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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 1996 or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______________
to ___________________________
Commission File Number: 72870
SONIC SOLUTIONS
(Exact name of registrant as specified in its charter)
CALIFORNIA 93-0925818
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
101 ROWLAND WAY, SUITE 110 NOVATO, CA 94945
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 893-8000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO
PAR VALUE
(Title of class)
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
--- ---
The number of outstanding shares of the registrant's Common Stock on October 31,
1996, was 7,535,787.
================================================================================
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SONIC SOLUTIONS
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements........................ 3
Condensed Balance Sheets as of March 31, 1996
and September 30, 1996................................ 3
Condensed Statements of Operations for the
three and six months ended September 30, 1995 and 1996 4
Condensed Statements of Cash Flows for the
six months ended September 30, 1995 and 1996.......... 5
Notes to Condensed Financial Statements............... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 8
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders... 15
ITEM 6. Exhibits and Reports on Form 8-K...................... 15
Signatures ...................................................... 16
Exhibit 11.1 Statement Re: Computation of Per Share Amounts........ 17
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
SONIC SOLUTIONS
BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
1996
---------------------------
March 31, September 30,
---------- -------------
(unaudited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents................................ $ 1,086 2,467
Short-term investments................................... 2,106 --
Accounts receivable, net of allowance for returns and
doubtful accounts of $1,690 and $931 at March 31, 1996
and September 30, 1996, respectively.................... 4,101 3,252
Inventory................................................ 1,881 1,790
Prepaid expenses and other current assets................ 476 681
Refundable income taxes.................................. 1,600 385
Deferred income taxes.................................... 1,018 1,018
------- ------
Total current assets............................... 12,268 9,593
Fixed assets, net............................................ 2,684 2,978
Purchased and internally developed software costs, net....... 1,273 1,556
Other assets................................................. 607 519
------- ------
Total assets....................................... $16,832 14,646
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities................. $ 2,753 3,275
Deferred revenue and deposits............................ 442 682
------- ------
Total current liabilities.......................... 3,195 3,957
------- ------
Deferred income taxes........................................ 725 725
Shareholders' Equity:
Common stock, no par value, 30,000,000 shares authorized;
7,493,628 and 7,535,419 shares issued and outstanding at
March 31, 1996 and September 30, 1996, respectively........ 13,133 13,206
Accumulated deficit.......................................... (219) (3,242)
Unrealized loss on investments............................... (2) --
------- ------
Total shareholders' equity......................... 12,912 9,964
------- ------
Commitments and contingencies
Total liabilities and shareholders' equity......... $16,832 14,646
======= ======
</TABLE>
See accompanying Notes to Condensed Financial Statements.
3
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SONIC SOLUTIONS
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts -- unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ------------------
September 30, September 30,
------------- -------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue................................................ $ 3,444 4,645 7,998 7,103
Cost of revenue............................................ 1,957 1,869 3,910 3,535
------- ----- ------ ------
Gross profit........................................... 1,487 2,776 4,088 3,568
------- ----- ------ ------
Operating expenses:
Marketing and sales.................................... 1,402 1,300 2,821 2,876
Research and development............................... 651 1,651 1,310 2,708
General and administrative............................. 566 503 1,081 1,036
------- ----- ------ ------
Total operating expenses............................... 2,619 3,454 5,212 6,620
------- ----- ------ ------
Operating loss......................................... (1,132) (678) (1,124) (3,052)
Other income............................................... 49 4 87 29
------- ----- ------ ------
Loss before income taxes............................... (1,083) (674) (1,037) (3,023)
Benefit for income taxes................................... (379) 0 (364) 0
------- ----- ------ ------
Net loss............................................... ($704) (674) (673) (3,023)
======= ===== ====== ======
Net loss per share......................................... ($0.09) (0.09) (0.09) (0.40)
======= ===== ====== ======
Shares used in computing net loss per share............ 7,445 7,524 7,423 7,514
======= ===== ====== ======
</TABLE>
See accompanying Notes to Condensed Financial Statements.
