<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1997 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,
1997, was 7,633,466.
1
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SONIC SOLUTIONS
FORM 10-Q
For the quarterly period ended September 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Balance Sheets as of March 31, 1997
and September 30, 1997................................ 3
Condensed Statements of Operations for the
three and six months ended September 30, 1996 and 1997 4
Condensed Statements of Cash Flows for the
six months ended September 30, 1996 and 1997.......... 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... 14
ITEM 6. Exhibits and Reports on Form 8-K...................... 14
Signatures........................................................ 15
Index to Exhibits................................................. 16
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SONIC SOLUTIONS
CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
1997
----------------------------
ASSETS March 31, September 30,
------ --------- -------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................................................... $ 4,806 $ 2,791
Accounts receivable, net of allowance for returns and doubtful accounts of $588
and $629 at March 31, 1997 and September 30, 1997, respectively................... 3,105 3,631
Inventory.......................................................................... 1,275 1,989
Prepaid expenses and other current assets.......................................... 719 793
Refundable income taxes............................................................ 450 441
------- -------
Total current assets......................................................... 10,355 9,645
Fixed assets, net...................................................................... 3,154 3,202
Purchased and internally developed software costs, net................................. 1,954 2,734
Other assets........................................................................... 426 377
------- -------
Total assets................................................................. $15,889 $15,958
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities........................................... $ 2,971 $ 4,681
Deferred revenue and deposits...................................................... 705 808
Subordinated debt, current portion................................................. 347 3,049
Current portion of obligations under capital leases................................ 69 103
------- -------
Total current liabilities.................................................... 4,092 8,641
------- -------
Subordinated debt, net of current portion.............................................. 3,195 485
Obligations under capital leases, net of current portion............................... 172 211
------- -------
Total liabilities............................................................ 7,459 9,337
------- -------
Commitments and contingencies
Shareholders' Equity:
Common stock, no par value, 30,000,000 shares authorized; 7,595,897 and
7,630,133 shares issued and outstanding at March 31, 1997 and
September 30, 1997, respectively...................................................... 13,840 13,889
Accumulated deficit.................................................................... (5,410) (7,268)
------- -------
Total shareholders' equity................................................... 8,430 6,621
------- -------
Total liabilities and shareholders' equity................................... $15,889 $15,958
======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
3
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SONIC SOLUTIONS
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
September 30, September 30,
------------- -------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue........................ $ 4,645 $4,714 $ 7,103 $10,638
Cost of revenue.................... 1,869 2,286 3,535 4,671
------- ------ ------- -------
Gross profit.................. 2,776 2,428 3,568 5,967
------- ------ ------- -------
Operating expenses:
Marketing and sales........... 1,300 1,920 2,876 3,872
Research and development...... 1,651 1,469 2,708 2,967
General and administrative.... 503 373 1,036 746
------- ------ ------- -------
Total operating expenses...... 3,454 3,762 6,620 7,585
------- ------ ------- -------
Operating loss................ (678) (1,334) (3,052) (1,618)
Other income (expense)............. 4 (119) 29 (240)
------- ----- ------- -------
Loss before income taxes...... (674) (1,453) (3,023) (1,858)
Provision for income taxes......... - - - -
------- ------- ------- -------
Net loss...................... ($ 674) ($ 1,453) ($ 3,023) ($ 1,858)
======= ======= ======= =======
Net loss per share............ ($ 0.09) ($ 0.19) ($ 0.40) ($ 0.24)
======= ======= ======= =======
Shares used in computing per
share amounts................ 7,524 7,614 7,514 7,605
======= ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
4
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SONIC SOLUTIONS
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands, - unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
September 30,
-------------
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................................................. ($3,023) ($1,858)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization....................................................... 748 1,068
Changes in operating assets and liabilities:
Accounts receivable.............................................................. 1,608 (526)
Inventory........................................................................ 91 (714)
Prepaid expenses and other current assets........................................ 1,010 (65)
Other assets..................................................................... 88 49
Accounts payable and accrued liabilities......................................... 522 1,702
Deferred revenue and deposits.................................................... 240 103
-------- --------
Net cash provided by (used in) operating activities............................ 525 (241)
-------- --------
Cash flows from investing activities:
Purchase of fixed assets.............................................................. (880) (717)
Additions to purchased and internally developed software.............................. (445) (1,067)
Redemption/maturities of short-term investments....................................... 2,108 -
-------- --------
Net cash provided by (used in) investing activities................................. 783 (1,784)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of common stock options........................................ 73 49
Principal payments on capital leases.................................................. - (39)
-------- --------
Net cash provided by financing activities........................................... 73 10
-------- --------
Net increase (decrease) in cash and cash equivalents.................................... 1,381 (2,015)
Cash and cash equivalents, beginning of period.......................................... 1,086 4,806
-------- --------
Cash and cash equivalents, end of period................................................ $ 2,467 $ 2,791
======== ========
Supplemental disclosure of cash flow information:
Interest paid during period........................................................... $ - $ 136
======== ========
Income taxes paid during period....................................................... $ - $ 2
======== ========
Noncash financing and investing activities:
Assets acquired through capital lease............................................. $ - $ 112
======== ========
</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 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, 1997, filed with the Securities and Exchange
Commission.
