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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 June 30, 1999 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
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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)
<TABLE>
<S> <C>
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)
</TABLE>
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
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The number of outstanding shares of the registrant's Common Stock on July 30,
1999, was 9,474,327.
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SONIC SOLUTIONS
FORM 10-Q
For the quarterly period ended June 30, 1999
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Balance Sheets as of March 31, 1999
and June 30, 1999.................................................... 3
Condensed Statements of Operations for the
quarter ended June 30, 1998 and 1999................................. 4
Condensed Statements of Cash Flows for the
quarter ended June 30, 1998 and 1999................................. 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 -K...................................... 14
Signatures........................................................... 15
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Sonic Solutions
Condensed Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
1999
--------------------------
ASSETS March 31 June 30
------ -------- --------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents..................................................... $ 2,414 $ 1,381
Accounts receivable, net of allowance for returns and doubtful
accounts of $599 and $649 at March 31, 1999 and June 30,
1999, respectively.................................................. 5,403 5,789
Inventory..................................................................... 807 798
Prepaid expenses and other current assets..................................... 287 363
-------- --------
Total current assets.......................................................... 8,991 8,331
Fixed assets, net...................................................................... 2,313 2,104
Purchased and internally developed software costs, net................................. 2,385 2,307
Other assets........................................................................... 156 152
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Total assets.................................................................. $ 13,765 $ 12,894
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities...................................... $ 4,359 $ 4,658
Bank note payable............................................................. 500 500
Deferred revenue and deposits................................................. 1,318 1,350
Subordinated debt, current portion............................................ 1,419 1,449
Current portion of obligations under capital leases........................... 148 136
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Total current liabilities..................................................... 7,744 8,093
Obligations under capital leases, net of current portion............................... 89 64
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Total liabilities............................................................. 7,833 8,157
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Commitments and contingencies
Shareholders' Equity:
Convertible preferred stock, no par value, 10,000,000 shares authorized; 294,038
and 286,538 shares issued and outstanding at March 31, 1999
and June 30, 1999, respectively................................................... 956 931
Common stock, no par value, 30,000,000 shares authorized; 9,468,123
and 9,473,338 shares issued and outstanding at March 31, 1999
and June 30, 1999, respectively................................................... 18,121 18,105
Accumulated deficit.................................................................... (13,145) (14,299)
-------- --------
Total shareholders' equity.................................................... 5,932 4,737
-------- --------
Total liabilities and shareholders' equity.................................... $ 13,765 $ 12,894
======== ========
</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>
Quarter Ended June 30,
----------------------
1998 1999
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<S> <C> <C>
Net revenue............................................................ $ 4,235 $ 5,591
Cost of revenue........................................................ 2,018 2,672
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Gross profit.................................................. 2,217 2,919
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Operating expenses:
Marketing and sales........................................... 1,761 2,151
Research and development...................................... 1,316 1,600
General and administrative.................................... 373 368
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Total operating expenses...................................... 3,450 4,119
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Operating loss................................................ (1,233) (1,200)
Other expense, net..................................................... (102) (51)
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Loss before income taxes...................................... (1,335) (1,251)
Provision (benefit) for income taxes................................... - (97)
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Net loss...................................................... $(1,335) $(1,154)
======= =======
Basic and diluted loss per share applicable to common
shareholders ................................................. $ (0.16) $ (0.12)
======= =======
Weighted average shares used in computing per share amounts... 8,374 9,476
======= =======
</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>
Quarter Ended June 30,
-----------------------
1998 1999
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<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................................................... $(1,335) $(1,154)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................................ 634 678
Provision for returns and doubtful accounts, net of write-offs............... (28) 50
Changes in operating assets and liabilities:
Accounts receivable....................................................... 143 (436)
Inventory................................................................. (320) 9
Prepaid expenses and other current assets................................. 145 (76)
Other assets.............................................................. (36) 4
Accounts payable and accrued liabilities.................................. 580 299
Deferred revenue and deposits............................................. 3 32
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Net cash used in operating activities.................................... (214) (594)
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Cash flows from investing activities:
Purchase of fixed assets..................................................... (158) (166)
Additions to purchased and internally developed software..................... (181) (225)
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Net cash used in investing activities.................................... (339) (391)
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Cash flows from financing activities:
Proceeds from exercise of common stock options............................... 4 13
Borrowings on line of credit................................................. 210 0
Repayments on line of credit................................................. (210) 0
Proceeds (costs) associated with equity line financing....................... 240 (40)
(Redemption) amortization of warrants........................................ (28) 30
Payment of dividends......................................................... 0 (14)
Repayments of subordinated debt.............................................. (60) 0
Principal payments on capital leases......................................... (34) (37)
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Net cash provided by (used by) financing activities...................... 122 (48)
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Net decrease in cash and cash equivalents......................................... (431) (1,033)
Cash and cash equivalents, beginning of period.................................... 2,479 2,414
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Cash and cash equivalents, end of period.......................................... $ 2,048 $ 1,381
======= =======
Supplemental disclosure of cash flow information:
Interest paid during period.................................................. $ 28 $ 27
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Income taxes paid during period.............................................. $ 6 $ 2
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Noncash financing and investing activities:
Conversion of preferred stock to common stock.............................. 0 25
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</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, 1999, filed with the Securities and Exchange
Commission.
