<PAGE>
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 March 31, 2000
---------------
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
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
754 Williamson Street, Madison, WI 53703
----------------------------------------
(Address of principal executive offices)
(608) 256-3133
--------------
(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 .
----- -----
State the number of shares outstanding of each of the issuer's common equity as
of the last practicable date:
Outstanding
Class May 10, 2000
----------------------------- ------------
Common Stock, $0.01 par value 21,643,031
<PAGE>
SONIC FOUNDRY, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - March 31, 2000 (Unaudited) and
September 30, 1999.............................................. 3
Statements of Operations (Unaudited) - Six months ended
March 31, 2000 and 1999, three months ended
March 31, 2000 and 1999......................................... 5
Statements of Cash Flows (Unaudited) - Six months ended
March 31, 2000 and 1999......................................... 6
Notes to Financial Statements (Unaudited)....................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk............................................... 15
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds....................... 16
Item 4. Submission of Matters to a Vote of Security Holders............. 17
Item 6. Exhibits and Reports on Form 8-K................................ 18
2
<PAGE>
Sonic Foundry, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
--------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $45,407,721 $ 5,889,107
Accounts receivable, net of allowances of
$1,285,894 and $1,314,750 at March 31, 2000 and
September 30, 1999, respectively 6,128,482 3,703,517
Accounts receivable - other 116,819 57,203
Revenues in excess of billings 180,000 -
Inventories 1,180,652 1,040,927
Prepaid expenses and other current assets 1,687,348 880,123
Prepaid advertising 2,500,000 -
---------------------------------------
Total current assets 57,201,022 11,570,877
Property and equipment:
Land 95,000 190,000
Buildings and improvements 1,661,847 1,737,962
Equipment 5,070,361 2,218,113
Furniture and fixtures 271,512 202,187
---------------------------------------
Total property and equipment 7,098,720 4,348,262
Less accumulated depreciation 1,388,562 923,051
---------------------------------------
Net property and equipment 5,710,158 3,425,211
Other assets:
Notes receivable - affiliates 2,000,000 -
Capitalized software development costs, net 798,732 643,220
Long term investment 513,787 513,787
Other assets 680,013 556,165
---------------------------------------
Total other assets 3,992,532 1,713,172
---------------------------------------
Total assets $66,903,712 $16,709,260
=======================================
</TABLE>
3
See accompanying notes.
These financial statements reflect adjustments for a 2-for-1 stock split.
<PAGE>
Sonic Foundry, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---------------------------------------
Liabilities and stockholders' equity (Unaudited)
Current liabilities:
<S> <C> <C>
Accounts payable $ 2,307,591 $ 1,866,821
Accrued liabilities 1,057,375 812,401
Current portion of long-term debt and capital leases 154,927 48,569
---------------------------------------
Total current liabilities 3,519,893 2,727,791
Long-term liabilities:
Long-term liabilities, net of current portion 742,336 653,800
Subordinated debt - 4,580,725
---------------------------------------
Total long-term liabilities 742,336 5,234,525
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;
19,361,886 and 12,994,498 shares issued and outstanding at
March 31, 2000 and September 30, 1999 193,619 129,945
Common stock warrants and options 1,194,607 1,011,375
Additional paid-in capital 76,403,494 15,271,280
Subscriptions receivable (2,860,000) -
Accumulated deficit (12,140,235) (7,465,656)
Unearned compensation (150,002) (200,000)
---------------------------------------
Total stockholders' equity 62,641,483 8,746,944
---------------------------------------
Total liabilities and stockholders' equity $ 66,903,712 $16,709,260
=======================================
</TABLE>
4
See accompanying notes.
These financial statements reflect adjustments for a 2-for-1 stock split.