(2) NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. The computation assumes no common equivalent shares
from stock options outstanding, as the effect would be anti dilutive.
The Financial Accounting Standards Board (FASB) recently issued SFAS No.
128, "Earnings Per Share". SFAS No. 128 requires the presentation of basic
earnings per share (EPS) and, for companies with complex capital structures,
diluted EPS. SFAS No. 128 is effective for annual and interim periods ending
after December 15, 1997. The Company expects that for profitable periods basic
EPS will be higher than earnings per share and diluted EPS will not differ
materially from earnings per share as the Company has historically presented.
Computations for loss periods should not change significantly.
6
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(3) INVENTORY
The components of inventory consist of (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
--------- -------------
1997 1997
------ -----
<S> <C> <C>
Raw materials..................................... $ 700 1,320
Work-in-process................................... 500 411
Original equipment manufacturers goods............ 75 258
------ -----
$1,275 1,989
====== =====
</TABLE>
(4) 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.
(5) 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,
------------- -------------
1996 1997 1996 1997
------ ----- ------ ------
<S> <C> <C> <C> <C>
North America (substantially all United States)...... $4,018 2,807 $5,260 5,266
Export:
Europe........................................... 425 1,113 953 2,503
Pacific Rim...................................... 104 794 556 2,427
Other international.............................. 98 -- 334 442
------ ----- ------ ------
Total net revenue..................... $4,645 4,714 $7,103 10,638
====== ===== ====== ======
</TABLE>
Foreign based assets were insignificant as of March 31, 1997 and
September 30, 1997.
(6) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This Statement establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. It does
not, however, require a specific format for the statement, but requires the
Company to display an amount representing total comprehensive income for the
period in that financial statment. The Company is in the process of determining
its preferred format. This Statment is effective for fiscal years beginning
after December 15, 1997.
7
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Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". The Statement establishes
standards for the manner in which public business enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. This Statement is effective for
financial statements for periods beginning after December 15, 1997, and is not
expected to have a significant impact on the Company's reporting of segment
information.
8
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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 products 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 its Digital Audio Workstation, the
SonicStudio, in the first calendar quarter of 1989. Sales of the SonicStudio
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 Sonic MediaNet accounted for virtually
all of the Company's net revenue during the six fiscal years ended March 31,
1996, and approximately half of the Company's net revenue during the fiscal year
ended March 31, 1997. SonicStudio is an integrated assembly of software, signal
processing cards and other Sonic manufactured hardware. SonicStudio is
integrated with a Macintosh computer and peripheral devices such as disk drives
and CD printers which are now not typically provided by the Company. The
Company's future success will depend in part on sales of the SonicStudio to
audio professionals. The Company believes there is little growth in the overall
market for professional audio equipment. Sales of products by Sonic have in the
past depended upon the substitution of digital audio workstations for other
existing technologies. The Company believes that as a greater number of audio
professionals have moved to workstations, industry-wide shipments of
professional digital audio workstations have slowed or declined. Accordingly,
Sonic's ability to increase sales of professional audio workstations will
henceforth depend on factors which encourage existing audio workstation users to
add or switch to SonicStudio products. In June, 1996, the Company began
shipments of its DVD Creator system. The Company's future success will also
depend in large part on sales of the DVD Creator system which accounted for
approximately half of the Company's net revenue in the fiscal year ended March
31, 1997 and for approximately 60% of the Company's net revenue for the six
months ended September 30, 1997.