(2) Basic and diluted loss per share
SFAS No. 128 "Earnings Per Share" requires the presentation of basic
net income per share, and for companies with complex capital structures, diluted
net income per share.
The following table sets forth the computations of shares and net loss
per share, applicable to common shareholders used in the calculation of basic
and diluted net loss per share for the first quarters ended June 30, 1998 and
1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter ended June 30,
1998 1999
<S> <C> <C>
Net loss ........................................................ $(1,335) $(1,154)
Dividends paid to preferred shareholders ........................ - 14
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Net loss applicable to common shareholders ...................... $(1,335) $(1,168)
======= =======
Weighted average number of common shares
outstanding ................................................... 8,374 9,476
======= =======
Basic and diluted net loss per share applicable to
common shareholders............................................ $ (0.16) $ (0.12)
======= =======
</TABLE>
As of June 30, 1998 and 1999, potentially dilutive shares totaling
1,136,606 and 2,309,257, respectively, for convertible preferred stock and
options with exercise prices less than the average market price that could
dilute basic earnings per share in the future, were not included in earnings per
share as their effect was anti-dilutive for those periods.
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(3) Inventory
The components of inventory consist of (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
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1999 1999
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Raw materials.......................................................... $603 $624
Work-in-process........................................................ 187 158
Original equipment manufacturers goods................................. 17 16
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$807 $798
==== ====
</TABLE>
(4) Income Taxes
We account 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) Segment Reporting
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Informaiton," which was
adopted by us in 1998. SFAS No. 131 requires companies to report financial and
descriptive information about its reportable operating segments, including
segment profit or loss, certain specific revenue and expense items and segment
assets, as well as information about the revenues derived from our products and
services, the countries in which we earn revenue and hold assets, and major
customers.
We operate in the audio and video media market and derive substantially
all our revenue from the sales of two workstation products. We organize our
operations based on designing, developing, manufacturing, selling and supporting
these products. Our chief operating decision maker is the Chief Executive
Officer (CEO) and the CEO allocates resources based on financial information,
including gross margins and operating losses, reported in a manner consistent
with the accompanying financial statements. Sales, gross profit, and operating
losses are not allocated or specific to individual departments within the
organization. Accordingly, we have a single reportable segment. As such, we are
required to disclose the following geographic information:
<TABLE>
<CAPTION>
June 30,
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1998 1999
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<S> <C> <C>
North America........................................... $2,175 $2,889
Export:
Europe......................................... 1,252 1,400
Pacific Rim.................................... 778 1,134
Other international............................ 30 168
------ ------
Total net revenue $4,235 $5,591
====== ======
</TABLE>
We sell our products to customers categorized geographically by each
customer's country of domicile. We do not have any material investment in
long-lived assets located in foreigh countries for any of the periods presented.
7
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Our accounting system does not capture meaningful revenue information
by product line. Accordingly, such information has not been disclosed.
(6) Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, as amended by SFAS No. 137, "Accounting for Derivative instruments and
hedging activities". We are required to adopt SFAS No. 133 in the first quarter
of fiscal year 2001. We do not anticipate that SFAS No. 133 will have a material
impact on our financial statements.