4
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SONIC SOLUTIONS
STATEMENTS OF CASH FLOWS
(in thousands, -- unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
September 30,
-------------
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................................... ($673) (3,023)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 387 748
Provision for returns and doubtful accounts.................... 271 (759)
Changes in operating assets and liabilities:
Accounts receivable......................................... (471) 1,608
Inventory................................................... (156) 91
Prepaid expenses and other current assets................... (620) 1,010
Other assets................................................ 5 88
Accounts payable and accrued liabilities.................... (1,282) 522
Deferred revenue and deposits............................... (61) 240
Income taxes payable........................................ (22) 0
------- ------
Net cash (used in) provided by operating activities....... (2,622) 525
------- ------
Cash flows from investing activities:
Purchase of fixed assets......................................... (806) (880)
Additions to purchased and internally developed software......... (326) (445)
Proceeds from sale of short-term investments..................... 3,324 2,108
------- ------
Net cash provided by investing activities...................... 2,192 783
------- ------
Cash flows from financing activities:
Proceeds from issuances of common stock, net of issuance costs... 118 73
Borrowings on line of credit..................................... 2,800 0
Repayments of line of credit..................................... (2,800) 0
------- ------
Net cash provided by financing activities...................... 118 73
------- ------
Net (decrease) increase in cash and cash equivalents............... (312) 1,381
Cash and cash equivalents, beginning of period..................... 681 1,086
------- ------
Cash and cash equivalents, end of period........................... $ 369 2,467
======= ======
Supplemental disclosure of cash flow information:
Interest paid during period...................................... $ 18 0
======= ======
Income taxes paid during period.................................. $ 0 0
======= ======
</TABLE>
See accompanying Notes to Condensed Financial Statements.
5
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SONIC SOLUTIONS
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. However, in the opinion of management, the
condensed financial statements include all adjustments (consisting of only
normal, recurring adjustments) necessary for their fair presentation. The
interim results are not necessarily indicative of results expected for a full
year. These unaudited condensed financial statements should be read in
conjunction with the financial statements and related notes included in the
Company's Form 10-K for the year ended March 31, 1996, filed with the Securities
and Exchange Commission.
(2) Short-term investments.
Short-term investments consist almost exclusively of tax free municipal
bonds. The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" and has classified its investments in certain debt and equity
securities as "available for sale". Such investments are recorded at fair value,
with unrealized gains and losses reported as a separate component of
shareholders' equity. The cost of securities sold is based upon the specific
identification method.
(3) Net Income (loss) Per Share.
Net income (loss) per share is computed using the weighted average number
of shares of common stock and dilutive common equivalent shares from stock
options (using the treasury stock method). The computation assumes that no stock
options were exercised where losses exist, as the effect would be anti dilutive.
(4) Inventory.
The components of inventory consist of (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
--------- -------------
1996 1996
---- ----
<S> <C> <C>
Raw materials........................... $1,180 1,194
Work-in-process......................... 580 476
Original equipment manufacturers goods.. 121 120
------ -----
$1,881 1,790
====== =====
</TABLE>
6
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(5) Deferred revenue and deposits.
Deferred revenue and deposits consist of (in thousands):
<TABLE>
<CAPTION>
March 31 September 30,
-------- -------------
1996 1996
---- ----
<S> <C> <C>
Deferred maintenance revenue................... $ 401 536
Deposits and billings against sales contracts.. 41 146
----- ----
Deferred revenue and deposits $ 442 682
===== ====
</TABLE>
Maintenance revenue is recognized ratably over the term of the contract.
Customer deposits and billings against sales contracts are primarily related to
sales of DVD Creator systems.
(6) Income Taxes.
The Company accounts for income taxes under the asset and liability method
of accounting. Under the asset and liability method, deferred tax assets and
liabilities are recognized based on the future tax consequences attributable to
differences between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases.
(7) Industry and Geographic Information.