In February of 1994, the Company began shipments of Sonic MediaNet, a high
performance, fully distributed networking system designed specifically to handle
digital audio, digital video, high resolution graphics and other multimedia data
types. In the fiscal year ended March 31, 1997, and the six months ended
September 30, 1997, Sonic MediaNet revenues constituted approximately 9% and 5%
of Company revenues. Of total Sonic MediaNet sales during fiscal 1997, and the
six months ended September 30, 1997, approximately 65% and 63% were for use with
applications other than Sonic-manufactured workstations.
Sonic MediaNet allows users to share digital audio and other "multimedia"
data types efficiently among multiple workers in a facility. Sonic MediaNet
consists of specialized network adapter plug in cards installed in the NuBus or
PCI bus of an Apple Macintosh computer. Sonic MediaNet combines FDDI or CDDI
(fiber-based or copper-based) 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, Sonic MediaNet has uses in
other areas of the computer industry 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.
It is the Company's intention to introduce in fiscal 1998 a second
generation Sonic 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
9
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returns of dealer stocks of the first generation product. Such difficulties
could have an adverse affect on revenues in future periods.
During 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. For the
fiscal year ended March 31, 1997, and the six months ended September 30, 1997,
DVD Creator Systems constituted approximately 46% and 60% of the Company's net
revenue.
DVD Creator incorporates solutions for the major steps involved in
preparing a title for DVD and permits customers to integrate these individual
solutions into a complete DVD workgroup via the Company's Sonic MediaNet
networking system. DVD Creator is sold both as a complete package and as
separable elements. The main separate elements in a DVD Creator system include
(1) a video encoding station which incorporates specialized circuit cards
designed by the Company, based on an IBM chip set, and which compresses
professional format digital video into either the MPEG-1 or MPEG-2 format
required by the DVD-Video specification; (2) an audio prep and encoding station
which incorporates the Company's USP audio processing cards, and permits
assembly of audio tracks into either the PCM, Dolby Digital, or MPEG-2 formats
supported by the DVD-Video specification, and (3) an authoring system. The
elements and operation of the Company's DVD Creator system are described in more
detail in the Company's Annual Report for the fiscal year ending March 31, 1997,
on Form 10-K on file with the Securities and Exchange Commission.
The DVD-Video format offers content publishers a wide range of features and
options. Video is presented in the MPEG-1 or MPEG-2 compressed digital video
format. A number of video streams may be presented in parallel so that,
responding to user commands, the player may seamlessly jump from stream to
stream. Audio is available in both compressed digital stereo and "surround"
formats, as well as uncompressed "PCM" digital audio. Up to eight audio streams
may be presented simultaneously (and may also be selected for playback based on
real-time user decisions) - to support different language dialog tracks, or to
allow stereo and surround versions of the same audio program. Chapter marks may
be specified for random access into the video program. Subpictures (images
overlayed on background video or still images) may be included and can be used
in a number of ways, for example, to create animated "buttons" to facilitate
user interaction, or to display language subtitles. Still pictures may be
presented with audio and with subpictures. Extensive navigation capabilities are
available to permit users to select from various program branches, to return to
previous branch points or menus, etc.
Since the introduction of its DVD Creator product line, the Company has
provided as the format authoring element of its offering the Scenarist authoring
software package running on computers manufactured by Silicon Graphics as well
as emulation software and some other software tools designed by Daikin
Industries, Ltd. of Japan (the "Daikin Software") pursuant to the terms of
certain agreements with Daikin and its subsidiaries (the "Daikin Agreements").
Under the Daikin Agreements, the Company had certain exclusive distribution
rights with respect to certain of the Daikin software packages, in particular
with respect to the main DVD-Video authoring package called Scenarist-2. Under
the terms of the Daikin Agreements, the Company's exclusivity lapsed at the end
of September, 1997. In October, 1997, Daikin announced a number of Scenarist-
related developments, including distribution agreements permitting a number of
companies including Minerva, Digital Vision, CagEnt, and Optibase to distribute
Scenarist, as well as an upcoming version of Scenarist designed to run on
Windows/NT computers.