In December 1998, the AICPA issued Statement of Position (SOP) 98-9,
"Modification of SOP 97-2 Software Revenue Recognition with Respect to Certain
Transactions". This amendment clarified the specification of what was considered
vendor specific objective evidence of fair value for the various elements in a
multiple element arrangement. We adopted SOP 98-9 during our first quarter ended
June 30, 1999 and the amendment did not have a material impact on our operating
results, financial position, or cash flow.
(7) Subsequent Event
On May 20, 1999, we secured a new equity-based line of credit by
entering into a new stock purchase agreement with Kingsbridge. Under the new
agreement, we may draw up to $12,000,000 in cash in exchange for common stock.
Pricing of the common stock issued under this arrangement is based on the market
price of our common stock at the time of the draw, discounted by 10% or 12%
depending upon the price of our common stock. On May 27, 1999, we filed a
Registration Statement on Form S-1 to register for resale the shares we may
issue to Kingsbridge under this credit line. Our use of this new line is subject
to a number of conditions, including the effectiveness of the Registration
Statement. More details concerning the terms and conditions governing this
arrangement are available in the Registration Statement. The Registration
Statement became effective on August 12, 1999.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW; CERTAIN FACTORS THAT MAKE FUTURE RESULTS DIFFICULT TO PREDICT; CERTAIN
ITEMS TO REMEMBER WHEN READING OUR FINANCIAL STATEMENTS
Our quarterly operating results vary significantly depending on the
timing of new product introductions and enhancements by ourselves and by our
competitors. Our results also depend on the volume and timing of orders which
are difficult to forecast. Because our customers generally order on an as-needed
basis, and we normally ship products within one week after receipt of an order,
we don't have an order backlog which can assist us in forecasting results. For
all these reasons, our results of operations for any quarter are a poor
indicator of the results to be expected in any future quarter.
A large portion of our quarterly revenue is usually generated in the
last few weeks of the quarter. Since our ongoing operating expenses are
relatively fixed, and we plan our expenditures based primarily on sales
forecasts, if revenue generated in the last few weeks of a quarter do not meet
our forecast, operating results can be very negatively affected.
We capitalize a portion of our software development costs in accordance
with Statement of Financial Accounting Standard No. 86. Such capitalized costs
are amortized to cost of revenue over the estimated economic life of the
product, which is generally three years.
9
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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 first quarter
ended June 30, 1998 and 1999:
<TABLE>
<CAPTION>
Quarter Ended June 30
-------------------------
1998 1999
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<S> <C> <C>
Net revenue............................................ 100.0% 100.0%
Cost of revenue........................................ 47.6 47.8
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Gross profit........................................... 52.4 52.2
Operating expenses:
Marketing and sales............................... 41.6 38.5
Research and development.......................... 31.1 28.6
General and administrative........................ 8.8 6.6
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Total operating expenses............................... 81.5 73.7
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Operating loss......................................... (29.1) (21.5)
Other expense.......................................... (2.4) (0.9)
Provision (benefit) for income taxes................... 0.0 (1.7)
----- -----
Net loss............................................... (31.5)% (20.7)%
===== =====
</TABLE>
Comparison of First Quarters Ended June 30
NET REVENUE. Our net revenue increased from $4,235,000 for the first
quarter ended June 30, 1998 to $5,591,000 for the first quarter ended June 30,
1999, representing an increase of 32%. The increase in revenue is primarily due
to increased sales of DVD Creator systems. In the quarter ending June 1998, we
began shipments of our DesktopDVD systems (now included in the DVD Creator
product line), but were unable to produce enough systems to fill all the orders
we received.
International sales accounted for 48.6% and 48.3% of our net revenue
for the first quarter ended June 30, 1998 and 1999, respectively. See Note 5 of
Notes to Condensed Financial Statements. International sales remained relatively
consistent for the first quarters ended June 30, 1998 and 1999. International
sales have historically represented between 43% and 52% of our quarterly sales,
and we expect that they will continue to represent a significant percentage of
future revenue.