The Company markets its products in the United States and in foreign
countries through its sales personnel, dealers, and distributors. Export sales
account for a significant portion of the Company's net revenues and are
summarized by geographic area as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
September 30, September 30,
------------- -------------
1995 1996 1995 1996
------ ----- ------ -----
<S> <C> <C> <C> <C>
North America (substantially all United States) $1,551 4,018 $3,949 5,260
Export:
Europe.................................... 519 425 1,521 953
Pacific Rim............................... 996 104 2,099 556
Other international....................... 378 98 429 334
------ ----- ------ -----
Total net revenue $3,444 4,645 $7,998 7,103
====== ===== ====== =====
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW, FORWARD LOOKING STATEMENTS AND CERTAIN FACTORS THAT MAY IMPACT FUTURE
RESULTS
To the extent that this report discusses future financial results,
information or expectations about products or markets, or otherwise makes
statements about future events, such statements are forward-looking and are
subject to a number of risks and uncertainties that could cause actual results
to differ materially from the statements made. These risks and uncertainties
include, among others, the timely introduction and acceptance of new products,
costs associated with new product introductions, the transition of products to
new hardware configurations and platforms, and other factors, including those
discussed in the Company's annual and quarterly reports on file with the
Securities and Exchange Commission. This report should be read in conjunction
with the Company's most recent annual report on Form 10-K on file with the
Securities and Exchange Commission, which contains a more detailed discussion of
the Company's business including risks and uncertainties that may affect future
results.
The Company commenced shipments of the Sonic System (also called "Sonic
Studio"), a professional digital audio workstation ("DAW") in the first calendar
quarter of 1989. Sales of the Sonic System product line including Sonic
developed software and Sonic manufactured hardware, third party developed
software and hardware peripheral devices and associated maintenance fees,
together with sales of MediaNet and DVD Creator have accounted for substantially
all of the Company's net revenue during the six fiscal years ended March 31,
1996 and the six months ended September 30, 1996. The Company's future success
will depend in part on sales of the Sonic System to audio professionals. The
Company believes there is little growth in the overall market for professional
audio equipment. Sales of products by Sonic have depended upon the substitution
of digital audio workstations for other existing technologies, and Sonic's
ability to increase sales will continue to depend in large part on the continued
substitution of digital audio workstations for other technologies. The
Company's future success will also depend in large part on sales of the DVD
Creator system (see below). Any factor adversely affecting demand for or
delivery of the DVD Creator system would have a material adverse effect on the
Company's results of operations.
The Sonic System is an integrated assembly of software, signal processing
cards and other Sonic manufactured hardware, as well as, in some cases,
peripheral devices such as disk drives and CD printers which are purchased as
complete or largely complete devices from other manufacturers. The Sonic System
is integrated with a Macintosh computer which is not typically provided by the
Company. The Company's gross margin on the software and Sonic manufactured
hardware is generally over 60%, and the gross margin on hardware peripheral
devices is generally less than 30%. As a result, overall gross margin from
period to period will vary depending on the volume of peripheral devices
relative to Sonic developed software and Sonic manufactured hardware included in
net revenue. During fiscal year 1996, the Company's gross margins were
negatively impacted as a result of the various extra costs associated with the
problems experienced in executing a transition to a Sonic System product line
including the new USP ("Ultra-Sonic Processor") audio digital signal processing
("DSP") card. During the three months ended June 30, 1996, the Company's gross
margins were negatively impacted as a result of lower than anticipated revenue
and costs associated with the DVD Creator systems shipped for which revenue was
not fully recognized (see discussion below).
In November, 1994, the Company introduced major changes to its Sonic System
product line including the introduction of its new USP card for higher end Sonic
System configurations as well as a repositioning of Sonic Systems based on the
older SSP-3 DSP card. The USP is the fourth generation card in the evolution of
the Company's DSP cards. The Company incorporates the USP card in Sonic System
configurations priced at the mid-range and upper-end of the Sonic System product
line. The USP, like the SSP-3 card, is a high performance signal processing
card that allows the input, output, storage, retrieval, and processing of
digital audio. Compared to the SSP-3 card, the USP offers higher
8
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processing speeds and the ability to handle more channels of digital audio input
and output per card, as well as the ability to play back from hard disk a larger
number of tracks of digital audio. The Company experienced a number of
difficulties in connection with this product transition which adversely affected
the operations of the Company in the third and fourth quarters of the fiscal
year ended March 31, 1995 and the fiscal year ended March 31, 1996.
