<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
(AMENDING ITEM 7)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-14007
-------
SONIC FOUNDRY, INC.
-------------------
(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)
<PAGE>
SONIC FOUNDRY, INC.
FORM 8-K/A
This Amendment No. 1 hereby amends Item 7 of the Current Report on Form 8-K
filed on April 3, 2000 by Sonic Foundry, Inc. ("Sonic Foundry") relating to the
acquisition of STV Communications ("STV"). The following financial statements
required by Item 7 are filed as part of this report:
ITEM 7: FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS, PRO FORMA
FINANCIAL INFORMATION AND EXHIBITS
<TABLE>
<CAPTION>
PAGE NO.
-------
(a) Financial Statements of Business Acquired
<S> <C>
Report of Independent Public Accountants......................................F-3
Balance Sheets - December 31, 1999 and
December 31, 1998...........................................................F-4
Statements of Operations For the Years Ended
December 31, 1999, 1998 and 1997............................................F-5
Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997............................................F-6
Statements of Cash Flows For the Years Ended
December 31, 1999, 1998 and 1997............................................F-7
Notes to Financial Statements.................................................F-8
Unaudited Balance Sheet - March 31, 2000.....................................F-16
Unaudited Statements of Operations For the Three Months Ended
March 31, 2000 and 1999....................................................F-17
Unaudited Statements of Cash Flows For the Three Months Ended
March 31, 2000 and 1999....................................................F-18
Notes to Unaudited Financial Statements......................................F-19
(b) Pro Forma Financial Information
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of March 31, 2000.......................................................F-21
Unaudited Pro Forma Condensed Consolidated Statements of
Operations For the Six Months Ended March 31, 2000.........................F-22
Unaudited Pro Forma Condensed Consolidated Statements of
Operations For the Year Ended September 30, 1999...........................F-23
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements.......................................................F-24
</TABLE>
(c) Exhibits
Number Description
------ -----------
2.1* Agreement and Plan of Merger, dated as of March 15, 2000, by
and among the Registrant, New Sonic, Inc. and STV
Communications, Inc. (Schedules and exhibits have been
omitted pursuant to Item 601 (b) (2) of Regulation S-K. The
Company hereby undertakes to furnish supplemental copies of
the omitted schedules and exhibits upon request by the
Securities and Exchange Commission.)
23.1 Independent Accountants' Consent
99.1* Press release dated February 28, 2000 regarding acquisition of
STV Communications, Inc.
* Previously filed
F-2
<PAGE>
Independent Auditors' Report
The Board of Directors
STV Communications, Inc.:
We have audited the accompanying balance sheets of STV Communications, Inc. as
of December 31, 1999 and 1998 and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of STV Communications, Inc. as of
December 31, 1999 and 1998 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1999 in
conformity with generally accepted accounting principles.
KPMG LLP
Los Angeles, California
April 14, 2000
F-3
<PAGE>
STV Communications, Inc.
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
-------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $981,400 $78,215
Trade receivables, net of allowances of $129,055 and $41,028, respectively 322,494 381,771
Inventories 28,702 529,288
Refundable income taxes 11,900 19,104
------------------------------------
Total current assets 1,344,496 1,008,378
Property and equipment, net 1,025,093 382,933
Other assets 6,384 61,422
------------------------------------
Total assets $2,375,973 $1,452,733
====================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $735,717 $338,848
Deferred revenue 358,287
20,608
------------------------------------
Total liabilities 1,094,004 359,456
------------------------------------
Stockholders' Equity
Series A convertible preferred stock, $.001 par value. Authorized 200,000
shares; 200,000 shares issued and outstanding. Liquidation preference of
$100,000. 200 200
Series B convertible preferred stock, $.001 par value. Authorized 500,000
shares; 368,000 shares issued and outstanding. Liquidation preference of
$230,000. 368 368
Series C convertible preferred stock, $.001 par value. Authorized 1,500,000
shares; 1,462,400 shares issued and outstanding. Liquidation preference of
$1,828,000. 1,462 1,462
Series D convertible preferred stock, $.001 par value. Authorized 900,000
shares; 699,994 shares issued and outstanding. Liquidation preference of
$1,049,990. 700
-
Series E convertible preferred stock, $.001 par value. Authorized 4,000,000
shares; 2,209,994 shares issued and outstanding. Liquidation preference of
$3,450,000. 2,210
-
Common stock, $.001 par value. Authorized 10,000,000 shares; 3,000,932 and
2,972,732 shares issued and outstanding at December 31, 1999 and 1998,
respectively. 3,000 2,972
Additional paid-in capital 6,739,312 2,151,591
Accumulated deficit (5,465,283) (1,063,316)
------------------------------------
Net stockholders' equity 1,281,969 1,093,277
Commitments (note 6)
Subsequent event (note 7)
------------------------------------
Total Liabilities and Stockholders' Equity $2,375,973 $1,452,733
====================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
STV Communications, Inc.
Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
Revenues:
Preview stations $ 945,029 $ 2,847,201 $ 2,326,827
Streaming media services 497,276 -- --
---------------- --------------- ----------------
Total revenues 1,442,305 2,847,201 2,326,827
---------------- --------------- ----------------
Costs and expenses:
Cost of revenues 1,543,915 1,735,011 1,131,584
Selling, general and administrative 4,360,239 2,235,061 953,527
---------------- --------------- ----------------
Total costs and expenses 5,904,154 3,970,072 2,085,111
---------------- --------------- ----------------
Operating income (loss) (4,461,849) (1,122,871) 241,716
Other income, net 8,064 4,462 31,570
Interest income, net 12,108 35,499 79,276
---------------- --------------- ----------------
Income (loss) before income taxes (4,441,677) (1,082,910) 352,562
Income tax provision (benefit) (39,710) 800 55,000
---------------- --------------- ----------------
Net income (loss) $ (4,401,967) $ (1,083,710) $ 297,562
================ =============== ================
Net income (loss) per share - basic $ (1.47) $ (0.37) $ 0.10
================ =============== ================
Net income (loss) per share - diluted $ (1.47) $ (0.37) $ 0.06
================ =============== ================
Weighted average shares outstanding - basic 2,988,007 2,965,722 2,976,946
================ =============== ================
Weighted average shares outstanding - diluted 2,988,007 2,965,722 5,017,746
================ =============== ================
</TABLE>
F-5
<PAGE>
STV Communications
Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Series A Series B Series C Series D Series E
preferred preferred preferred preferred preferred
stock stock stock stock stock Common stock
------------ ------------- -------------- --------------- --------------- ---------------
Share Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------------ ------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 200,000 $ 200 368,000 $ 368 1,462,400 $ 1,462 -- -- -- -- 3,000,000 3,000
Exercise of stock options -- -- -- -- -- -- -- -- -- -- 17,438 17
Repurchase of common stock -- -- -- -- -- -- -- -- -- -- (60,000) (60)
Net income -- -- -- -- -- -- -- -- -- -- -- --
------------- -------------- --------------- --------------- ---------------- -----------------
Balance at December 31, 1997 200,000 200 368,000 368 1,462,400 1,462 -- -- -- -- 2,957,438 2,957
Exercise of stock options -- -- -- -- -- -- -- -- -- -- 15,294 15
Net loss -- -- -- -- -- -- -- -- -- -- -- --
------------- -------------- --------------- --------------- ---------------- -----------------
Balance at December 31, 1998 200,000 200 368,000 368 1,462,400 1,462 -- -- -- -- 2,972,732 2,972
Issuance of preferred stock -- -- -- -- -- -- 699,994 700 2,209,994 2,210 -- --
Issuance of warrants for
services -- -- -- -- -- -- -- -- -- -- -- --
Issuance of stock options
for services -- -- -- -- -- -- -- -- -- -- -- --
Exercise of stock
options -- -- -- -- -- -- -- -- -- -- 28,200 28
Net loss -- -- -- -- -- -- -- -- -- -- -- --
------------- -------------- --------------- --------------- ---------------- -----------------
Balance at December 31, 1999 200,000 $200 368,000 $368 1,462,40 $1,462 699,994 $700 2,209,994 $2,210 3,000,932 $3,000
============= ============== =============== =============== ================ =================
</TABLE>
<TABLE>
<CAPTION>
Retained
Additional earnings Total
Paid-in (accumulated stockholders'
capital deficit) equity
--------- ----------- ------------
<S> <C> <C> <C>
Balance at December 31, 1996 $2,154,470 ($277,168) $ 1,882,332
Exercise of stock
options 2,163 -- 2,180
Repurchase of
common stock (6,940) -- (7,000)
Net income -- 297,562 297,562
---------- ----------- -----------
Balance at December 2,149,693 20,394 2,175,074
31, 1997
Exercise of stock
options 1,898 -- 1,913
Net loss -- (1,083,710) (1,083,710)
---------- ------------ -----------
Balance at December 2,151,591 (1,063,316) 1,093,277
31, 1998
Issuance of
preferred stock 4,497,090 -- 4,500,000
Issuance of
warrants for
services 59,273 -- 59,273
Issuance of stock
options for service 27,000 -- 27,000
Exercise of stock
options 4,358 -- 4,386
Net loss -- (4,401,967) (4,401,967)
---------- ------------ -----------
Balance at December 31, 1999 $6,739,312 $(5,465,283) $ 1,281,969
========== ============ ===========
</TABLE>
F-6
<PAGE>
STV Communications, Inc.
Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $(4,401,967) $(1,083,710) $297,562
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 310,727 145,681 86,187
Allowance for doubtful accounts 129,055 11,860 24,743
Non-cash compensation 86,273 - -
Changes in operating assets and liabilities:
Trade receivables 59,277 (94,231) (36,777)
Inventories 500,586 (288,286) 10,950
Refundable income taxes 7,204 143,896 (163,000)
Other assets 55,038 (15,251) (45,749)
Accounts payable and accrued liabilities 396,869 267,868 10,192
Deferred revenue 337,679 (76,716) (94,986)
--------------------------------------- -----------
Net cash (used in) provided by operating activities (2,519,259) (988,889) 89,122
Investing activities
Purchases of property and equipment (1,081,942) (282,809) (180,201)
-------------------------------------- -----------
Net cash used in investing activities (1,081,942) (282,809) (180,201)
Financing activities
Proceeds from issuance of preferred stock 4,500,000 - -
Repurchase of common stock - - (7,000)
Proceeds from the exercise of stock options 4,386 1,913 1,758
--------------------------------------------------------
Net cash provided by financing activities 4,504,386 1,913 (5,242)
--------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 903,185 (1,269,785) (96,321)
Cash and cash equivalents at beginning of year 78,215 1,348,000 1,444,321
--------------------------------------------------------
Cash and cash equivalents at end of year $ 981,400 $ 78,215 $1,348,000
========================================================
Supplemental disclosure of cash flow information -
Cash paid during the year for income taxes $ 800 $ 10,300 $ 221,583
========================================================
</TABLE>
F-7
<PAGE>
STV Communications, Inc.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
STV is a streaming media services provider, offering webcasting, production and
post-production services, high-end encoding, signal acquisition, hosting,
content management, digital rights management and syndication . STV retains
exclusive online distribution rights to unique content libraries. STV's
customers use its services to create, obtain, encode and deliver content from
music, movies, television, radio, advertising and live events to the Internet.