COST OF REVENUE. Our cost of revenue, as a percentage of net revenue,
was relatively consistent at 47.6% for the first quarter ended June 30, 1998
compared to 47.8% for the first quarter ended June 30, 1999.
MARKETING AND SALES. Our marketing and sales expenses increased from
$1,761,000 for the first quarter ended June 30, 1998 to $2,151,000 for the first
quarter ended June 30, 1999. Marketing and sales represented 41.6% and 38.5% of
net revenue for the first quarter ended June 30, 1998 and 1999, respectively.
Our marketing and sales headcount increased from twenty-eight at June 30, 1998
to thirty-nine at June 30, 1999. Our marketing and sales expenses increased
primarily due to increases in salary expenses as a result of the increase in
headcount, and increases in advertising and marketing costs related to our DVD
Creator product line. Included in our marketing and sales expenses are dealer
and employee commission expenses, which as a percentage of net revenue decreased
from 5.6% for the first quarter ended June 30, 1998 to 4.8% for the first
quarter ended June 30, 1999.
RESEARCH AND DEVELOPMENT. Our research and development expenses
increased from $1,316,000 for the first quarter ended June 30, 1998 to
$1,600,000 for the first quarter ended June 30, 1999. Our research and
development expenses represented 31.1% and 28.6% of net revenue for the first
quarter
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ended June 30, 1998 and 1999, respectively. We capitalize a portion of our
software development costs in accordance with Statement of Financial Accounting
Standards No. 86. (This means that a portion of the costs we incur for software
development are not recorded as an expense in the period in which they are
actually incurred. Instead they are recorded as an asset on our balance sheet.
The amount recorded on our balance sheet is then amortized over the estimated
life of the products in which the software is included.) Our research and
development expenses increased primarily due to increases in consulting and
prototype expenses associated with introductions of new products (including our
DVDit! product which has not yet been released) in our DVD Creator product line.
Prototype and consulting expenses can fluctuate significantly from period to
period depending upon the status of hardware and software development projects
and our schedule of new product introductions. Headcount for research and
development increased from twenty-six at June 30, 1998 to thirty-three at June
30, 1999.
GENERAL AND ADMINISTRATIVE. Our general and administrative expense
decreased slightly from $373,000 for the first quarter ended June 30, 1998 and
$368,000 for the first quarter ended June 30, 1999. Our general and
administrative expenses represented 8.8% and 6.6% of net revenue for the first
quarter ended June 30, 1998 and 1999, respectively. We anticipate that general
and administrative expenses will increase in the future as costs increase and
our operations expand.
OTHER EXPENSE, NET. The "Other Expense" item on our statement of
operations includes primarily the net amount of interest or other financing
charges we have incurred due to borrowings reduced by the interest we earn on
cash balances and short term investments. For the first quarter ended June 30,
1998 and 1999, we incurred interest and other financing charges related to
financing agreements we had with entities associated with Hambrecht & Quist, as
well as borrowings under our bank credit line.
PROVISION FOR INCOME TAXES. In accordance with Statement of Financial
Accounting Standards No. 109, no provision was made for incomes taxes for the
first quarter ended June 30, 1998 and a benefit was recorded for the first
quarter ended June 30, 1999. The benefit recorded for the quarter ended June 30,
1999 reflected the refund due us per the conclusion of an Internal Revenue
Service audit. During the fiscal year ended March 31, 1996, we exhausted our
ability to carryback tax losses.
LIQUIDITY AND CAPITAL RESOURCES. In December, 1996 we entered into a
Loan and Security Agreement with Silicon Valley Bank. This Agreement, which we
sometimes refer to as our "bank credit line", has been modified or renewed at
various times since December 1996. The current bank credit line provides for up
to $1,500,000 in available borrowings based upon our eligible accounts
receivable balances. The current bank credit line will expire on September 15,
1999. We are currently negotiating a new bank credit line with Silicon Valley
Bank to continue until mid-2000. We expect our new bank credit line will include
terms that are quite similar to our current bank credit line. This bank credit
line provides for a variety of covenants, including among other things, that we
maintain certain financial ratios. The bank credit line is collateralized by a
security interest in substantially all of our assets. Interest on borrowings
under this agreement is payable monthly at a rate between three-quarters percent
and two and one half percent in excess of the prime rate. On June 30, 1999
$500,000 was outstanding under this agreement. The Company was in compliance
with its debt covenants under this agreement at June 30, 1999.