In February, 1994, the Company began shipments of MediaNet, a high
performance, fully distributed networking system designed specifically to handle
digital audio, digital video, high resolution graphics and other multimedia data
types, for use with applications other than the Sonic System. In the fiscal
year ended March 31, 1996, and the six months ended September 30, 1996, MediaNet
revenues constituted approximately 16% and 11% of Company revenues. Of total
MediaNet sales during fiscal 1996, and the six months ended September 30, 1996,
approximately 67% and 79% were for use with applications other than the Sonic
System.
MediaNet allows users to share digital audio and other "multimedia" data
types efficiently among multiple workers in a facility. MediaNet consists of
specialized network adapter plug in cards installed in the NuBus or PCI bus of
an Apple Macintosh computer. MediaNet combines FDDI or CDDI (fiber-based or
copper-based 100 megabit token ring networking) technology with a special file
system running on SCSI disks attached directly to the network cards. This file
system, called the Media Optimized File System, addresses the needs of
multimedia applications. In addition to its use in digital audio applications,
MediaNet has uses in other areas whenever work groups wish to collaborate on
applications which require high, sustained rates of data transfer, a high degree
of compatibility with conventional computing systems and some degree of
guaranteed bandwidth.
In the last quarter of the 1996 fiscal year the Company became aware of
competitive announcements which may significantly reduce demand for MediaNet in
the prepress industry in the immediate future. Based on these announcements,
the Company began preparing for an earlier than expected transition of the
MediaNet product line to higher performance technology, and, as a result,
included various charges related to this transition in the 1996 fiscal year
results of operations.
It is the Company's intention to introduce in calendar year 1997 a second
generation MediaNet product line, incorporating newer networking technologies
and supporting increased performance levels. There can be no assurance that the
Company will be successful in developing such a product line, or that, if
successfully developed, such a second generation product line will be attractive
to customers when compared to other network product offerings. Further,
transition between the first generation and second generation product lines may
present a number of difficulties for the Company including slow sales or returns
of dealer stocks of the first generation product. Such difficulties could have
an adverse affect on results of operations in future periods.
In the fall of 1995, Apple Computer discontinued sale of Macintosh
computers with NuBus interfaces, transitioning to a product line based
exclusively on the PCI bus. While compatible equipment suppliers ("clone"
makers) have continued to supply NuBus computers until recently, they also have
signaled their intention to transition to product lines based exclusively on the
PCI bus. Shortly before the end of the 1996 fiscal year, the Company began
shipping MediaNet cards compatible with the PCI bus. In June, 1996, the Company
began shipping USP cards compatible with the PCI bus. While the Company
believes that the new MediaNet and USP cards will perform adequately in the
hands of customers, there can be no assurance that bugs or defects will not be
discovered once such cards are installed and in use. It is the Company's
current intention to complete development on and introduce to the market
before the end of calendar 1996 an SSP-3 DSP card compatible with the PCI bus.
There can be no assurance that this development will be completed, or will be
completed in a timely fashion. Further, while the Company believes that the new
SSP-3 card will perform adequately in the hands of customers, there can be no
assurance that bugs or defects will not be discovered once such cards are
installed and in use.
9
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In April, 1996 at the National Association of Broadcasters convention
(NAB), the Company introduced a new product line, the DVD Creator system. DVD
Creator is a networked production system for preparing titles for release on
digital versatile discs ("DVD"). DVD is a new, higher density optical disc
format for the delivery of video, audio and information. Please see the
discussion contained in the Company's Annual Report on Form 10-K on file with
the Securities and Exchange Commission for more information on the DVD format,
particularly the discussion under the heading "Sonic Cinema & DVD Creator."
