<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 December 31, 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 January 31,
1998, was 7,653,940.
===============================================================================
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SONIC SOLUTIONS
FORM 10-Q
For the quarterly period ended DECEMBER 31, 1997
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Balance Sheets as of March 31, 1997
and December 31, 1997................................. 3
Condensed Statements of Operations for the
three and nine months ended December 31, 1996 and 1997 4
Condensed Statements of Cash Flows for the
nine months ended December 31, 1996 and 1997.......... 5
Notes to Condensed Financial Statements............... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 9
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...................... 17
Signatures ...................................................... 18
Index to Exhibits ............................................... 19
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SONIC SOLUTIONS
CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
1997
--------------------------------
ASSETS March 31, December 31,
------ --------- ------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................................................... $ 4,806 2,226
Accounts receivable, net of allowance for returns and doubtful accounts of $588
and $630 at March 31, 1997 and December 31, 1997, respectively.................... 3,105 2,972
Inventory.......................................................................... 1,275 1,692
Prepaid expenses and other current assets.......................................... 719 642
Refundable income taxes............................................................ 450 -
------- ------
Total current assets......................................................... 10,355 7,532
Fixed assets, net...................................................................... 3,154 2,851
Purchased and internally developed software costs, net................................. 1,954 3,161
Other assets........................................................................... 426 390
------- ------
Total assets................................................................. $15,889 13,934
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities........................................... $ 2,971 3,911
Deferred revenue and deposits...................................................... 705 892
Subordinated debt, current portion................................................. 347 3,525
Current portion of obligations under capital leases................................ 69 118
------- ------
Total current liabilities.................................................... 4,092 8,446
------- ------
Subordinated debt, net of current portion.............................................. 3,195 -
Obligations under capital leases, net of current portion............................... 172 219
------- ------
Total liabilities............................................................ 7,459 8,665
------- ------
Commitments and contingencies
Shareholders' Equity:
Common stock, no par value, 30,000,000 shares authorized; 7,595,897 and 7,637,466
shares issued and outstanding at March 31, 1997 and December 31, 1997, respectively.. 13,840 13,913
Accumulated deficit.................................................................... (5,410) (8,644)
------- ------
Total shareholders' equity................................................... 8,430 5,269
------ ------
Total liabilities and shareholders' equity................................... $15,889 13,934
======= ======
</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 Nine Months Ended
-------------------- -------------------
December 31, December 31,
-------------------- -------------------
<S> <C> <C> <C> <C>
1996 1997 1996 1997
------- ------ ------- ------
Net revenue......................................................... $ 4,511 4,692 $11,614 15,330
Cost of revenue..................................................... 2,003 2,452 5,538 7,123
------- ------ ------- ------
Gross profit.................................................... 2,508 2,240 6,076 8,207
------- ------ ------- ------
Operating expenses:
Marketing and sales............................................. 1,537 1,786 4,413 5,658
Research and development........................................ 1,472 1,319 4,180 4,286
General and administrative...................................... 425 378 1,461 1,124
------- ------ ------- ------
Total operating expenses........................................ 3,434 3,483 10,054 11,068
------- ------ ------- ------
Operating loss.................................................. (926) (1,243) (3,978) (2,861)
Other income (expense).............................................. (1) (133) 28 (373)
------- ------ ------- ------
Loss before income taxes........................................ (927) (1,376) (3,950) (3,234)
Provision for income taxes.......................................... - - - -
------- ------ ------- ------
Net loss........................................................ ($927) (1,376) ($3,950) (3,234)
======= ====== ======= ======
Basic and diluted loss per common share......................... ($0.12) ($0.18) ($0.52) ($0.42)
======= ====== ======= ======
Shares used in computing per share amounts...................... 7,557 7,634 7,535 7,615
======= ====== ======= ======
</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>
Nine Months Ended
-----------------------
December 31,
-----------------------
1996 1997
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................................................. ($3,950) (3,234)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization....................................................... 1,181 1,888
Changes in operating assets and liabilities:
Accounts receivable.............................................................. 1,112 133
Inventory........................................................................ 405 (417)
Prepaid expenses and other current assets........................................ 1,121 527
Other assets..................................................................... 86 36
Accounts payable and accrued liabilities......................................... 351 440
Deferred revenue and deposits.................................................... 175 187
-------- ------
Net cash provided by (used in) operating activities............................ 481 (440)
-------- ------
Cash flows from investing activities:
Purchase of fixed assets.............................................................. (1,238) (775)
Additions to purchased and internally developed software.............................. (711) (1,856)
Purchase of short-term investments.................................................... (867) -
-------- ------
Net cash used in investing activities............................................... (2,816) (2,631)
-------- ------
Cash flows from financing activities:
Proceeds from exercise of common stock options........................................ 125 73
Borrowings on bank credit line........................................................ - 500
Issuance of subordinated debt......................................................... 4,103 -
Principal payments on capital leases.................................................. - (82)
-------- ------
Net cash provided by financing activities........................................... 4,228 491
-------- ------
Net increase (decrease) in cash and cash equivalents.................................... 1,893 (2,580)
Cash and cash equivalents, beginning of period.......................................... 1,086 4,806
-------- ------
Cash and cash equivalents, end of period................................................ $ 2,979 2,226
======== ======
Supplemental disclosure of cash flow information:
Interest paid during period........................................................... $ 16 200
======== ======
Income taxes paid during period....................................................... $ - 13
======== ======
Noncash financing and investing activities:
Assets acquired through capital lease............................................. $ - 161
======== ======
</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) BASIC AND DILUTED LOSS PER SHARE
In December, 1997, the Company adopted 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. Prior
year results did not require restatement to conform with the new standard as the
computation assumes no common equivalent shares from stock options outstanding,
as the effect would be anti-dilutive. The Company expects that for profitable
periods basic EPS will be higher than previously disclosed earnings per share
and diluted EPS will not differ materially from the earnings per share that the
Company has historically presented.