In December, 1996, we also obtained a $5,100,000 financing facility
with entities associated with Hambrecht & Quist. This facility included
subordinated debt as well as equipment lease financing. We received $3,000,000
of subordinated debt from Hambrecht & Quist Transition Capital, LLC and
$1,100,000 of subordinated debt from Hambrecht & Quist Guaranty Finance, LLC
pursuant to the above facility. The remaining $1,000,000 of the facility was
used to fund a master lease line for financing of future capital asset
purchases. The facility with the Hambrecht & Quist entities is secured by an
interest in our fixed assets and substantially all of our other assets but is
subordinate to our bank credit line. In connection with this financing facility
we issued warrants to purchase 260,200 common shares to entities associated with
Hambrecht & Quist. The Hambrecht & Quist entities were entitled to exercise the
warrants with respect to 130,100 shares at an exercise price of $10.00 at any
time on or before December 24, 2004, and with respect to 130,100 shares at an
exercise price of $7.00 at any time on or after December 24, 1997 and
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before December 24, 2004. In December, 1997, all of the $7.00 warrants were
exercised on a "net" basis, and the warrant holder received 40,266 shares of
common stock. We recorded $549,000 of deferred interest attributable to the
value of the warrants, which was amortized using the effective interest rate
method to interest expense over the term of the financing facility. The value of
the warrants was estimated using the Black-Scholes option pricing model and the
following assumptions: volatility of .75, risk free interest rate of 6.3% and
expected life equal to the contractual terms.
In March, 1998, we renegotiated our financing arrangement with
Hambrecht & Quist Guaranty Finance. The agreement we reached involved the
restructuring of $3,000,000 debt into $1,500,000 of convertible preferred stock
and $1,500,000 of debt. The interest rate on such restructured debt is 7.25% and
is due in October 1999. We filed a Form S-3 Registration Statement under the
Securities Act of 1933 to register the 461,538 shares of our common stock which
underlie the Series C Convertible Preferred Stock issued to Hambrecht & Quist
Guaranty Finance. In connection with the agreement, the exercise price of 90,000
of the $10.00 warrants issued in connection with the original arrangement
reached in December 1996 was changed to $3.25. We accounted for this transaction
by revaluing the new warrant, using comparable assumptions as the original
warrant grant and the resultant value of $90,000 is being amortized to interest
expense over the new loan period. In June, 1998, 90,000 of the $3.25 warrants
were exercised on a "net exercise" basis, and warrant holder received 29,691
shares of common stock. During the 1999 fiscal year 167,500 shares of the
Preferred Stock were converted into common stock.
In December, 1997, we secured a $7,000,000 equity-based line of credit
by entering into a stock purchase agreement with Kingsbridge Capital Ltd.
("Kingsbridge"). Under this arrangement, we had the right to draw up to a total
of $7,000,000 in cash in exchange for common stock. Pricing of the common stock
issued was based on the market price of Sonic Solutions' common stock at the
time of a draw subject to a 14% discount and a 4% commission payable in common
stock. The availability of the credit line, and the amounts and timing of draws
under the line were subject to a number of conditions. In January, 1998, we
filed a Form S-3 Registration Statement under the Securities Act of 1933 to
register the resale of shares issued under this credit line. During the fiscal
year ended March 31, 1998, we drew $1,450,000 from this credit line for which we
issued 606,130 shares of common stock to Kingsbridge and 12,000 shares to
Trinity Capital Advisors. During the fiscal year ended March 31, 1999, we drew
an additional $2,358,000 from this credit line for which we issued 903,870
shares of common stock. Because of certain limitations on the total number of
shares which can be issued under this line of credit, this facility is currently
unavailable to us.
On May 20, 1999, we secured a new equity-based line of credit by
entering into a new stock purchase agreement with Kingsbridge. Under the new
arrangement, we may draw up to $12,000,000 in cash in exchange for common stock.