The DVD Creator system is comprised of three separable subsystems all of
which are used in preparing DVD titles: (1) an MPEG-2 variable bit rate video
compression subsystem (based on an IBM chip set incorporated into a circuit card
of the Company's design), (2) an audio preparation and encoding subsystem
(utilizing the Company's USP audio cards programmed to perform Dolby AC-3 and
MPEG-2 audio compression), and (3) an authoring and formatting subsystem
(incorporating Scenarist-DVD, a sophisticated DVD authoring system developed by
Daikin Industries). The DVD Creator subsystems are networked together via the
Company's high-speed MediaNet networking system. During the month of June,
1996, the Company began shipping the first installation phase of the DVD Creator
system for DVD encoding and premastering including the audio and authoring
subsystems. During the quarter ended September 30, 1996, the Company began
shipping the video subsystem of the DVD Creator system. The Company expects to
deliver additional updates of DVD Creator software during the rest of the 1997
fiscal year and, possibly, during the 1998 fiscal year. The entire DVD Creator
System is complex, and incorporates leading edge technologies. While it is the
Company's current intention to continue development and enhancement of the DVD
Creator system, there can be no assurance that development and enhancement of
the DVD Creator system will be successfully continued. There are a number of
companies engaged in the development and marketing of products which can perform
some or all of the steps involved in preparing titles for release in the DVD-
Video format. Many of these companies have long standing involvements with
technologies involved in DVD-Video premastering, and many of them have technical
and/or financial resources which are greater than Sonic's. Accordingly, there
can be no assurance that the Company's DVD Creator system, as developed and
enhanced, will be preferred by customers over competitive offerings. Further,
since the Company and its customers have had only limited experience to date
with the DVD Creator system in actual production, there can be no assurance that
design flaws, limitations, "bugs", or other problems will not be discovered in
the DVD Creator system which may be difficult or impossible to repair or
address, or to repair or address in a timely fashion. Under such circumstances
the Company would potentially incur significant costs related to addressing such
problems, and the Company's sales of new systems would undoubtedly be adversely
affected.
The DVD-Video format is widely expected to be introduced to consumers
before the end of this calendar year in Japan, other parts of Asia, and early in
the next year in both North America and in Europe. Many industry observers
expect the format to be highly attractive to consumers since it combines
superior-quality digital video, six-channel surround sound, multiple language
tracks, sub-titles, and interactive story branching, among other features and
permits "feature length" movies and videos to be delivered on a convenient
"Compact Disc" sized disc. As of the date of this report, the final
specification of the DVD-Video format has only recently been published by the
industry consortium which is developing and promoting the format. There have
been a number of delays in reaching agreement on the final specification
including disagreements within the consortium and among various companies,
industry associations and political organizations concerning issues involving
copyright protection schemes and sharing of royalty revenues from patented
technologies involved in the DVD format. While the Company expects that since
finalization of the DVD-Video format has occurred, introduction of the format
will now take place rapidly in various areas of the world, however, there can be
no assurance that this will in fact happen, nor that the DVD format, once
introduced, will be attractive to consumers. Further delays in the introduction
of the DVD format, or lack of consumer acceptance of the format once it is
introduced, would have a significant negative effect on demand for the Company's
DVD Creator systems. Given the Company's significant levels of
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expenditure on DVD Creator development and marketing, under such conditions the
Company's future results of operations would be significantly adversely
affected.
The Company's quarterly operating results vary significantly depending on
the timing of new product introductions and enhancements by the Company and its
competitors and on the volume and timing of orders, which are difficult to
forecast. Customers generally order on an as-needed basis, and the Company
normally ships products within one week after receipt of an order. The results
of operations for any quarter are not necessarily indicative of the results to
be expected for any future period. A disproportionate percentage of the
Company's quarterly net revenue is typically generated in the last few weeks of
the quarter. A significant portion of the Company's operating expenses is
relatively fixed, and planned expenditures are based primarily on sales
forecasts. As a result, if revenue generated in the last few weeks of a quarter
do not meet with the Company's forecast, operating results may be materially
adversely affected.