(3) INVENTORY
The components of inventory consist of (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
1997 1997
------ -----
<S> <C> <C>
Raw materials...........................................................
Work-in-process......................................................... $ 700 1,149
Original equipment manufacturers goods.................................. 500 309
75 234
------ -----
$1,275 1,692
====== =====
</TABLE>
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(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 Nine Months Ended
------------------ --------------------
December 31, December 31,
---------------------- --------------------
1996 1997 1996 1997
------ ----- ------ ------
<S> <C> <C> <C> <C>
North America $1,813 2,544 $ 7,073 7,193
Export:
Europe...................................... 885 1,196 1,837 3,699
Pacific Rim................................. 1,624 951 2,181 3,379
Other international......................... 189 1 523 1,059
------ ----- ------- ------
$4,511 4,692 $11,614 15,330
Total net revenue ====== ===== ======= ======
</TABLE>
Foreign based assets were insignificant as of March 31, 1997 and December
31, 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 statement. The Company is in the process of determining
its preferred format. This Statement is effective for fiscal years beginning
after December 15, 1997.
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.
7
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(7) SUBSEQUENT EVENTS
In December, 1997, the Company secured a $7,000,000 equity-based line of
credit. Under this arrangement, the Company has the right to draw up to a total
of $7,000,000 in cash in exchange for the Company's common stock. Pricing of
common stock issued will be based on the market price of the Company's common
stock at the time of a draw. The timing and amount of individual draws are at
the sole discretion of the Company, subject to a number of conditions. The line
will remain in place for a period of approximately 24 months. The Company filed
a registration statement for the resale of shares issued under this arrangement
in January, 1998.
In February, 1998, the Company drew down $300,000 on this equity-based line of
credit and issued 119,772 shares of common stock.
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 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 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. The Company plans to introduce in
fiscal 1999 versions of SonicStudio compatible with computer platforms other
than the Macintosh. Because of the uncertain nature of such development, there
can be no assurance that problems or delays will not be encountered which will
delay or prevent such versions of the SonicStudio from reaching market. In
light of the substantial costs associated with such development, the financial
results of the Company would be materially adversely affected if such
introduction were delayed for a significant period of time. 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 nine months ended December 31, 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 nine months ended
December 31, 1997, Sonic MediaNet revenues constituted approximately 9% and 5%
of Company revenues. Of total Sonic MediaNet sales during fiscal 1997 and the
nine months ended December 31, 1997, approximately 65% and 36% were for use with
applications other than Sonic-manufactured workstations.
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Sonic MediaNet allows users to share digital audio and other OmultimediaO
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 1999 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 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 nine months ended December 31, 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 CompanyOs 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 CompanyOs 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 CompanyOs DVD Creator system are described in more
detail in the CompanyOs 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 OsurroundO
formats, as well as uncompressed OPCMO digital audio. Up to eight audio streams
may be presented simultaneously (and may also be selected for playback based on
real-time user decisions) N 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 ObuttonsO 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
10
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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.
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 quarter 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 DVD Creator, or that it will be attractive to
customers. Further, Scenarist is now being 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 may 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 its product line, or that, if
successfully developed, such additions to its product line will be attractive to
customers.
The Company has signaled its intention to introduce in 1998 versions of its
DVD-related products to address corporate applications of the DVD format. In
addition to the development risks surrounding any new product introduction, the
Company's DVD-Corporate product introduction is dependent upon successful
marketing, distribution, sales and customer support strategies and programs.