Pricing of the common stock issued under this arrangement is based on the market
price of our common stock at the time of a draw, discounted by 10% or 12%
depending upon the price of our common stock. On May 27, 1999, we filed a
Registration Statement on Form S-1 to register for resale the shares we may
issue to Kingsbridge under this credit line. Our use of this new line is subject
to a number of conditions, including the effectiveness of the Registration
Statement. More details concerning the terms and conditions governing this
arrangement are available in the Registration Statement. The Registration
Statement became effective on August 12, 1999.
Our operating activities have used cash of $214,000 and $594,000 for
the first quarter ended June 30, 1998 and 1999, respectively. Cash was used
primarily to fund the operating loss and to support the increase in inventory
for the first quarter ended June 30, 1998. Cash was used primarily to fund the
operating loss and to support the increase in accounts receivables for the first
quarter ended June 30, 1999.
We believe that existing cash, cash equivalents and short term
investments, cash generated from operations, and cash available from the new
equity-based line of credit will be sufficient to meet the Company's cash and
investment requirements at least through the first quarter of fiscal 2001.
As of June 30, 1999, the Company had cash and cash equivalents of
$1,381,000 and net working capital of $238,000.
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IMPACT OF YEAR 2000 ISSUE. The year 2000 issue is the result of
computer programs being written using two digits rather than four to represent
the applicable year in a date. Any of our computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 (or
some other year) rather than the year 2000. This could potentially result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in other similar normal business activities.
We are heavily dependent upon the proper functioning of our own
computer or data-dependent systems. These include our systems in information,
business, finance, operations, manufacturing and customer service. Any failure
or malfunctioning on the part of these or other systems could adversely affect
our business in ways that are not currently known, discernable, quantifiable or
otherwise anticipated by us.
We have ensured that our internal software and embedded technology is
already Year 2000 compliant. Thus, we do not expect this issue to have a
material effect on our operations. We also believe that all current versions of
our products are Year 2000 compliant.
We currently have only limited information on Year 2000 compliance of
our key suppliers and customers. We have received confirmation from a primary
supplier that it is Year 2000 compliant. We are currently surveying our key
suppliers and customers for Year 2000 compliance and will be developing our own
contingency plan in case of suppliers' failures. We anticipate that these
surveys and the development of our contingency plan should be completed by
October, 1999. The operations of our key suppliers and customers could be
adversely affected by the Year 2000 problem, which could cause significant
problems in our business.
A survey of our leased properties and facilities, including vendors
providing power, local and long distance telecommunications, water, heating and
cooling, and various services to determine the status of embedded technology
equipment that could affect our operations, will be conducted within the next
few months. Temporary disruption of our manufacturing, customer service, sales
and marketing, research and development and administrative functions may occur
as a result of vendors' non-compliance affecting the delivery of power,
telecommunications, water and heating and cooling services.
We believe we are taking the steps necessary to understand the Year
2000 issues; however, failure to adequately address all known and unknown Year
2000 compliance issues could have a material adverse effect on our business,
financing condition and results of operations. The remaining Year 2000
compliance activities are not expected to result in significant incremental
operating expenses. To date, we have not incurred significant incremental costs
to become Year 2000 compliant.
FORWARD LOOKING STATEMENTS. Certain statements in this Report,
including statements contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations", constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Sonic Solutions to be materially
different from any future results, performance or achievements express or
implied by such forward-looking statements. Such factors include, but are not
limited to the following: general economic and business conditions; charges and
costs related to acquisitions; and the ability of Sonic Solutions to develop and
market products for the markets in which it operates, to successfully integrate
its acquired products and services, to adjust to changes in technology, customer
preferences, enhanced competition and new competitors in the markets in which it
operates.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No disclosure is required or applicable pursuant to Item 102 of
Regulation S-K
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
14
<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 16th day of August, 1999.
SONIC SOLUTIONS
Signature Date
--------- ----
/s/ Robert J. Doris August 16, 1999
---------------------------
Robert J. Doris
President and Director (Principal
Executive Officer)
/s/ A. Clay Leighton August 16, 1999
----------------------------
A. Clay Leighton
Senior Vice President of Worldwide
Operations and Finance and Chief
Financial Officer (Principal Financial
Accounting Officer)
15
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