The Company capitalizes a portion of its software development costs in
accordance with Statement of Financial Accounting Standard No.86. Such costs
are amortized to cost of revenue over the estimated economic life of the
product, which is generally three years.
11
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RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's statements of
operations as a percentage of net revenue for the three and six months ended
September 30, 1995 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ -----------------
September 30, September 30,
----------------- -----------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue.............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenue.......................... 56.8 40.2 48.9 49.8
----- ----- ----- -----
Gross profit............................. 43.2 59.8 51.1 50.2
Operating expenses:
Marketing and sales.................. 40.7 28.0 35.3 40.5
Research and development............. 18.9 35.6 16.4 38.1
General and administrative........... 16.4 10.8 13.5 14.6
----- ----- ----- -----
Total operating expenses................. 76.0 74.4 65.2 93.2
----- ----- ----- -----
Operating loss........................... (32.8) (14.6) (14.1) (43.0)
Other income............................. 1.4 .1 1.1 .4
Benefit for income taxes................. (11.0) 0.0 (4.6) 0.0
----- ----- ----- -----
Net loss................................. (20.4)% (14.5)% (8.4)% (42.6)%
===== ===== ==== =====
</TABLE>
COMPARISON OF SIX AND THREE MONTHS ENDED SEPTEMBER 30
NET REVENUE. Net revenue increased from $3,444,000 for the quarter ended
September 30, 1995 to $4,645,000 for the quarter ended September 30, 1996,
representing an increase of 34.9%. For the six months ended September 30, 1996,
net revenue decreased from $7,998,000 to $7,103,000 compared to the same period
in the prior fiscal year, representing a decrease of 11.2%. The increase in net
revenue for the quarter ended September 30, 1996 is primarily due to revenue
recognized on sales of DVD Creator systems. During the quarter ended June 30,
1996, the Company began shipping the authoring and audio subsystems of its DVD
Creator system. The Company did not recognize revenue during the June quarter
related to sales to customers who had ordered complete DVD Creator systems
(including authoring, audio and video subsystems), and who were shipped only the
authoring and/or audio subsystems during that quarter. In September 1996, the
Company began shipping the video subsystem of the DVD Creator system.
Accordingly, in the September quarter, the Company recognized approximately
$3,030,000 in DVD Creator revenue including revenue related to customers who had
purchased and received portions of their DVD Creator system during the June 1996
quarter.
International sales accounted for 55% and 13% of net revenue for the
quarters ended September 30, 1995 and 1996, respectively. International sales
accounted for 51% and 26% of net revenue for the six months ended September 30,
1995, and 1996, respectively. See Note 7 of Notes to Condensed Financial
Statements. International sales as a percentage of net revenue varies from
quarter to quarter due to the timing of international orders. During the quarter
ended September 30, 1996, international sales as a percentage of net revenue
decreased due to the revenue recognized on DVD Creator Systems which were
primarily sold to customers located in the United States. The Company expects
that international sales will continue to represent a significant percentage of
future revenue.
COST OF REVENUE. Cost of revenue, as a percentage of net revenue, decreased
from 56.8% for the quarter ended September 30, 1995 to 40.2% for the quarter
ended September 30, 1996. Cost of revenue, as a percentage of net revenue,
increased from 48.9% for the six months ended September 30,
12
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1995 to 49.8% for the six months ended September 30, 1996. Cost of revenue for
the quarter and six months ended September 30, 1995 included additional costs
related to the "swap" and "customer satisfaction" programs in place to resolve
the transition difficulties associated with the Company's USP product. Cost of
revenue for the quarter ended September 30, 1996 improved primarily due to
increased sales of DVD Creator systems.