The Company has only limited experience in selling to corporate customers and
the required strategies and programs are likely to be significantly different
from those the Company is familiar with in the professional audio and video
markets. There can be no assurance that the Company has correctly identified
the corporate opportunity or that the Company will be able to establish the
necessary distribution channels to sell and support the DVD-Corporate products.
The Company expects expenses to increase to support research and development and
sales and marketing efforts related to the DVD-Corporate products in fiscal
years 1998 and 1999. The Company's results of operations will be materially
adversely affected if these new porducts do not achieve market acceptance.
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
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last few weeks of a quarter do not meet with the Company's forecast, operating
results may be materially adversely affected.
12
<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 nine months ended
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- -----------------
December 31, December 31,
------------ ------------
1996 1997 1996 1997
------ ------ ------ -----
<S> <C> <C> <C> <C>
Net revenue............................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue........................................... 44.4 52.3 47.7 46.5
------ ------ ------ -----
Gross profit.............................................. 55.6 47.7 52.3 53.5
Operating expenses:
Marketing and sales..................................... 34.1 38.1 38.0 36.9
Research and development................................ 32.6 28.1 36.0 28.0
General and administrative............................. 9.4 8.0 12.6 7.3
------ ------ ------ -----
Total operating expenses.................................. 76.1 74.2 86.6 72.2
------ ------ ------ -----
Operating loss............................................ (20.5) (26.5) (34.3) (18.7)
Other income (expense).................................... - (2.8) .3 (2.4)
Provision for income taxes................................ - - - -
------ ------ ------ -----
Net loss.................................................. (20.5)% (29.3)% (34.0)% (21.1)
====== ====== ====== ======
</TABLE>
COMPARISON OF THREE AND NINE MONTHS ENDED DECEMBER 31
NET REVENUE. Net revenue increased from $4,511,000 for the quarter ended
December 31, 1996 to $4,692,000 for the quarter ended December 31, 1997,
representing an increase of 4.0%. For the nine months ended December 31, 1997,
net revenue increased from $11,614,000 to $15,330,000 compared to the same
period in the prior fiscal year, representing an increase of 32.0%. The
increase in net revenue for the nine months ended December 31, 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 60.0% and 45.7% of net revenue for the
quarters ended December 31, 1996 and 1997, respectively. International sales
accounted for 39.0% and 53.1% of net revenue for the nine months ended December
31, 1996, and 1997, respectively. See Note 5 of Notes to Condensed Financial
Statements. For the nine months ended December 31, 1997, 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 nine months ended December 31, 1996 were primarily to customers in North
America, whereas in the nine months ended December 31, 1997 DVD Creator was sold
worldwide. During the quarter ended December 31, 1997, international sales were
negatively impacted due to financial problems in Korea and other Asian
countries. The Company expects that international sales will continue to
represent a significant percentage of future revenue. The Company also
anticipates that certain national and regional economies, particularly those in
the Pacific Rim, will continue to experience turmoil and financial uncertainty,
negatively impacting the Company's ability to consummate sales of its products
in those countries.
COST OF REVENUE. Cost of revenue, as a percentage of net revenue, increased
from 44.4% for the quarter ended December 31, 1996 to 52.3% for the quarter
ended December 31, 1997, primarily due to greater amortization of intangibles
and increased manufacturing expenses. Cost of revenue, as a percentage of net
revenue, decreased from 47.7% for the nine months ended December 31, 1996 to
46.5%
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for the nine months ended December 31, 1997. Cost of revenue for the nine
months ended December 31, 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 $1,537,000
for the quarter ended December 31, 1996 to $1,786,000 for the quarter ended
December 31, 1997 and increased from $4,413,000 for the nine months ended
December 31, 1996 to $5,658,000 for the nine months ended December 31, 1997.
Marketing and sales represented 34.1%, 38.1%, 38.0% and 36.9% of net revenue for
the quarters ended December 31, 1996 and 1997 and the nine months ended December
31, 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 decreased from 4.4% for the
quarter ended December 31, 1996 to 2.3% for the quarter ended December 31, 1997.
The decrease in the dealer and employee commission expense, as a percentage of
net revenue, is primarily due to a shift in sales mix away from direct sales
(which generally involve a commission payable to a dealer) to dealer sales
(where no commission is ordinarily payable to a dealer). The Company's marketing
and sales headcount decreased from thirty-two at December 31, 1996 to thirty-one
at December 31, 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased from
$1,472,000 for the quarter ended December 31, 1996 to $1,319,000 for the quarter
ended December 31, 1997 and increased from $4,180,000 for the nine months ended
December 31, 1996 to $4,286,000 for the nine months ended December 31, 1997.
