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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2000 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)
<TABLE>
<S> <C>
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)
</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
----- -----
The number of outstanding shares of the registrant's Common Stock on October 31,
2000, was 12,350,230.
--------------------------------------------------------------------------------
1
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SONIC SOLUTIONS
FORM 10-Q
For the quarterly period ended September 30, 2000
Table of Contents
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ITEM 1.
Condensed Balance Sheets as of March 31, 2000
and September 30, 2000.......................................................................... 3
Condensed Statements of Operations for the
three and six months ended September 30, 1999 and 2000.......................................... 4
Condensed Statements of Cash Flows for the
six months ended September 30, 1999 and 2000.................................................... 5
Notes to Condensed Financial Statements......................................................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................... 10
ITEM 3. Quantitative and Qualitative disclosures about
Market Risk..................................................................................... 13
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
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Sonic Solutions
Condensed Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
2000
-----------------------------------
ASSETS March 31 September 30
------ -------------- ----------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................................................... $ 5,179 $ 2,947
Accounts receivable, net of allowance for returns and doubtful accounts of $930
and $1,039 at March 31, 2000 and September 30, 2000, respectively.............. 4,635 4,051
Inventory.......................................................................... 945 714
Prepaid expenses and other current assets.......................................... 425 419
-------- --------
Total current assets........................................................... 11,184 8,131
Fixed assets, net...................................................................... 1,515 1,176
Purchased and internally developed software costs, net................................. 1,876 1,504
Other assets........................................................................... 393 399
-------- --------
Total assets................................................................... $ 14,968 $ 11,210
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities....................................... $ 4,306 $ 4,066
Deferred revenue and deposits.................................................. 1,224 1,143
Subordinated debt.............................................................. 600 357
Current portion of obligations under capital leases............................ 78 42
-------- --------
Total current liabilities...................................................... 6,208 5,608
Obligations under capital leases, net of current portion............................... 10 0
-------- --------
Total liabilities.............................................................. 6,218 5,608
Commitments and contingencies
Shareholders' Equity:
Convertible preferred stock, no par value, 10,000,000 shares authorized; 155,544
and 0 shares issued and outstanding at March 31, 2000 and September 30, 2000,
respectively................................................................... 506 0
Common stock, no par value, 30,000,000 shares authorized; 12,050,214 and
12,350,230 shares issued and outstanding at March 31, 2000 and September 30,
2000, respectively............................................................. 27,083 27,582
Accumulated deficit................................................................ (18,839) (21,980)
-------- --------
Total shareholders' equity..................................................... 8,750 5,602
-------- --------
Total liabilities and shareholders' equity..................................... $ 14,968 $ 11,210
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
3
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Sonic Solutions
Condensed Statements of Operations
(in thousands, except share amounts -- unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ----------------
<S> <C> <C> <C> <C>
1999 2000 1999 2000
------ ------ ------ ------
Net revenue......................................................... $ 4,811 $ 4,089 $10,402 $ 9,090
Cost of revenue..................................................... 2,037 1,622 4,709 3,356
------- ------- ------- -------
Gross profit.................................................... 2,774 2,467 5,693 5,734
------- ------- ------- -------
Operating expenses:
Marketing and sales............................................. 2,193 2,344 4,344 4,691
Research and development........................................ 1,691 1,453 3,291 2,804
General and administrative...................................... 364 533 732 1,306
------- ------- ------- -------
Total operating expenses........................................ 4,248 4,330 8,367 8,801
------- ------- ------- -------
Operating loss.................................................. (1,474) (1,863) (2,674) (3,067)
Other expense, net.................................................. (43) (32) (94) (74)
------- ------- ------- -------
Loss before income taxes........................................ (1,517) (1,895) (2,768) (3,141)
Provision (benefit) for income taxes................................ 0 0 (97) 0
------- ------- ------- -------
Net loss........................................................ (1,517) (1,895) (2,671) (3,141)
Dividends paid to preferred shareholders............................ 14 0 28 8
------- ------- ------- -------
Net loss applicable to common shareholders...................... $(1,531) $(1,895) $(2,699) $(3,149)