In addition to providing media services, STV also creates interactive marketing
programs through the use of its proprietary interactive point of purchase (I-
POP) displays These i-POP displays, or preview stations, integrate custom
hardware, software and content to promote consumer products through a Software
Preview Station. In 1999, the Company revised its corporate strategy to focus on
the streaming media services business. Revenues from preview station sales are
expected to decline in future periods.
(b) Revenue Recognition
Revenue is generated primarily from video encoding and distribution services.
Revenue from video encoding services is recognized as the service is provided
and revenue from video distribution services is recognized at the time of
delivery. STV also performs services on development contracts and recognizes
related revenues on a percentage-of-completion method as services are performed.
Substantially all revenue is generated from domestic customers.
Revenues are also derived from hardware sales and consumer software preview
services. Revenues for hardware sales are recognized after execution of an
agreement or receipt of a definitive purchase order and delivery of the product
to the customer, provided that there are no uncertainties surrounding product
acceptance, the fees are fixed and determinable, collectibility is probable and
the company has no remaining obligations. Revenues from the sale of consumer
software preview services are typically recognized when earned, provided that no
significant vendor obligations remain and accounts receivable are deemed
collectible. If collectibility is not considered probable, revenue will be
recognized when the fee is collected. Advance payments will be recorded as
deferred revenue until the products are shipped, services are provided or
obligations are met.
(c) Cash and Cash Equivalents
STV considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents.
(d) Inventories
Inventories, consisting of preview station components used for warranty service,
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
F-8
<PAGE>
STV Communications, Inc.
Notes to Financial Statements, continued
December 31, 1999, 1998 and 1997
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated on the straight-line method over the estimated useful
lives of the assets, generally three to five years. Leasehold improvements are
amortized over the shorter of the useful life of the related asset or lease
term.
(f) Income Taxes
The Company accounts for income taxes using Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), Accounting for Income Taxes. Under SFAS No.
109, deferred income taxes reflect the impact of "temporary differences" between
assets and liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations.
(g) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and disclosure of contingent
liabilities at the reporting dates and the reporting of revenue and expenses
during the reporting periods to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
(h) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of
The Company periodically reviews the carrying amounts of property and equipment
and its identifiable intangible assets to determine whether current events or
circumstances warrant adjustments to such carrying amounts. If an impairment
adjustment is deemed necessary, such loss is measured by the amount by which the
carrying valued of such assets exceeds its fair value. Considerable management
judgement is necessary to estimate the fair value of assets; accordingly, actual
results could vary significantly from such estimates. Assets to be disposed of
are carried at the lower of their financial statement carrying amounts or fair
value, less cost to sell.
(i) Concentration of Credit Risk
Certain financial instruments potentially subject the Company to credit risk.
These consist of cash and cash equivalents and accounts receivable. The Company
maintains its cash and cash equivalents with high-quality financial institutions
and, as part of its cash management process, performs periodic evaluations of
the relative credit standing of these financial institutions. The Company also
performs ongoing credit evaluations of its customer but does not require
collateral. The Company maintains reserves for potential credit losses, and such
losses have been within expectations. At December 31, 1999, the Company had one
customer which accounted for approximately 26% of total receivables. For the
year ended December 31, 1999, two customers accounted for approximately 45% of
total revenues, 26% and 19%, respectively.
(j) Stock Based Compensation
See accompanying notes
F-9
<PAGE>
STV Communications, Inc.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
The Company accounts for its stock-based compensation arrangements with
employees using the intrinsic-value method pursuant to Accounting Principles
Board (APB) Opinion No. 25. As such, compensation expense is recorded on the
date of grant when the fair value of the underlying common stock exceeds the
exercise price for stock options or the purchase price for the issuance or sales
of common stock. Pursuant to Statement of Financial Accounting Standards (SFAS)
No. 123, the Company discloses the pro forma effects of using the fair value
method of accounting for stock-based compensation arrangements.
The Company accounts for stock-based compensation arrangements with non-
employees in accordance with the Emerging Issues Task Force (EITF) Abstract No.
96-18, Accounting for Equity Instruments that are Issued to Other than Employees
for Acquiring, or in Conjunction with Selling Goods or Services. Accordingly,
unvested options held by non-employees are subject to revaluation at each
balance sheet date based on the then current fair market value.