Research and development represented 32.6%, 28.1%, 36.0% and 28.0% of net
revenue for the quarter and nine months ended December 31, 1996 and 1997,
respectively. The Company capitalizes a portion of its software development
costs in accordance with Statement of Financial Accounting Standard No.E86.
Research and development expenses decreased for the nine months ended December
31, 1997 primarily due to the decrease of consulting and prototype expenses
which was partially offset by the increase in headcount. Headcount for research
and development increased from thirty-two at December 31, 1996 to thirty-six at
December 31, 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 $425,000 for the quarter ended December 31, 1996 to $378,000 for the
quarter ended December 31, 1997 and from $1,461,000 for the nine months ended
December 31, 1996 to $1,124,000 for the nine months ended December 31, 1997.
General and administrative expenses represented 9.4%, 8.1%, 12.6% and 7.3% of
net revenue for the quarter ended December 31, 1996 and 1997 and the nine months
ended December 31, 1996 and 1997, respectively. The decrease in general and
administrative expense 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 nine
months ended December 31, 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 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.
14
<PAGE>
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. The Company was in technical default of certain
financial covenants in connection with its bank facility, which have been waived
by the lender; on December 31, 1997 $500,000 was 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 on 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.
In December 1997, 130,100 of these warrants were exercised on a "net" basis, and
the warrant holder received 40,266 shares of Common Stock. 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.
In December, 1997, the Company secured a $7,000,000 equity-based line of
credit. Under this arrangement, the Company has the right to draw up to a total
of $7,000,000 in cash in exchange for the Company's common stock. Pricing of
common stock issued will be based on the market price of the Company's common
stock at the time of a draw. The timing and amount of individual draws are at
the sole discretion of the Company, subject to a number of conditions. The line
will remain in place for a period of approximately 24 months. The Company filed
a registration statement for the resale of shares issued under this arrangement
in January, 1998. In February, 1998, the Company drew down $300,000 on this
equity-based line of credit and issued 119,772 shares of common stock.
The Company's operating activities have provided cash of $481,000 for the
nine months ended December 31, 1996 and used cash of $440,000 for the nine
months ended December 31, 1997. Cash was generated in the nine months ended
December 31, 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 nine months
ended December 31, 1997. The management of the Company believes that existing
cash, cash equivalents, cash generated from operations and cash raised from the
equity line of credit will be sufficient to meet the Company's cash and
investment requirements at least through the second quarter of fiscal 1999.
However, management continues to evaluate proposals for additional financing
opportunities.
As of December 31, 1997, the Company had cash and cash equivalents of
$2,226,000 and working capital of ($914,000).
15
<PAGE>
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.
16
<PAGE>
PART II -- OTHER INFORMATION
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.
17
<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 February, 1998.
SONIC SOLUTIONS
Signature Date
--------- ----
/s/ Robert J. Doris February 13, 1998
- ------------------------------
Robert J. Doris
President and Director (Principal
Executive Officer)
/s/ A. Clay Leighton February 13, 1998
- --------------------
A. Clay Leighton
Vice President of Finance and
Chief Financial Officer (Principal
Financial Accounting Officer)
18
<PAGE>
Exhibit 11.1
SONIC SOLUTIONS
STATEMENT RE: COMPUTATION OF PER SHARE AMOUNTS
Three and Nine Months Ended December 31, 1996 and 1997
(In thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
December 31, December 31,
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1996 1997 1996 1997
------- ------- ------- -------
Net loss..................................................... ($927) (1,376) ($3,950) (3,234)
Weighted average number of common shares outstanding......... 7,557 7,634 7,527 7,615
======= ======== ======== ========
Net loss per share........................................... ($0.12) (0.18) ($0.52) (0.42)
======= ======= ======= =======
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998
<PERIOD-START> OCT-01-1997 APR-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 0 2,226
<SECURITIES> 0 0
<RECEIVABLES> 0 3,602
<ALLOWANCES> 0 630
<INVENTORY> 0 1,692
<CURRENT-ASSETS> 0 7,532
<PP&E> 0 2,851
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 0 13,934
<CURRENT-LIABILITIES> 0 8,446
<BONDS> 0 0
0 0
0 0
<COMMON> 0 13,913
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 13,934
<SALES> 4,692 15,330
<TOTAL-REVENUES> 4,692 15,330
<CGS> 2,452 7,123
<TOTAL-COSTS> 3,483 11,068
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 133 373
<INCOME-PRETAX> (1,376) (3,234)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,376) (3,234)
<EPS-PRIMARY> ($0.18) ($0.42)
<EPS-DILUTED> 0 0
</TABLE>