======= ======= ======= =======
Basic and diluted loss per share applicable to common
shareholders................................................... $ (0.15) $ (0.15) $ (0.28) $ (0.26)
======= ======= ======= =======
Weighted average shares used in computing per share amounts..... 9,909 12,351 9,692 12,276
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
Sonic Solutions
Condensed Statements of Cash Flows
(in thousands -- unaudited)
<TABLE>
<CAPTION>
Six Months Ended September 30,
-----------------------------
<S> <C> <C>
1999 2000
------- ------
Cash flows from operating activities:
Net loss............................................................................. $(2,671) $(3,141)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................ 1,432 1,209
Provision for returns and doubtful accounts, net of write-offs....................... 50 109
Interest expense amortization........................................................ 0 89
Changes in operating assets and liabilities:
Accounts receivable.......................................................... (717) 475
Inventory.................................................................... (598) 231
Prepaid expenses and other current assets.................................... (149) 6
Other assets................................................................. 4 (6)
Amortization of discount on warrants......................................... 50 0
Accounts payable and accrued liabilities..................................... 574 (240)
Deferred revenue and deposits................................................ (8) (81)
------- -------
Net cash used in operating activities..................................... (2,033) (1,349)
------- -------
Cash flows from investing activities:
Purchase of fixed assets..................................................... (449) (216)
Additions to purchased and internally developed software..................... (424) (282)
------- -------
Net cash used in investing activities..................................... (873) (498)
------- -------
Cash flows from financing activities:
Proceeds from exercise of common stock options............................... 28 82
Borrowings on line of credit................................................. 422 0
Proceeds(costs) associated with equity line financing........................ 1,825 (81)
Payment of dividends......................................................... (28) (8)
Repayments of subordinated debt.............................................. 0 (332)
Principal payments on capital leases......................................... (73) (46)
------- -------
Net cash provided by (used in) financing activities....................... 2,174 (385)
------- -------
Net decrease in cash and cash equivalents............................................ (732) (2,232)
Cash and cash equivalents, beginning of period....................................... 2,414 5,179
------- -------
Cash and cash equivalents, end of period............................................. $ 1,682 $ 2,947
======= =======
Supplemental disclosure of cash flow information:
Interest paid during period.................................................. $ 55 $ 24
======= =======
Income taxes paid during period.............................................. $ 0 0
======= =======
Noncash financing and investing activities:
Conversion of preferred stock to common stock................................ $ 73 $ 506
======= =======
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
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, 2000, filed with the Securities and Exchange
Commission (SEC).
(2) Basic and diluted loss 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 quarter and six months ended September 30,
1999 and 2000 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- ---------------------
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss................................................. $(1,517) $(1,895) $(2,671) $(3,141)
Dividends paid to preferred shareholders................. 14 - 28 8
------- ------- ------- -------
Net loss applicable to common shareholders............... $(1,531) $(1,895) $(2,699) $(3,149)
======= ======= ======= =======
Weighted average number of common shares outstanding..... 9,909 12,351 9,692 12,276
======= ======= ======= =======
Basic and diluted net loss per share applicable to
common shareholders..................................... $ (0.15) $ (0.15) $ (0.28) $ (0.26)
======= ======= ======= =======
</TABLE>
As of September 30, 1999 and 2000, potentially dilutive shares totaling
1,621,067 and 152,759, respectively, for convertible preferred stock and options
with exercise prices less than the average market price that could dilute
earnings per share in the future, were not included in loss per share as
their effect was anti-dilutive for those periods.
6
<PAGE>
(3) Inventory
The components of inventory consist of (in thousands, unaudited):
March 31, September 30,
2000 2000
--------- ------------
Finished goods....................... $ 387 $ 191
Work-in-process...................... 75 62
Raw materials........................ 483 461
----- -----
$ 945 $ 714
===== =====
(4) Equity Financing
On May 4, 2000, we entered into a new Private Equity Line Agreement with
Kingsbridge Capital. Under this Agreement, we may receive ("draw") cash from
Kingsbridge in exchange for our common stock. The total of all draws under this
Agreement may not exceed $20,000,000 in cash nor involve issuance of more than
19.9% of our outstanding common stock. Pricing of each draw is based on the
market price of our common stock around the time of a draw discounted by amounts
ranging from 8% to 12% of market price. On July 19, 2000, we filed a
Registration Statement on Form S-1 to register for resale the shares we may
issue to Kingsbridge under this Agreement and on November 13, 2000 the Statement
became effective. Utilization of the equity line by us is subject to a number of
restrictions and conditions that are described more fully in the Registration
Statement.