(k) Earnings (loss) per share
Basic and diluted earnings (loss) per common share are presented in accordance
with Statement of Financial Accounting Standards No. 128, Computation of
Earnings per Share, for all periods presented. In accordance with SFAS No. 128
and the SEC Staff Accounting Bulletin No. 98, basic earnings per share are
computed using the weighted average number of common shares outstanding during
the period.
For 1999 and 1998, diluted loss per share is equivalent to basic loss per share
because outstanding stock options, warrants and convertible preferred stock are
antidilutive. Potentially dilutive common shares outstanding as of December 31,
1999 and 1998 were 6,133,290 and 2,314,490, respectively. For 1997, 104,000
outstanding stock options, and 2,030,400 shares of convertible preferred stock
have been included in the calculation of diluted earnings per share.
(2) Property and Equipment
A summary of property and equipment at December 31, 1999, 1998 and 1997
is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ------------------ ------------------
<S> <C> <C> <C>
Preview stations $ 97,625 $ 97,625 $ 93,725
Audio and video equipment 45,555 232,186 145,510
Office furniture and computer equipment 1,275,815 267,479 112,586
Leasehold improvements 96,834 76,075 67,465
---------------- ---------------- ----------------
1,515,829 673,365 419,286
Less accumulated depreciation and
amortization (490,736) (290,432) (144,751)
---------------- ---------------- ----------------
$ 1,025,093 $ 382,933 $ 274,535
================ ================ ================
</TABLE>
See accompanying notes.
F-10
<PAGE>
STV Communications, Inc.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(3) Income Taxes
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ (40,510) $ -- $ 40,000
Deferred -- -- --
--------------------------------------------------
(40,510) -- 40,000
--------------------------------------------------
State:
Current 800 800 15,000
Deferred -- -- --
--------------------------------------------------
800 800 15,000
--------------------------------------------------
Total $ (39,710) $ 800 $ 55,000
==================================================
</TABLE>
Actual income taxes (benefit) differ from expected income taxes computed
based on the statutory federal tax rate of 34% as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Expected income tax expense (benefit) $ (1,510,170) $(368,189) $ 119,871
State income taxes, net of federal benefit (202,579) (51,521) 9,900
Nondeductible expenses 28,494 3,016 1,865
Losses carried back to prior years (25,904) -- --
Change in valuation allowance 1,654,324 418,372 (78,661)
Other 16,125 (878) 2,025
-------------------------------------------------
Actual income taxes (benefit) $ (39,710) $ 800 $ 55,000
=================================================
</TABLE>
See accompanying notes.
F-11
<PAGE>
STV Communications, Inc.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and liabilities are presented
below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Net operating loss carryforward $ 1,958,092 $ 391,931 $ --
Section 179 expense carryforward 7,129 7,129 7,129
Accrued expenses 29,371 15,316 3,175
Allowance for bad debts 38,151 17,577 12,495
State income taxes 460 272 5,100
Tax credit carryforward 12,534 4,655 --
Depreciation and amortization 43,180 -- --
Other -- 11 47
-------------------------------------------------
Gross deferred tax assets 2,088,917 436,891 27,946
Less valuation allowance (2,088,917) (434,594) (16,222)
-------------------------------------------------
Net deferred tax assets -- 2,297 11,724
Gross deferred tax liabilities -- (2,297) (11,724)
-------------------------------------------------
Net deferred tax assets $ -- $ -- $ --
=================================================
</TABLE>
At December 31, 1999, the Company had tax net operating loss carryforwards
of approximately $5,083,000 for federal and approximately $2,600,000 for
state income tax purposes, which expire at varying dates beginning in 2019
and 2004, respectively.
In assessing the recoverability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent on the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers projected future taxable income and tax planning
strategies in making this assessment. The Company has recorded a full
valuation allowance for the total net deferred tax assets due to the
uncertainty surrounding the realizability of this asset.
See accompanying notes.
F-12
<PAGE>
STV Communications, Inc.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(4) Stockholders' Equity
The Company's Board of Directors has authorized the issuance of up to
10,000,000 shares of preferred stock, $.001 par value, which have been
designated as follows:
Series A 200,000
Series B 500,000
Series C 1,500,000
Series D 900,000
Series E 4,000,000
As of December 31, 1999, 2,900,000 authorized shares of preferred stock
remain undesignated.
During 1994, the Company sold 200,000 shares of Series A preferred stock at
a price of $.50 per share. In 1995, the Company sold 368,000 shares of
Series B preferred stock at a price of $.625 per share. During 1996, the
Company sold 1,462,400 shares of Series C preferred stock at a price of
$1.25 per share. During 1999, the Company sold 699,994 shares of Series D
preferred stock at a price of $1.50 per share and 2,209,994 shares of
Series E preferred stock at a price of $1.563 per share.
The preferred stockholders have the same voting rights as the common
stockholders as if such shares were converted into common shares. Each
share of preferred stock is convertible into one share of common stock upon
approval by the Board of Directors. Dividends when and if declared by the
Board of Directors will be payable proportionately among the preferred
stockholders. In the event of a liquidation of the Company, the liquidation
preference to the preferred stockholders will be the original purchase
price to the preferred stock and any remaining amount will be allocated
among the common stockholders.