<PAGE>
Sonic Foundry, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Software license fees $ 5,661,335 $ 2,760,722 $10,728,683 $ 5,516,289
Media services 366,962 - 403,166 -
----------------------------------------------------------------------------
Total revenue 6,028,297 2,760,722 11,131,849 5,516,289
Cost of revenue:
Cost of software license fees 1,165,864 701,208 2,220,505 1,521,630
Cost of media services 370,109 - 473,503 -
----------------------------------------------------------------------------
Total cost of revenue 1,535,973 701,208 2,694,008 1,521,630
----------------------------------------------------------------------------
Gross margin 4,492,324 2,059,514 8,437,841 3,994,659
Operating expenses:
Selling and marketing
expenses 4,055,557 1,970,404 8,111,540 4,042,795
General and administrative
expenses 1,705,634 987,015 3,157,866 1,761,911
Product development expenses 1,521,988 657,888 2,712,488 1,215,522
----------------------------------------------------------------------------
Total operating expenses 7,283,179 3,615,307 13,981,894 7,020,228
----------------------------------------------------------------------------
Loss from operations (2,790,855) (1,555,793) (5,544,053) (3,025,569)
Other income (expense):
Interest expense (58,928) (2,362) (225,394) (5,957)
Interest and other income 378,656 51,321 1,094,868 142,902
----------------------------------------------------------------------------
Total other income 319,728 48,959 869,474 136,945
----------------------------------------------------------------------------
Net loss $(2,471,127) $(1,506,834) $(4,674,579) $(2,888,624)
=================================================================================
Loss per common share -
Basic and diluted $ (0.15) $ (0.28) $ (.31) $ (.54)
=================================================================================
</TABLE>
See accompanying notes.
These financial statements reflect adjustments for a 2-for-1 stock split.
5
<PAGE>
Sonic Foundry, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended March 31,
2000 1999
----------------------------------------
<S> <C> <C>
Operating activities
Net loss $(4,674,579) $(2,888,624)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 465,511 228,190
Amortization of capitalized software development costs 283,984 132,863
Noncash charge for common stock warrants 204,027 51,600
Amortization of debt discount and debt issuance costs 163,007 -
Amortization of unearned compensation 49,998 -
(Gain)/loss on sale of assets and investments (649,763) 754
Changes in operating assets and liabilities:
Accounts receivable (2,419,432) (1,008,654)
Accounts receivable-other (59,616) -
Revenues in excess of billings (180,000) -
Inventories (139,725) (264,644)
Prepaid expenses and other assets (807,225) (75,587)
Accounts payable and accrued liabilities 693,764 (22,237)
----------------------------------------
Total adjustments (2,395,470) (957,715)
----------------------------------------
Net cash used in operating activities (7,070,049) (3,846,339)
Investing activities
Purchases of property and equipment (2,830,512) (621,086)
Notes receivable-affiliates (2,000,000) -
Acquisition, net of cash acquired (146,462) -
Proceeds from sale of marketable securities - 3,000,000
Proceeds from sale of assets and investments 1,000,000 3,857
Capitalized software development costs - (101,611)
----------------------------------------
Net cash provided by (used in) investing activities (3,976,974) 2,281,160
Financing activities
Proceeds from sale of common stock, net of issuance costs 50,632,113 -
Proceeds from long-term debt - 632,000
Payments on long-term debt and capital leases (66,476) (620,245)
----------------------------------------
Net cash provided by financing activities 50,565,637 11,755
----------------------------------------
Net increase (decrease) in cash 39,518,614 (1,553,424)
Cash and cash equivalents at beginning of period 5,889,107 6,939,533
----------------------------------------
Cash and cash equivalents at end of period $45,407,721 $ 5,386,109
========================================
</TABLE>
6
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental cash flow information:
Interest paid $ 62,311 $ 5,957
Noncash transactions -
Capital lease acquisitions 261,370
Issuance of stock in exchange for future advertising 2,500,000 -
Issuance of stock for acquisition 300,000 -
Issuance of warrants 696,000 -
Conversion of subordinated debt and associated debt
issuance costs and accrued interest into common stock 4,271,007 -
</TABLE>
7
<PAGE>
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 subsidiary. 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 six months ended March 31, 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 were built on
the principle of "Create" (ACID, Loop Libraries, Audio Anywhere), "Edit" (Sound
Forge, Sound Forge XP, Vegas Audio, Viscosity, various plug-ins) 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 arrangements for high-end
audio and video encoding 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 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 the fiscal year beginning 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, 2000.
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.