(5) Significant Customer Information and Segment Reporting
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which we adopted 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. The method for
determining what information to report is based on the way that management
organized the operating segments within our company for making operating
decisions and assessing financial performance.
Our chief operating decision maker is considered to be our Chief Executive
Officer ("CEO"). The CEO reviews financial information presented on a
consolidated basis accompanied by desegregated information about revenue by
product line and revenue by geographic region for purposes of making operating
decisions and assessing financial performance. The consolidated financial
information reviewed by the CEO is identical to the information presented in the
accompanying statement of operations. Therefore, we operate in, and measure our
results in a single operating segment. As such, we are required to disclose the
following revenue by product line, revenue by geographic and significant
customer information:
7
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Revenues by Product Line:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues
Consumer DVD $ 292 $ 439 $ 292 $ 973
Pro AudioVideo 4,519 3,650 10,110 8,117
------ ------ ------- ------
Total net revenue $4,811 $4,089 $10,402 $9,090
====== ====== ======= ======
</TABLE>
Our accounting system does not capture meaningful gross margin and
operating income (loss) information by product line, nor is such information
used by the CEO for purposes of making operating decisions. Accordingly, such
information has not been disclosed.
Revenues by Geographic Location:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
North America $2,516 $2,170 $ 5,404 $4,833
Export:
Europe 1,296 1,257 2,697 2,592
Pacific Rim 979 662 2,113 1,640
Other international 20 - 188 25
------ ------ ------- ------
Total net revenue $4,811 $4,089 $10,402 $9,090
====== ====== ======= ======
</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 foreign countries for any of the years presented.
Significant customer information:
<TABLE>
<CAPTION>
Revenues
-----------------------------------------
Three Months Ended Six Months Ended Percent of Total Accounts
September 30, September 30, Receivable September 30,
------------------ ---------------- --------------------------
1999 2000 1999 2000 1999 2000
-------- -------- -------- ------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Customer A 13% 3% 11% 7% 6% 1%
Customer B 12% 21% 8% 16% 11% 8%
</TABLE>
(6) Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
as amended by SFAS No. 137 and SFAS No. 138, "Accounting for Derivative
instruments and hedging activities". We are required to adopt SFAS No. 133 in
the first quarter of fiscal year 2002. We do not anticipate that SFAS No. 133
will have a material impact on our financial statements.
8
<PAGE>
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements", as amended by SAB 101A and SAB 101B, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. We are required to adopt SAB 101 in the fourth quarter of
fiscal year 2001. We do not expect the adoption of SAB 101 to have a material
effect on our financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting For Certain Transactions involving Stock
Compensation". FASB Interpretation No. 44 clarifies the application of APB
Opinion No. 25 for certain issues. We adopted FASB Interpretation No. 44
effective July 1, 2000.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
federal securities laws that relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "intend," "potential" or "continue" or the
negative of these terms or other comparable terminology. Risks and uncertainties
and the occurrence of other events could cause actual results to differ
materially from these predictions. Factors that could cause or contribute to
such differences include those discussed below as well as those discussed in our
Annual Report on Form 10-K for the year ended March 31, 2000.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this report or to conform these statements to actual results.
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.
10
<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, 1999 and 2000:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
1999 2000 1999 2000
------- -------- ------- -------
<S> <C> <C> <C> <C>
Net revenue........................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue....................... 42.3 39.7 45.3 36.9
----- ----- ----- -----
Gross profit.......................... 57.7 60.3 54.7 63.1
Operating expenses:
Marketing and sales.............. 45.6 57.3 41.8 51.6
Research and development......... 35.1 35.5 31.6 30.8
General and administrative....... 7.6 13.0 7.0 14.5
----- ----- ----- -----
Total operating expenses.............. 88.3 105.8 80.4 96.9
----- ----- ----- -----
Operating loss........................ (30.6) (45.5) (25.7) (33.8)
Other expense......................... (0.9) (0.8) (0.9) (0.8)
Provision (benefit) for income taxes.. 0.0 0.0 (0.9) 0.0
----- ----- ----- -----
Net loss.............................. (31.5)% (46.3)% (25.7)% (34.6)%
===== ===== ===== =====
</TABLE>
Comparison of Second Quarters Ended September 30
NET REVENUE. Our net revenue decreased from $4,811,000 for the second
quarter ended September 30, 1999 to $4,089,000 for the second quarter ended
September 30, 2000, representing a decrease of 15%. For the six months ended
September 30, 2000, net revenue decreased from $10,402,000 to $9,090,000
compared to the same period in the prior fiscal year, representing a decrease of
13%. The decrease in revenue for the three and six months ended September 30,
2000 is due primarily to the decrease in sales of our audio products. This
decrease was partially offset by increases in sales of our DVD products, in
particular DVDit!, our Consumer DVD product which we introduced in September
1999.