MARKETING AND SALES. Marketing and sales expenses decreased from $1,402,000
for the quarter ended September 30, 1995 to $1,300,000 for the quarter ended
September 30, 1996 and increased from $2,821,000 for the six months ended
September 30, 1995 to $2,876,000 for the six months ended September 30, 1996.
Marketing and sales represented 40.7%, 28.0%, 35.3% and 40.5% of net revenue for
the quarters ended September 30, 1995 and 1996 and the six months ended
September 30, 1995 and 1996, respectively. Marketing and sales expenses
decreased in the September 1996 quarter relative to the same quarter in the
prior year primarily due to the reduction of dealer commissions. Included in the
marketing and sales expense is dealer and employee commission expense, which as
a percentage of net revenue decreased from 6.4% for the quarter ended September
30, 1995 to 2.6% for the quarter ended September 30, 1996. The decrease in
commission expense, as a percentage of net revenue, is primarily due to a shift
in sales mix away from direct sales (which generally involves a commission
payable to a dealer) to dealer sales (where no commission is ordinarily payable
to a dealer). Marketing and sales expenses remained relatively constant for the
six months ended September 1996 relative to the same period in the prior year.
The Company's marketing and sales headcount decreased from thirty-five at
September 30, 1995 to thirty-one at September 30, 1996.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$651,000 for the quarter ended September 30, 1995 to $1,651,000 for the quarter
ended September 30, 1996 and increased from $1,310,000 for the six months ended
September 30, 1995 to $2,708,000 for the six months ended September 30, 1996.
Research and development represented 18.9%, 35.6%, 16.4% and 38.1% of net
revenue for the quarter ended September 30, 1995 and 1996, respectively. The
Company capitalizes a portion of its software development costs in accordance
with Statement of Financial Accounting Standard No.86. Research and development
expenses increased for the quarter and six months ended September 30, 1996
relative to the same periods in the prior year primarily due to increase in
headcount and increase of consulting and prototype expenses associated with the
development of the DVD Creator systems. Headcount for research and development
increased from twenty-three at September 30, 1995 to thirty-three at September
30, 1996. Prototype and consulting expenses can fluctuate significantly from
period to period depending upon the status of hardware development projects.
The Company anticipates increased prototype and consulting expenses related to
new products, as well as increased salary expenses from hiring additional
software and hardware engineers in the future.
GENERAL AND ADMINISTRATIVE. General and administrative expense decreased
from $566,000 for the quarter ended September 30, 1995 to $503,000 for the
quarter ended September 30, 1996 and from $1,081,000 for the six months ended
September 30, 1995 to $1,036,000 for the six months ended September 30, 1996.
General and administrative expenses represented 16.4%, 10.8%,13.5% and 14.6% of
net revenue for the quarter ended September 30, 1995 and 1996 and the six months
ended September 30, 1995 and 1996, respectively. General and administrative
expenses in dollar amount have remained relatively constant throughout the
periods presented, however, the Company anticipates that general and
administrative expenses will increase in the future as the Company's operations
expand.
OTHER INCOME (EXPENSE). The income for the six months ended September 30,
1995 and 1996 is primarily due to interest income received on investments which
were purchased with cash not immediately needed for operations.
BENEFIT FOR INCOME TAXES. The Company has presented a benefit for income
taxes, computed at the combined federal and state effective corporate rate in
accordance with Statement of
13
<PAGE>
Financial Accounting Standards No. 109. The benefit for taxes for the quarter
ended September 30, 1995 was based upon an effective rate of 35%. During fiscal
year ended March 31, 1996, the Company exhausted its loss carryback
capabilities, and therefore no benefit was recorded during the quarter and six
months ended September 30, 1996.
The Company accrues quarterly for income taxes based upon its projection of
its full year tax liability. This may result in significant adjustments based on
the actual quarterly results.
LIQUIDITY AND CAPITAL RESOURCES. The Company funded its operations through
fiscal 1994 primarily from cash flows from operations. In fiscal 1994 the
Company completed a private sale of equity securities and an initial public
offering of Common Stock which generated net proceeds of approximately $10
million after all expenses and a one time special distribution to the former
subchapter S corporation shareholders. As of September 30, 1996, the Company had
cash and cash equivalents of $2,467,000 and working capital of $5,636,000.