8
<PAGE>
(c) Net Loss Per Share
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 Six Months Ended
March 31, March 31,
2000 1999 2000 1999
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Denominator
Denominator for basic and diluted
loss per share - weighted average
common shares 17,027,306 5,331,870 15,202,123 5,331,870
========== ========= ========== =========
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 3,131,559 1,133,762 3,549,099 1,058,286
Convertible Series B Preferred Stock - 7,223,720 - 7,223,720
</TABLE>
Note 2: Inventories
Inventory consists of the following:
<TABLE>
<CAPTION>
March 31, 2000 September 30, 1999
-------------- ------------------
<S> <C> <C>
Raw materials and supplies $ 649,690 $ 437,223
Work-in-process 437,140 577,651
Finished goods 93,822 26,053
---------- ----------
$1,180,652 $1,040,927
---------- ----------
</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 1,816,676 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 recording of $2.5 million of prepaid advertising.
Proceeds, net of issuance costs, for the above transactions amounted to
approximately $48 million. Proceeds received subsequent to March 31, 2000, were
recorded as subscriptions receivable.
9
<PAGE>
Note 4: Subsequent Events
On April 3, 2000 the Company completed its acquisition of California-based STV
Communications, a premier media convergence company offering webcasting,
syndication and production, and post-production services. Pursuant to the Merger
Agreement, an aggregate of $1,222,273 in cash was paid and 2,107,096 shares of
the Company's common stock 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. The majority was issued to replace existing STV options
and warrants. The acquisition will be accounted for using the purchase method of
accounting. 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, as determined by an independent appraisal. The portion of
the purchase price to be allocated to identifiable intangible assets is expected
to be over $60 million and will be amortized based upon the useful lives
determined in the appraisal.
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.
10
<PAGE>
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 the Company's 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
We are a leading provider of software products and services that enable our
customers to create, edit and deliver digital media. Founded in 1991, our award-
winning software line began with the development of Sound Forge, a Windows based
audio editing software program, which began shipping in 1993. By 1996, we had
released Sound Forge versions 3.0 and 4.0, and expanded the product line to
include Sound Forge XP, a scaled down version of Sound Forge, as well as various
plug-in products whose functions include noise reduction, spectrum analysis and
batch conversion. In June 1997, we released CD Architect, an audio mastering
software product and in May 1998, we released a loop-based, music creation
software product called ACID. Both the professional and the consumer versions of
ACID are supported by a catalog of loop library CD's. In May 1999 we introduced
our first product targeted to an office environment; Audio Anywhere combines
ACID and Sound Forge XP to produce multimedia content for use with Microsoft
Office 2000. We released Vegas Pro, a multi-track digital audio editor developed
for professional audio and video users, in July 1999. In September 1999 we
released Stream Anywhere, a software tool that allows website developers to
translate or encode audio and video media in various formats. That same month we
also released Siren, a consumer product that allows users to manage entire music
collections on their PC. In October 1999, we announced the formation of the
Media Services division. This division uses our existing technology to provide
format conversion and digital encoding to music, film, broadcast, and corporate
content owners interested in digital distribution of their media. In February
2000 we acquired Jedor, Inc, a small Canadian-based company. This acquisition
brings image and animation technology to our software line through a product
called Viscosity. In April 2000, we acquired STV Communications, Inc., which
will allow us to be a single source Internet media solutions company offering
software, encoding, syndication, web casting and consulting services. We expect
that Vegas Video, a comprehensive software tool providing audio and video
editing along with streaming capabilities, will be released in late fiscal 2000.
11
<PAGE>
RESULTS OF OPERATIONS
Total Net Revenues
Total net revenues increased 101.8% to $11,132,000 for the six months ended
March 31, 2000 from $5,516,000 in the comparable period of 1999.
Total net revenues increased 118.4% to $6,028,000 for the three months ended
March 31, 2000 from $2,761,000 in the comparable period of 1999.
Revenue from Software License Fees
Software license fees increased 94.5% to $10,729,000 for the six months ended
March 31, 2000 from $5,516,000 in the comparable period of 1999 and represented
96.4% of total net revenues.
Software license fees increased 105.1% to $5,661,000 for the three months ended
March 31, 2000 from $2,761,000 in the comparable period of 1999.