(5) Stock Options
The Company's 1996 Stock Plan (the 1996 Plan) as amended, provides for
grants of incentive stock options and nonqualified stock options. Under the
Plan, options can be granted from time to time for an aggregate of no more
than 114,604 shares of common stock as determined by the Board of
Directors. The options vest over a four-year period, with 25% vested after
the first year of service and the remaining options are earned ratably on a
monthly basis thereafter. The options are exercisable up to ten years from
the date of grant.
The 1996 Stock Plan was terminated in 1997 and no further options or shares
of common stock will be issued under this Plan. The Board further adopted
the 1997 Stock Plan (1997 Plan) and reserved 1,685,396 shares of the
Company's common stock for issuance under the 1997 Plan. The terms of the
1997 Plan are essentially the same as the 1996 Plan.
See accompanying notes
F-13
<PAGE>
STV Communications, Inc.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
During 1999, the Company issued 90,000 options having a fair value of
$27,000 to a consultant for services provided. This amount has been
reflected as compensation expense in the accompanying financial
statements.
During 1999, the Company issued 42,705 warrants to purchase common stock
at $3.125 per share as consideration for services rendered by a third
party. The fair value of these warrants, determined using the
minimum-value method, was approximately $59,000, which has been reflected
as compensation expense in the accompanying financial statements. The
assumptions used to calculate the fair value of these warrants are as
follows: no dividend yield; risk-free interest rate of 6%; and an
expected life of five years.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted-
Number of average
options exercise price
----------------- ---------------
<S> <C> <C>
Balance at December 31, 1996 102,334 $ .105
Options granted 57,666 .125
Options terminated (38,562) .125
Options exercised (17,438) .125
-------------
Balance at December 31, 1997 104,000 .105
Options granted 202,810 .125
Options terminated (7,426) .125
Options exercised (15,294) .125
-------------
Balance at December 31, 1998 284,090 .115
Options granted 1,247,266 1.22
Options terminated (310,254) .85
Options exercised (28,200) .13
------------- -------
Balance at December 31, 1999 1,192,902 $ 1.11
============= =======
</TABLE>
The following table summarizes information regarding options outstanding
and options exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------------------------- ----------------------------------
Weighted-
average Weighted- Exercisable Weighted-
Range of Outstanding at remaining average at average
exercise December 31, 1999 contractual exercise December 31, exercise
prices life price 1999 price
----------------- ------------------ --------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
$.125-$1.33 1,192,902 40 months $1.11 220,594 $.37
================= ================== =============== =============== ================ ==============
</TABLE>
See accompanying notes
F-14
<PAGE>
STV Communications, Inc.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss
would have been the pro forma amount indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Net loss:
As reported $ (4,401,967) $ (1,083,710) $ 297,562
Pro forma (4,484,000) (1,087,000) 295,000
Diluted net income (loss) per common share - as reported (1.47) (.37) (.06)
Diluted net income (loss) per common share - pro forma (1.47) (.37) (.06)
========================================================
</TABLE>
The fair value of options granted during the years ended December 31,
1999, 1998 and 1997 is estimated on the date of grant using the
minimum-value method with the following weighted-average assumptions: no
dividend yield; risk-free interest rate of 6%; and an expected life of
four years.
(6) Commitments
The Company leases certain of its facilities and equipment under
operating leases expiring at various dates through 2004, with net
aggregate future lease payments of $1,866,010 payable as follows:
Year ending December 31:
2000 $ 582,548
2001 637,517
2002 559,085
2003 82,978
2004 3,882
----------
$1,866,010
==========
Rent expense for the years ended December 31, 1999 and 1998 was
approximately $148,000 per year and approximately $76,000 for the year
ended December 31, 1997.
(7) Subsequent Event
On February 23, 2000, the Company entered into a merger agreement with
Sonic Foundry, Inc. ("Sonic Foundry"), a NASDAQ company, in a stock for
stock transaction. Also, the Company consummated a 2-for-1 stock split
for all outstanding common stock. Accordingly, the accompanying financial
statements and footnotes have been restated to reflect the stock split
for all periods presented. On April 4, 2000 the merger was completed and
STV merged with a new entity, New Sonic, Inc. Under terms of the
agreement, Sonic Foundry acquired STV by issuing approximately 2.107
million shares of Sonic Foundry common stock in exchange for all
outstanding shares of the Company's capital stock. Additionally, Sonic
Foundry converted all outstanding stock options and warrants into Sonic
Foundry options and warrants.
See accompanying notes.
F-15
<PAGE>
STV Communications, Inc.
Balance Sheet
March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 917,283
Trade receivable, net of allowances of $129,055 308,847
Inventories 28,702
Prepaid expenses and other 245,458
-------------
Total current assets 1,500,290
-------------
Property and equipment, net 2,309,572
-------------
Total assets $ 3,809,862
=============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued liabilities $ 1,500,876
Promissory notes 1,218,601
-------------
Total liabilities 2,719,477
Note payable to Sonic Foundry 2,000,000
Stockholders' Equity (Deficit)
Series A convertible preferred stock, $.001 par value. Authorized 200,000
shares; 200,000 shares issued and outstanding. Liquidation preference of
$100,000. 200
Series B convertible preferred stock, $.001 par value. Authorized 500,000
shares; 368,000 shares issued and outstanding. Liquidation preference of
$230,000. 368
Series C convertible preferred stock, $.001 par value. Authorized 1,500,000
shares; 1,462,400 shares issued and outstanding. Liquidation preference of
$1,828,000. 1,462
Series D convertible preferred stock, $.001 par value. Authorized 900,000
shares; 699,994 shares issued and outstanding. Liquidation preference of
$1,049,990. 700
Series E convertible preferred stock, $.001 par value. Authorized 4,000,000
shares; 2,209,994 shares issued and outstanding. Liquidation preference of
$3,450,000. 2,210
Common stock, $.001 par value. Authorized 10,000,000 shares; 3,000,932 and
2,972,732 shares issued and outstanding at December 31, 1999 and 1998,
respectively. 3,214
Additional paid-in capital 6,741,630
Accumulated deficit (7,659,399)
---------------
Net stockholders' equity (deficit) (909,615)
--------------
Total Liabilities and Stockholders' Equity (Deficit) $ 3,809,862
==============
</TABLE>
See accompanying notes
F-16
<PAGE>
STV Communications, Inc.