10
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In September, 1997, the Company introduced DVD Producer. DVD Producer
is a format authoring package designed to run on the Macintosh computer. Sonic
began shipments of early versions of DVD Producer in September 1997 and plans to
ship further versions in the last two quarters of the fiscal year ending March
31, 1998. Introduction of new software tools, particularly in a technically
complex area such as DVD-Video premastering, is a process which involves a
number of risks, among them the chance of technical difficulties with such new
tools, and the possibility that the user interface, or working procedures
associated with such a tool will be rejected in the marketplace. Accordingly,
there can be no assurance that the Company will be successful in distributing
the DVD Producer as either a stand alone or a component of the DVD Creator, or
that it will be attractive to customers. Further, Scenarist is currently the
most widely installed DVD-Video authoring system, and it will now be distributed
by a number of companies in addition to Sonic. There can be no assurance that
the Company's position in the DVD-Video premastering market will not be
seriously negatively affected by the changes in products and distribution
described above.
Since the market for DVD premastering is still quite new and the target
market is somewhat specialized, the Company currently offers a limited DVD
Creator product line. The Company anticipates that in the future it will
introduce additions to the DVD Creator product line, some with reduced
functionality priced more economically to address the needs of budget conscious
customers, and some which will carry higher prices to reflect additional value
added functionality. There can be no assurance that the Company will be
successful in developing such additions to the product line, or that, if
successfully developed, such additions to the product line will be attractive to
customers.
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.
11
<PAGE>
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,
------------- -------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue........................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue....................... 40.2 48.5 49.8 43.9
------ ------ ------ ------
Gross profit.......................... 59.8 51.5 50.2 56.1
Operating expenses:
Marketing and sales................. 28.0 40.7 40.5 36.4
Research and development............ 35.6 31.2 38.1 27.9
General and administrative.......... 10.8 7.9 14.6 7.0
------ ------ ------ ------
Total operating expenses.............. 74.4 79.8 93.2 71.3
------ ------ ------ ------
Operating loss........................ (14.6) (28.3) (43.0) (15.2)
Other income (expense)................ .1 (2.5) .4 (2.3)
Provision for income taxes............ 0.0 0.0 0.0 0.0
------ ------ ------ ------
Net loss.............................. (14.5)% (30.8)% (42.6)% (17.5)%
====== ====== ====== ======
</TABLE>
COMPARISON OF THREE AND SIX MONTHS ENDED SEPTEMBER 30
NET REVENUE. Net revenue increased from $4,645,000 for the quarter ended
September 30, 1996 to $4,714,000 for the quarter ended September 30, 1997,
representing an increase of 1.5%. For the six months ended September 30, 1997,
net revenue increased from $7,103,000 to $10,638,000 compared to the same period
in the prior fiscal year, representing an increase of 49.7%. The increase in net
revenue for the six months ended September 30, 1997 is primarily due to the
increase in sales of Sonic's DVD Creator System which was first introduced in
June 1996.
International sales accounted for 13.5% and 53.5% of net revenue for the
quarters ended September 30, 1996 and 1997, respectively. International sales
accounted for 25.9% and 56.3% of net revenue for the six months ended September
30, 1996, and 1997, respectively. See Note 5 of Notes to Condensed Financial
Statements. International sales as a percentage of net revenue increased
primarily due to the increase in sales in the Pacific Rim and European markets.
Initial sales of DVD Creator Systems in the six months ended September 30, 1996
were primarily to customers in North America, whereas in the six months ended
September 30, 1997 DVD Creator was sold worldwide. 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, increased
from 40.2% for the quarter ended September 30, 1996 to 48.5% for the quarter
ended September 30, 1997 primarily due to greater amortization of intangibles
and increased manufacturing expenses. Cost of revenue, as a percentage of net
revenue, decreased from 49.8% for the six months ended September 30, 1996 to
43.9% for the six months ended September 30, 1997. Cost of revenue for the six
months ended
12
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September 30, 1997 improved primarily due to sales product mix and the
higher margins realized on DVD sales.