The increases for both periods were due primarily to (1) new product releases,
which accounted for 17.6% of software license fees for the six months ended
March 31, 2000, (2) consistent sales from the ACID family of products, which
contributed over 50.2% and 45.6% of net revenue from software license fees for
the six months ended March 31, 2000 and March 31, 1999, respectively, (3)
continued growth in the OEM channel from 12.6% to 27.7% of total revenues for
the six months ended March 31, 1999 and March 31, 2000, respectively, which
resulted from ongoing relationships with partners such as Hewlett Packard and
Creative Labs, as well as new relationships, such as a recent software license
agreement with Sony Pictures encompassing products from the full "Create, Edit
and Deliver" software line, and (4) an increase in the direct channel from 11.2%
to 13.4% of total revenues for the six months ended March 31, 1999 and March 31,
2000, respectively, which resulted from a significant catalog and email
campaign.
Revenues from international customers accounted for 12% and 16% of total net
revenues for the six months ended March 31, 2000 and 1999, respectively and was
comprised completely of revenue from software license fees. The reduction in
international revenues as a percentage of total revenues is primarily due to the
increased growth in the OEM and direct channels.
Revenue from Media Services
Revenues from our services division consist of fees charged for audio and video
encoding and consulting services. Revenue from media services totaled $403,000
for the six months ended March 31, 2000 and represented 3.6% of total net
revenue. With the acquisition of STV and 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 $699,000 or 45.9%
to $2,221,000 for the six months ended March 31, 2000 from $1,522,000 in the
comparable period of 1999. However, for the same timeframe, costs as a
percentage of net
12
<PAGE>
revenues from software license fees decreased from 27.6% in 1999 to 20.7% in
2000. Cost of software license fees increased by $465,000 or 66.3% to $1,166,000
for the three months ended March 31, 2000 from $701,000 in the comparable period
of 1999. However, for the same timeframe, costs as a percentage of net revenues
from software license fees decreased from 25.4% in 1999 to 20.6% 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
Cost of media services includes direct labor, depreciation on production
equipment, and other general expenses associated with personnel. Costs of
media services totaled $474,000 for the six months ended March 31, 2000, which
is 17.4% of net revenue from Media Services. Costs of media services totaled
$370,000 for the three months ended March 31, 2000, which is 100.9% of net
revenue from Media Services.
Increasing costs of media services have been driven primarily by compensation
and benefits for the addition of 19 encoding personnel and depreciation on
capital investments of $1,470,000, both of which are necessary to support a
rapidly expanding services 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
$4,069,000 or 100.6% to $8,112,000 during the six months ended March 31, 2000
from $4,043,000 during the comparable period in 1999. Selling and marketing
expenses as a percentage of total revenues were 72.9% and 73.3% for the 2000 and
1999 periods, respectively.
Selling and marketing expenses increased by $2,085,000 or 105.8% to $4,056,000
during the three months ended March 31, 2000 from $1,970,000 during the
comparable period in 1999. Selling and marketing expenses as a percentage of
total revenues were 67.3% and 71.4% for the 2000 and 1999 periods, respectively.
The majority of the increase in absolute dollars resulted from our recently
expanded 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.
13
<PAGE>
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 $1,396,000 or 79.2% to $3,158,000 during the six months ended March
31, 2000 from $1,762,000 during the comparable period in 1999. General and
administrative expenses as a percentage of total revenues were 28.4% and 31.9%
for the 2000 and 1999 periods, respectively.
General and administrative expenses increased by $719,000 or 72.8% to $1,706,000
during the three months ended March 31, 2000 from $987,000 during the comparable
period in 1999. General and administrative expenses as a percentage of total
revenues were 28.3% and 35.8% for the 2000 and 1999 periods, respectively.
The increase in absolute dollars related to increases in wages and related
recruitment and benefit costs, professional fees, depreciation, and other
expenses required to build an infrastructure 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 $1,497,000 or
123.2% to $2,712,000 during the six months ended March 31, 2000 from $1,216,000
during the comparable period in 1999. Product development expenses as a
percentage of total revenues were 24.4% and 22.0% for the 2000 and 1999 periods,
respectively.
Product development expenses increased by $864,000 or 131.3% to $1,522,000
during the three months ended March 31, 2000 from $658,000 during the comparable
period in 1999. Product development expenses as a percentage of total revenues
were 25.2% and 23.8% 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 six month period ended March 31,
2000 and $102,000 Vegas-related costs were capitalized in the six month period
ended March 31, 1999. The majority of the purchase price for Jedor, Inc. was
allocated to capitalized software development 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 increase significantly.