Statements of Operations
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Revenues:
Media services & hardware sales $ 402,336 $ 381,495
-------------- --------------
Costs and expenses:
Cost of revenues 429,997 216,799
Selling, general and administrative 2,159,455 663,785
-------------- --------------
Total costs and expenses 2,589,452 880,584
-------------- --------------
Operating loss (2,187,116) (499,089)
Other expense, net (7,003) (6,707)
-------------- --------------
Net loss $ (2,194,119) $ (505,796)
============== ==============
Basic and diluted loss per share $ (0.73) $ (0.17)
============== ==============
Weighted average shares outstanding--basic
and diluted 2,988,007 2,965,722
============== ==============
</TABLE>
See accompanying notes.
F-17
<PAGE>
STV Communications, Inc.
Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
2000 1999
------------------------------------
<S> <C> <C>
Operating activities
Net loss $ (2,194,119) $ (505,796)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 152,854 81,176
Loss on sale of assets - 6,707
Changes in operating assets and liabilities:
Trade receivables 13,647 82,902
Inventories - (41,024)
Other assets (227,174) 11,807
Accounts payable and accrued liabilities 425,473 (5,370)
------------------------------------
Net cash (used in) provided by operating activities $ (1,829,319) $ (369,598)
Investing activities
Purchases of property and equipment (1,437,333) (79,638)
Proceeds from sale of assets - 147,783
------------------------------------
Net cash used in investing activities $ (1,437,333) $ 68,145
Financing activities
Proceeds from issuance of preferred stock - 1,049,991
Proceeds from the exercise of stock options 2,535 1,885
Proceeds from note payable to Sonic Foundry 2,000,000 -
Proceeds from promissory note 1,200,000 -
------------------------------------
Net cash provided by financing activities $ 3,202,535 $ 1,051,876
------------------------------------
Net increase (decrease) in cash and cash equivalents (64,117) 750,423
Cash and cash equivalents at beginning of period 981,400 78,215
------------------------------------
Cash and cash equivalents at end of period $ 917,283 $ 828,638
====================================
</TABLE>
F-18
See accompanying notes.
<PAGE>
STV Communications, Inc.
Notes to Financial Statements
(Unaudited)
Note 1: Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles and pursuant to the
rules and regulations of the SEC. Accordingly, certain information and note
disclosures normally included in the financial statements have been condensed or
omitted pursuant to such rules and regulations relating to interim financial
information.
In the opinion of management, all normal and recurring adjustments considered
necessary for a fair presentation of STV's financial position at March 31, 2000,
and the results of its operations and its cash flows for the three months ended
March 31, 2000 and 1999, have been included. Operating results for the three
month period ended March 31, 2000 are not necessarily indicative of future
results.
Note 2: Net income (loss) per share
Basic and diluted earnings (loss) per common share presented in accordance with
Statement of Financial Accounting Standards No. 128, Computation of Earnings per
Share, for all periods presented. In accordance with SFAS No. 128 and the SEC
Staff Accounting Bulletin No. 98, basic earnings per share are computed using
the weighted average number of common shares outstanding during the period.
For March 31, 2000 and 1999, diluted loss per share is equivalent to basic loss
per share because outstanding stock options, warrants and convertible preferred
stock are antidilutive. Potentially dilutive common shares outstanding as of
March 31, 2000 and 1999 were 6,654,290 and 2,402,090, respectively.
Note 3: Promissory Note
In January 2000, the Company issued $1,200,000 of 8% subordinated notes payable
to a group of private investors. The notes were paid in full in April 2000
following the merger with Sonic Foundry.
F-19
<PAGE>
ITEM 7 (b)
PRO FORMA FINANCIAL INFORMATION.
The following unaudited pro forma financial statements relate to Sonic Foundry's
April 3, 2000 acquisition of STV Communications, Inc. ("STV") The transaction
will be accounted for under the purchase method of accounting. Under the
purchase method of accounting, the purchase price is allocated to the assets
acquired and liabilities assumed based on estimated fair values. The acquisition
is valued at approximately $78 million based on the closing price of Sonic
Foundry's common stock on February 28, 2000. The amount of the consideration
issued to the former shareholders and option holders of STV was determined by
arms-length negotiations between the parties.
