3, 1999 between the Company and Associated
Bank South Central, filed as Exhibit No. 10.14 to the Quarterly Report
on form 10-QSB for the period ended March 31, 1999, and hereby
incorporated by reference.
10.13 Business Note Agreement, dated March 3, 1999 between the Company and
Associated Bank South Central, filed as Exhibit No. 10.15 to the
Quarterly Report on form 10-QSB for the period ended March 31, 1999,
and hereby incorporated by reference.
10.14 Termination Statement between the Company and Associated Bank South
Central, effective June 30, 1999, filed as Exhibit No. 10.16 to the
Quarterly Report on form 10-QSB for the period ended June 30, 1999,
and hereby incorporated by reference.
10.15 Convertible Debenture Purchase Agreement dated September 13, 1999
between Purchasers and the Company filed as Exhibit No. 10.17 to the
Current Report on form 8-K filed on September 24, 1999.
10.16 Commercial Lease between the Company and Tenney Place Development, LLC
regarding 1617 Sherman Ave., Madison, Wisconsin dated October 1, 1999,
filed as Exhibit No. 10.18 to the Annual Report on form 10-K for the
period ended September 30, 1999 and hereby incorporated by reference.
10.17 Subscription Agreement dated February 8, 2000 between Subscribers and
the Company filed as Exhibit No. 10.19 to the Current Report on Form
8-k which was filed on February 15, 2000, and hereby incorporated by
reference.
10.18 Stock Restriction and Registration Agreement, dated as of March 15,
2000 among the Company, Jan Brzeski, Jeffrey Gerst, David Fife, and
Fife Capital, LLC, filed as Exhibit 4.2 to the S-3, and hereby
incorporated by reference.
</TABLE>
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<TABLE>
<C> <S>
10.19 Voting and Option Agreement, dated March 15, 2000, among the Company,
certain of its stockholders, and Jan Brzeski, David Fife, Jeffrey
Gerst, and Fife Waterfield, filed as Exhibit 4.3 to the S-3, and
hereby incorporated by reference.
10.20 Registration Rights Agreement, dated February 8, 2000, by and among
the Conpany and certain investors, filed as Exhibit 4.5 to the S-3,
and hereby incorporated by reference.
10.21 Registration Rights Agreement, dated March 31, 2000, among the Company
and Sony Pictures Entertainment, Inc., filed as Exhibit 4.6 to the
S-3, and hereby incorporated by reference.
27.1 Financial Data Schedule
</TABLE>
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SIGNATURES
Pursuant to the requirement 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.
Sonic Foundry, Inc.
-------------------
(Registrant)
August XXX, 2000 By: /s/ Rimas P. Buinevicius
------------------------
Rimas P. Buinevicius
Chairman and Chief Executive Officer
August XXX, 2000 By: /s/ Kenneth A. Minor
--------------------
Kenneth A. Minor
Chief Financial Officer
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