Interest and other income increased by $952,000 to $1,095,000 during the six
months ended March 31, 2000 from $143,000 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 of 2000.
No Federal or State tax expense was recorded during either of the quarters ended
March 31, 2000 or 1999 due to the Company's Federal and State net operating loss
position. No deferred tax benefit was recorded in the quarter ended March 31,
2000 as the Company continues to record a valuation allowance equal to the
balance of net deferred tax assets.
14
<PAGE>
Liquidity and Capital Resources
Cash used in operating activities equaled $7,070,000 and $3,846,000 for the six-
month periods ended March 31, 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.
Cash used in investing activities of $3,977,000 for the six-month period ended
March 31, 2000 included purchases of fixed assets equal to $2,831,000, which is
a 355.7% increase from the $621,000 of fixed assets purchased in 1999. Equipment
additions including network, storage and production equipment for the new Media
Services division and purchases of computers, furniture and other assets
necessary to outfit the company-wide growth in employees drove the increase
during the first six months of fiscal 2000. Other factors impacting cash
included $2,000,000 loaned to STV and net cash of $146,000 used in the
acquisition of Jedor. Cash used in investing activities during fiscal 2000 was
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 $12,000 in 1999 to
$50,566,000 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. More details regarding the sale of common stock
through private placement can be found under Item 2 of this report. 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 and the private placement of common stock, 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.
15
<PAGE>
PART II OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not Applicable.
(b) Not Applicable.
(c) 1. Private Placement
-----------------
a. We sold 1,000,000 shares of common stock on February 7,
2000, 206,826 shares of common stock on February 17, 2000,
330,920 shares of common stock on February 23, 2000, 82,730
shares of common stock on February 28, 2000, 82,730 shares
of common stock on March 2, 2000, 62,048 shares of common
stock on March 3, 2000, and 53,422 shares of common stock on
March 31, 2000. (All share and dollar per share figures set
forth in this Item 2 have been adjusted for the 2-for-1
split of our common stock.)
b. There were no underwriters involved in these transactions.
The names of the purchasers, and the number of shares
purchased, are set forth below.
Name Number of Shares
---- ----------------
Capital Trust Management 300,000
Cranshire Capital, L.P. 70,000
David King & Maggie S. King 30,000
RS Pacific Partners 29,200
RS Pacific Partners Onshore LP 170
RS Emerging Growth Partners LP 12,400
RS Premium Partners LP 15,880
RS Emerging Growth Fund 523,570
RS Internet Age Fund 18,780
Societe Generale 82,730
Warner Bros., a division of Time Warner
Entertainment Company, L.P. 62,048
Montrose Investments Ltd. 165,460
Strong River Investments, Inc. 165,460
AMPAL-American Israel Corporation 82,730
Essex Global High Technology Fund-II (USA)
a series of Essex qualified purchaser funds
LLC, c/o Essex Investment Management Co,
LLC 2,884
Essex High Technology Offshore II Fund,
Limited Partnership, c/o Essex Investment
Management Co., LLC 24,438
Essex High Technology (USA) Fund,
Limited Partnership c/o Essex Investment
Management Co., LLC 46,202
Permal Media & Communications
Fund, Limited Partnership, c/o
Essex Investment Management Co., LLC 99,368
Esser High Technology (Bermuda) Fund,
Limited Partnership, c/o Essex Investment
Management Co., LLC 33,934
Sony Pictures 53,422
c. The shares set forth above were sold for $48.35 per share in
cash, expect for Warner Bros. and Sony Pictures, in which a
portion of the shares were issued in exchange for
advertising consideration.
d. The issuance of these shares was exempt from registration
pursuant to section 4(2) of the Securities Act of 1933.