Sonic Foundry's fiscal year ends on September 30. The following Unaudited Pro
Forma Condensed Consolidated Balance sheet as of March 31, 2000 reflects the
combined historical financial position with pro forma adjustments as though the
acquisition of STV had occurred on March 31, 2000.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations
for the year ended September 30, 1999 and the six months ended March 31, 2000
reflect the combined historical financial position with pro forma adjustments as
though the acquisition of STV had occurred on October 1, 1998.
The Pro Forma Condensed Consolidated Statements of Operations are based on the
following: 1) historical results of operations of Sonic Foundry for the year
ended September 30, 1999 derived from audited financial statements included in
the Sonic Foundry 1999 annual Report on Form 10-K; 2) historical results of STV
derived from unaudited financial statements for the year ended September 30,
1999; 3) unaudited financial statements of Sonic Foundry and STV for the six
months ended March 31, 2000. The Pro Forma Financial Statements and the
accompanying notes ("Pro Forma Financial Information") should be read in
conjunction with, and are qualified by, the historical financial statements and
notes thereto of Sonic Foundry and STV.
The Pro Forma Financial Information is intended for informational purposes only
and is not necessarily indicative of the combined results that would have
occurred had the acquisition taken place on October 1, 1998 nor is it
necessarily indicative of results that may occur in the future.
F-20
<PAGE>
SONIC FOUNDRY, INC.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
March 31, 2000
<TABLE>
<CAPTION>
Assets Pro Forma
------
Sonic Foundry STV Adjustments Pro Forma
------------- --- ----------- ---------
<S> <C> <C> <C> <C>
Current assets
Cash & cash equivalents $ 45,407,721 $ 917,283 $ (1,222,273) e. $ 45,102,731
Accounts receivable, net of allowances 6,425,301 308,847 - 6,734,148
Inventories 1,180,652 28,702 - 1,209,354
Prepaid expenses and other 4,187,348 245,458 - 4,432,806
---------------------------------------------------------------------
Total current assets 57,201,022 1,500,290 $ (1,222,273) 57,479,039
Fixed assets
Property and equipment 7,098,720 2,953,159 - 10,051,879
Less accumulated depreciation 1,388,562 643,587 - 2,032,149
---------------------------------------------------------------------
Net property and equipment 5,710,158 2,309,572 - 8,019,730
Other assets
Notes receivable - affiliates 2,000,000 - (2,000,000) d. -
Goodwill and other intangible assets - - 69,358,287 c. 69,358,287
Other assets 1,992,532 - - 1,992,532
---------------------------------------------------------------------
Total other assets 3,992,532 - 67,358,287 71,350,819
---------------------------------------------------------------------
Total assets $ 66,903,712 $ 3,809,862 $ 66,136,014 $136,849,588
=====================================================================
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
-------------------
Accounts payable $ 2,307,591 $ 767,129 - 3,074,720
Accrued liabilities 1,057,375 733,747 1,272,000 f. 3,063,122
Promissory notes - 1,218,601
3,672 e.
(1,222,273) e.
Current portion of long-term debt 154,927 - - 154,927
---------------------------------------------------------------------
Total current liabilities 3,519,893 2,719,477 53,399 6,292,769
Long-Term Liabilities
---------------------
Notes payable - affiliates - 2,000,000 (2,000,000) d. -
Long-term debt, net of current portion 742,336 - - 742,336
---------------------------------------------------------------------
Total long-term liabilities 742,336 2,000,000 (2,000,000) 742,336
Stockholders' Equity
--------------------
Preferred stock - 4,940 (4,940) b. -
Common stock 193,619 3,214 21,071 a. 214,690
- - (3,214) b. -
Common stock warrants and options 1,194,607 - - 1,194,607
Additional paid-in-capital 73,543,494 6,741,630 72,458,929 a. 146,002,423
- - (6,741,630) b. -
Accumulated deficit (12,140,235) (7,659,399) 7,659,399 b. (12,140,235)
Unearned compensation (150,002) - (5,307,000) c. (5,457,002)
---------------------------------------------------------------------
Total stockholders' equity 62,641,483 (909,615) 68,082,615 129,814,483
---------------------------------------------------------------------
Total liabilities and stockholders' equity $ 66,903,712 $ 3,809,862 $ 66,136,014 $136,849,588
=====================================================================
</TABLE>
F-21
See accompanying notes.
<PAGE>
SONIC FOUNDRY, INC.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Six Months Ended March 31, 2000
<TABLE>
<CAPTION>
Pro Forma
Sonic Foundry STV Adjustments Pro Forma
------------- --- ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Software license fees $ 10,728,683 $ - $ - $ 10,728,683
Media services 403,166 859,738 - 1,262,904
------------------------------------------------------------------------
Total revenue 11,131,849 859,738 - 11,991,587
Cost of revenue:
Cost of software license fees 2,220,505 - - 2,220,505
Cost of media services 473,503 845,266 - 1,318,769
------------------------------------------------------------------------
Total cost of revenue 2,694,008 845,266 - 3,539,274
------------------------------------------------------------------------
Gross margin 8,437,841 14,472 - 8,452,313
Operating expenses 13,981,894 3,523,459 - 17,505,353
Goodwill and other intangible amortization - - 11,876,381 c. 11,876,381
Stock option compensation - - 758,143 c. 758,143
------------------------------------------------------------------------
Total expenses 13,981,894 3,523,459 12,634,524 30,139,877
Loss from operations (5,544,053) (3,508,987) (12,634,524) (21,687,564)
Other income, net 869,474 14,375 - 883,849
------------------------------------------------------------------------
Net loss $ (4,674,579) $(3,494,612) $(12,634,524) $ (20,803,715)
========================================================================
Per common share:
Basic and diluted net loss per share $ (.31) $ (1.20)
============= =============
</TABLE>
F-22
See accompanying notes.