The Company's operating activities have used cash of $2,622,000 for the six
months ended September 30, 1995 and provided cash of $525,000 for the six months
ended September 30, 1996. During the six months ended September 30, 1996, cash
was used to pay down payables and fund the net loss and was positively offset by
the receipt of the income tax refunds received from the Internal Revenue
Service. The management of the Company believes that existing cash, cash
equivalents, and cash generated from operations will be sufficient to meet the
Company's cash and investment requirements at least through the first quarter of
fiscal 1998.
This Management's discussion and analysis should be read in conjunction
with the Management's discussion and analysis that accompanies the Company's
report on Form 10-K for the fiscal year ended March 31, 1996.
14
<PAGE>
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on September 3, 1996, at the
Company's headquarters, the Company shareholders voted to:
1) Approve Michael C. Child, Robert J. Doris, Robert M. Greber, Peter J.
Marguglio, James A. Moorer and Mary C. Sauer to continue to serve as directors
for the ensuing year end until their successors are elected. The vote for the
nominated directors was as follows: out of a total of 7,513,849 shares eligible
to vote at the meeting: 7,015,400 voted in favor and 16,370 withheld for the
approval of Michael C. Child; 7,015,650 voted in favor and 16,120 withheld for
the approval of Robert J. Doris; 7,015,650 voted in favor and 16,120 withheld
for the approval of Robert M. Greber; 7,015,650 voted in favor and 16,120
withheld for the approval of Peter J. Marguglio; 7,015,650 voted in favor and
16,120 withheld for the approval of James A. Moorer; and, 7,010,430 voted in
favor and 21,340 withheld for the approval of Mary C. Sauer.
2) Approve the amendment to the Sonic Solutions Stock Option Plan
increasing the number of shares reserved for issuance by 750,000 shares. Out of
a total 7,513,849 shares eligible to vote at the meeting, 4,655,665 voted in
favor, 303,639 voted against and 6,700 withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11.1 Statement Re: Computation of Per Share Amounts.
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Sonic Solutions, has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Novato,
State of California, on the 13th day of November, 1996.
SONIC SOLUTIONS
Signature
--------- Date
----
/s/ Robert J. Doris
------------------------------------ November 13, 1996
Robert J. Doris
President and Director (Principal
Executive Officer)
/s/ A. Clay Leighton
------------------------------------ November 13, 1996
A. Clay Leighton
Vice President of Finance and Chief
Financial Officer (Principal
Financial Accounting Officer)
16
<PAGE>
Exhibit 11.1
SONIC SOLUTIONS
STATEMENT RE: COMPUTATION OF PER SHARE AMOUNTS
Three and Six Months Ended September 30, 1995 and 1996
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ------------------
September 30, September 30,
-------------------- ------------------
1995 1996 1995 1996
--------- -------- -------- -------
<S> <C> <C> <C> <C>
Net loss................................ ($704) (674) ($673) (3,023)
Weighted average number of common ====== ===== ====== ======
shares outstanding..................... 7,445 7,524 7,423 7,514
====== ===== ====== ======
Net loss per share...................... ($0.09) (0.09) ($0.09) (0.40)
====== ===== ====== ======
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,467
<SECURITIES> 0
<RECEIVABLES> 4,183
<ALLOWANCES> (931)
<INVENTORY> 1,790
<CURRENT-ASSETS> 9,593
<PP&E> 2,978
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,646
<CURRENT-LIABILITIES> 3,957
<BONDS> 0
0
0
<COMMON> 13,206
<OTHER-SE> (3,242)
<TOTAL-LIABILITY-AND-EQUITY> 14,646
<SALES> 7,103
<TOTAL-REVENUES> 7,103
<CGS> 3,535
<TOTAL-COSTS> 6,620
<OTHER-EXPENSES> 29
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,023)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,023)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