2. Exercise of Private Warrants
----------------------------
a.b. We issued 50,000 shares to John Feith on January 14, 2000,
25,000 shares to John Knoeller on January 14, 2000 and
25,000 shares to Frank Shibilski on March 20, 2000 pursuant
to the exercise of certain private warrants.
c. The shares were issued for $.01 in cash, the exercise price
of the warrants.
d. The issuance of these shares was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
3. Issuance of Shares in Connection with an Acquisition
----------------------------------------------------
a.b. We issued 19,814 shares to the principals of Jedor, Inc. on
February 1, 2000 in connection with an acquisition of that
company.
c. The shares were issued as partial consideration for the
purchase of the company.
d. The issuance of these shares was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
4. Issuance of Warrants for Services
---------------------------------
a.b. We issued warrants to purchase 50,000 shares to
Frederick H. Kopko, Jr., one of our directors, on
February 1, 2000.
c. Consideration consisted of services rendered.
d. The issuance of these warrants was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
5. Issuance of Options to Employees
--------------------------------
a.b. We issued options to purchase 123,500 shares to employees
during the quarter.
c. Consideration consisted of services rendered.
d. The issuance of these options was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
(d) Not Applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on March 24, 2000. A quorum
consisting of approximately 99% of the Company's common stock issued and
outstanding was represented either in person or by proxy. At the meeting the
following proposals were approved by the stockholders:
1. To re-elect Arnold Pollard as a Class two Director for a term of five
years. Rimas Buinevicius, Monty Schmidt, Curtis Palmer, Frederick Kopko and
David Kleinman continued as directors following the meeting.
2. To amend the 1995 Stock Option Plan by increasing the aggregate number of
shares of the Company's Common Stock that may be subject to options from
2,000,000 to 4,000,000.
3. To amend the Non-Employee Directors Stock Option Plan by increasing the
aggregate number of shares of the Company's Common Stock that may be
subject to options from 180,000 to 600,000.
4. To adopt the Sonic Foundry, Inc. Employee Stock Purchase Plan.
16
<PAGE>
5. To amend the Company's Articles of Incorporation to increase the authorized
number of pre-split shares of the Company's Common Stock from 20,000,000 to
100,000,000 and to allow the board of directors of to increase or decrease
the aggregate number of authorized shares of any class of stock without
further stockholder approval.
6. To ratify the appointment of Ernst & Young LLP as independent auditors of
Sonic Foundry for the year ending September 30, 2000.
Rimas Buinevicius, Monty Schmidt, Curtis Palmer and Frederick H. Kopko, Jr. also
continued as directors following the meeting.
<TABLE>
<CAPTION>
For Against Abstain/Withheld
---------- --------- ----------------
<S> <C> <C> <C>
Proposal #1 15,873,852 - 291,800
Proposal #2 11,593,354 769,448 21,904
Proposal #3 11,054,090 1,305,198 25,418
Proposal #4 11,661,828 701,098 21,780
Proposal #5 11,526,772 835,352 22,582
Proposal #6 16,139,352 13,770 11,530
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: (see exhibit list)
(b) Reports on Form 8-K:
On February 15, 2000 the Company filed a report on Item 5 of Form 8-K that
announced it raised $24 million in a private financing of restricted common
stock to a group of institutional investors. C.E. Unterberg, Towbin acted
as placement agent in the transaction.
17
<PAGE>
ITEM 6(a) EXHIBIT LIST
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------
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 registration statement No. 333-46005, filed on
April 3, 1997 (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.
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 the Company and Dolby
18
<PAGE>
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.
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 Company 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
19
<PAGE>
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)
May 12, 2000 By: /s/ Rimas P. Buinevicius
------------------------
Rimas P. Buinevicius
Chairman and Chief Executive Officer
May 12, 2000 By: /s/ Kenneth A. Minor
--------------------
Kenneth A. Minor
Chief Financial Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Form 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 7,414,376
<ALLOWANCES> 1,285,894
<INVENTORY> 1,180,652
<CURRENT-ASSETS> 57,201,022
<PP&E> 7,098,720
<DEPRECIATION> 1,388,562
<TOTAL-ASSETS> 66,903,712
<CURRENT-LIABILITIES> 3,519,893
<BONDS> 0
0
0
<COMMON> 193,619
<OTHER-SE> 62,447,864
<TOTAL-LIABILITY-AND-EQUITY> 66,903,712
<SALES> 6,028,297
<TOTAL-REVENUES> 6,028,297
<CGS> 1,535,973
<TOTAL-COSTS> 1,535,973
<OTHER-EXPENSES> 7,283,179
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,928
<INCOME-PRETAX> (2,471,127)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,471,127)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,471,127)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.15)
</TABLE>