MARKETING AND SALES. Marketing and sales expenses increased from $1,300,000
for the quarter ended September 30, 1996 to $1,920,000 for the quarter ended
September 30, 1997 and increased from $2,876,000 for the six months ended
September 30, 1996 to $3,872,000 for the six months ended September 30, 1997.
Marketing and sales represented 28.0%, 40.7%, 40.5% and 36.4% of net revenue for
the quarters ended September 30, 1996 and 1997 and the six months ended
September 30, 1996 and 1997, respectively. Marketing and sales expenses
increased primarily due to increased participation at major trade shows, and
enhanced advertising and marketing related to the DVD Creator system product
line. Included in the marketing and sales expense is dealer and employee
commission expense, which as a percentage of net revenue increased from 2.6% for
the quarter ended September 30, 1996 to 6.6% for the quarter ended September 30,
1997. The increase in the dealer and employee commission expense, as a
percentage of net revenue, is primarily due to the commissions associated with
the DVD Creator system sales. The Company's marketing and sales headcount
increased from thirty-one at September 30, 1996 to thirty-two at September 30,
1997.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased from
$1,651,000 for the quarter ended September 30, 1996 to $1,469,000 for the
quarter ended September 30, 1997 and increased from $2,708,000 for the six
months ended September 30, 1996 to $2,967,000 for the six months ended September
30, 1997. Research and development represented 35.6%, 31.2%, 38.1% and 27.9% of
net revenue for the quarter and six months ended September 30, 1996 and 1997,
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 six months ended September
30, 1997 primarily due to increase in headcount and increase of consulting and
prototype expenses. Headcount for research and development increased from
twenty-nine at September 30, 1996 to thirty-seven at September 30, 1997.
Consulting and prototype expenses were incurred in association with the
development of the DVD Creator system. These consulting and prototype expenses
can fluctuate significantly from period to period depending upon the status of
hardware development projects. Research and development expenses, as a
percentage of net revenue, decreased significantly due to the increase in
revenue primarily related to sales of the DVD Creator system.
GENERAL AND ADMINISTRATIVE. General and administrative expense decreased
from $503,000 for the quarter ended September 30, 1996 to $373,000 for the
quarter ended September 30, 1997 and from $1,036,000 for the six months ended
September 30, 1996 to $746,000 for the six months ended September 30, 1997.
General and administrative expenses represented 10.8%, 7.9%, 14.6% and 7.0% of
net revenue for the quarter ended September 30, 1996 and 1997 and the six months
ended September 30, 1996 and 1997, respectively. The decrease in general and
administrative expenses is primarily due to the reduction in bad debt accrual.
The Company anticipates that general and administrative expenses will increase
in the future as the Company's operations expand.
OTHER INCOME (EXPENSE). Other income (expense) for the quarter and six
months ended September 30, 1997 was primarily due to the interest expense
associated with the debt financing agreements with entities associated with
Hambrecht & Quist obtained in December, 1996, which was partially offset by the
interest income received on cash balances.
BENEFIT FOR INCOME TAXES. No provision was made for income taxes for the
quarter or six
13
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months ended September 30, 1996 and 1997. During fiscal year ended March 31,
1996, the Company exhausted it's loss carryback capabilities, and therefore no
benefit was recorded.
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. In December, 1996, the Company entered
into a Loan and Security Agreement with Silicon Valley Bank. The Agreement
provides for up to $2,500,000 in available borrowings based upon the Company's
eligible accounts receivable balances, and expires in May, 1998. This Agreement
provides for a variety of covenants, including among other things, that the
Company maintain certain financial ratios and is collateralized by a security
interest in substantially all of the Company's assets. Interest on borrowings
under this agreement is payable monthly at a rate of three-quarters percent in
excess of the prime rate. On September 30, 1997 the Company was in technical
default of certain financial covenants in connection with its bank facility,
which have been waived by the lender; no borrowings were outstanding.