<PAGE>
SONIC FOUNDRY, INC.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended September 30, 1999
<TABLE>
<CAPTION>
Pro Forma
Sonic Foundry STV Adjustments Pro Forma
------------- --- ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Software license fees $ 14,829,639 $ - $ - $ 14,829,639
Media services - 1,469,968 - 1,469,968
--------------------------------------------------------------------------
Total revenue 14,829,639 1,469,968 - 16,299,607
Cost of revenue:
Cost of software license fees 3,389,403 - - 3,389,403
Cost of media services - 1,449,226 - -
--------------------------------------------------------------------------
Total cost of revenue 3,389,403 1,449,226 - 3,389,403
--------------------------------------------------------------------------
Gross margin 11,440,236 20,742 - 12,910,204
Operating expenses 17,612,613 3,690,520 - 17,612,613
Goodwill and other amortization - - 23,752,762 c. 23,752,762
Stock option compensation - - 1,516,286 c. 1,516,286
--------------------------------------------------------------------------
Total expenses 17,612,613 3,690,520 25,269,048 42,881,661
--------------------------------------------------------------------------
Loss from operations (6,172,377) (3,669,778) (25,269,048) (29,971,457)
Other income, net 175,229 (1,206) - 174,023
--------------------------------------------------------------------------
Net loss $ (5,997,148) $ (3,670,984) $ (25,269,048) $ (29,797,434)
==========================================================================
Per common share:
Basic and diluted net loss per share $ (1.05) $ (3.82)
============= ==============
</TABLE>
F-23
See accompanying notes.
<PAGE>
SONIC FOUNDRY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) To record the April 3, 2000 acquisition of STV Communications, Inc. ("STV").
A summary of the purchase price for the acquisition is as follows:
--------------------------------- ------------------------------
Stock and stock options $72,480,000
--------------------------------- ------------------------------
Cash 1,222,273
--------------------------------- ------------------------------
Direct acquisition costs 1,272,000
--------------------------------- ------------------------------
Accounts payable and
--------------------------------- ------------------------------
Accrued liabilities assumed 1,500,876
--------------------------------- ------------------------------
Notes payable to Sonic Foundry 2,000,000
--------------------------------- ------------------------------
Total purchase price 78,475,149
--------------------------------- ------------------------------
The purchase price was allocated as follows:
------------------------------------- ----------------------------
Cash acquired, net $ 917,283
------------------------------------- ----------------------------
Other current assets 583,007
------------------------------------- ----------------------------
Equipment 2,309,572
------------------------------------- ----------------------------
Goodwill 68,408,287
------------------------------------- ----------------------------
Assembled workforce 950,000
------------------------------------- ----------------------------
Unearned compensation 5,307,000
------------------------------------- ----------------------------
Total allocated price 78,475,149
------------------------------------- ----------------------------
Purchase accounting adjustments include:
(a) the issuance of Sonic Foundry's common stock as part of the purchase price.
(b) the elimination of STV's equity prior to the transaction.
(c) the recognition of goodwill, assembled workforce and unearned compensation.
Goodwill will be amortized equally over a three year life. Assembled
workforce will be amortized equally over a one year life. Unearned
compensation will be amortized over the remaining average vesting period of
the unvested options and warrants (3.5 years).
(d) the elimination of a $2,000,000 note issued from Sonic Foundry to STV.
(e) the reduction of cash used to pay the promissory note shortly after
closing.
(f) the recognition of estimated closing costs of $1,272,000.
F-24
<PAGE>
(2) Pro forma basic and diluted net loss per share are computed by dividing the
pro forma net loss attributable to common shareholders by the pro forma
weighted average number of common shares outstanding. Potentially dilutive
securities were not taken into account because their effects would be anti-
dilutive. A reconciliation of shares used to compute historical basic and
diluted net loss per share to shares used to compute pro forma basic and
diluted net loss per share is as follows:
<TABLE>
<CAPTION>
------------------------------------------- ----------------------- -------------------------
Six months ended Year ended
------------------------------------------- ----------------------- -------------------------
March 31, 2000 September 30, 1999
------------------------------------------- ----------------------- -------------------------
<S> <C> <C>
Shares used to compute historical basic
and diluted net loss per share 15,202,123 5,687,296
------------------------------------------- ----------------------- -------------------------
Share issued in acquisition 2,107,096 2,107,096
------------------------------------------- ----------------------- -------------------------
Shares used to compute pro forma basic
And diluted net loss per share 17,309,219 7,794,392
------------------------------------------- ----------------------- -------------------------
</TABLE>
(3) Other Information
In March, 2000 the board of directors of Sonic Foundry approved a 2-for-1 split
of the Company's common stock to shareholders of record as of April 7, 2000.
Shares used for the computation of basic and diluted net income (loss) per share
in the pro forma condensed consolidated financial statements are presented
post-split.
F-25
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SONIC FOUNDRY, INC.
By: /s/ Ken Minor, CFO
F-26