In December, 1996, the Company also obtained a $5,100,000 financing
facility with entities associated with Hambrecht & Quist. The facility includes
subordinated debt and equipment financing. In December, 1996, the Company
received $3,000,000 from Hambrecht & Quist Transition Capital, LLC and
$1,100,000 from Hambrecht & Quist Guaranty Finance, LLC, pursuant to the above
facility. The $3,000,000 of subordinated debt is due June 30, 1998. The
remaining $1,000,000 is a master lease line for financing of future capital
asset purchases. The facility with the Hambrecht & Quist entities is secured by
an interest in the Company's fixed assets and substantially all of the assets of
the Company subordinate to the Silicon Valley Bank Agreement. In connection with
the financing facility, the Company issued warrants to purchases 260,200 common
shares to entities associated with Hambrecht & Quist. The Hambrecht & Quist
entities may exercise 130,100 shares at an exercise price of $10.00 at any time
on or before December 24, 2003, and 130,100 shares at an exercise price of $7.00
at any time on or after December 24, 1997 and before December 24, 2004. The
Company recorded $549,000 of deferred interest, which is amortized to interest
expense over the term of the financing facility, attributable to the value of
the warrants.
The Company's operating activities have provided cash of $525,000 for the
six months ended September 30, 1996 and used cash of $241,000 for the six months
ended September 30, 1997. Cash was generated in the six months ended September
30, 1996 primarily due to the receipt of the income tax refunds received from
the Internal Revenue Service. Cash was used for the purchase of inventory and to
support the increase in accounts receivable for the six months ended September
30, 1997. 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 1999. However, management continues to evaluate proposals for additional
financing opportunities.
As of September 30, 1997, the Company had cash and cash equivalents of
$2,791,000 and working capital of $1,004,000.
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, 1997.
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 2, 1997, 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 7,598,397 shares eligible
to vote at the meeting: 7,254,645 voted in favor and 17,850 withheld for the
approval of Michael C. Child; 7,256,245 voted in favor and 16,250 withheld for
the approval of Robert J. Doris; 7,256,245 voted in favor and 16,250 withheld
for the approval of Robert M. Greber; 7,252,795 voted in favor and 19,700
withheld for the approval of Peter J. Marguglio; 7,256,245 voted in favor and
16,250 withheld for the approval of James A. Moorer; and, 7,256,245 voted in
favor and 16,250 withheld for the approval of Mary C. Sauer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11.1 Statement Re: Computation of Per Share Amounts.
27.1 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, 1997.
SONIC SOLUTIONS
<TABLE>
<CAPTION>
Signature Date
--------- ----
<S> <C>
/s/ Robert J. Doris November 13, 1997
- -----------------------------------------------
Robert J. Doris
President and Director (Principal Executive
Officer)
/s/ A. Clay Leighton November 13, 1997
- -----------------------------------------------
A. Clay Leighton
Vice President of Finance and Chief Financial
Officer (Principal Financial Accounting
Officer)
</TABLE>
16
<PAGE>
Exhibit 11.1
SONIC SOLUTIONS
STATEMENT RE: COMPUTATION OF PER SHARE AMOUNTS
Three and Six Months Ended September 30, 1996 and 1997
(In thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ----------------------
September 30, September 30,
--------------------- ----------------------
1996 1997 1996 1997
------ ------- ------ -------
<S> <C> <C> <C> <C>
Net loss..................................................... ($674) (1,453) ($3,023) (1,858)
====== ====== ======= ======
Weighted average number of common shares outstanding......... 7,524 7,614 7,514 7,605
====== ====== ======= ======
Net loss per share........................................... ($0.09) (0.19) ($0.40) (0.24)
====== ====== ======= ======
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998
<PERIOD-START> JUL-01-1997 APR-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 0 2,791
<SECURITIES> 0 0
<RECEIVABLES> 0 4,260
<ALLOWANCES> 0 629
<INVENTORY> 0 1,989
<CURRENT-ASSETS> 0 9,645
<PP&E> 0 6,884
<DEPRECIATION> 0 3,632
<TOTAL-ASSETS> 0 15,958
<CURRENT-LIABILITIES> 0 9,337
<BONDS> 0 0
0 0
0 0
<COMMON> 0 13,889
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 15,958
<SALES> 4,714 10,638
<TOTAL-REVENUES> 4,714 10,638
<CGS> 2,286 4,671
<TOTAL-COSTS> 3,762 7,585
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 119 240
<INCOME-PRETAX> (1,453) (1,858)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,453) (1,858)
<EPS-PRIMARY> (0.19) (0.24)
<EPS-DILUTED> 0 0
</TABLE>