International sales accounted for 47.7% and 46.9% of our net revenue for
the second quarter ended September 30, 1999 and 2000, respectively.
International sales accounted for 48.0% and 46.8% of net revenue for the six
months ended September 30, 1999 and 2000, respectively. See Note 5 of Notes to
Condensed Financial Statements. International sales have historically
represented slightly less than 50% of our total sales, and we expect that they
will continue to represent a significant percentage of future revenue.
International sales as a percentage of our total sales fluctuate from quarter to
quarter depending on a number of factors.
COST OF REVENUE. Our cost of revenue, as a percentage of net revenue
decreased from 42.3% for the second quarter ended September 30, 1999 to 39.7%
for the quarter ended September 30, 2000. Cost of revenue, as a percentage of
net revenue, decreased from 45.3% for the six months ended September 30, 1999 to
36.9% for the six months ended September 30, 2000. The decrease in percentage
cost of revenue is primarily due to the shift in sales product mix towards
higher margin professional and consumer DVD systems (as opposed to lower margin
professional audio systems).
MARKETING AND SALES. Our marketing and sales expenses increased from
$2,193,000 for the second quarter ended September 30, 1999 to $2,344,000 for the
second quarter ended September 30, 2000. Marketing and sales expenses increased
from $4,344,000 for the six months ended September 30, 1999 to $4,691,000 for
the six months ended September 30, 2000. Marketing and sales represented 45.6%,
57.3%,
11
<PAGE>
41.8% and 51.6% of net revenue for the second quarters ended September 30, 1999
and 2000 and the six months ended September 30, 1999 and 2000, respectively. Our
marketing and sales expenses increased primarily due to increases in staff
headcount, advertising and marketing costs related to our DVDit! and our DVD
Creator product lines and enhanced participation at major tradeshows. Our
marketing and sales headcount increased from thirty-nine at September 30, 1999
to forty-one at September 30, 2000. We include dealer and employee commissions
in marketing and sales expenses, and these decreased as a percentage of net
revenue from 5.3% in the second quarter ended September 30, 1999 to 4.3% in the
second quarter ended September 30, 2000.
RESEARCH AND DEVELOPMENT. Our research and development expenses decreased
from $1,691,000 for the second quarter ended September 30, 1999 to $1,453,000
for the second quarter ended September 30, 2000 and decreased from $3,291,000
for the six months ended September 30, 1999 to $2,804,000 for the six months
ended September 30, 2000. Our research and development expenses represented
35.1% and 35.5% of net revenue for the quarters ended September 30, 1999 and
September 30, 2000, respectively; they represented 31.6% and 30.8% of net
revenue for the six months ended September 30, 1999 and 2000, 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 decreased primarily due to
decreases in consulting and prototype expenses associated with new product
introductions. 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 decreased from thirty-six at September 30, 1999 to
thirty-three at September 30, 2000.
GENERAL AND ADMINISTRATIVE. Our general and administrative expense
increased from $364,000 for the second quarter ended September 30, 1999 to
$533,000 for the second quarter ended September 30, 2000 and from $732,000 for
the six months ended September 30, 1999 to $1,306,000 for the six months ended
September 30, 2000. Our general and administrative expenses represented 7.6% and
13.0% of net revenue for the quarters ended September 30, 1999 and 2000,
respectively; they represented, 7.0% and 14.5% of net revenue for the six months
ended September 30, 1999 and 2000, respectively. The increase in general and
administrative expenses for the six months ended September 30, 2000 is primarily
due to a charge to bad debt expense of $170,000 in the quarter ended June 30,
2000 which represented an additional reserve for sales of our professional audio
products to end users and distributors who are experiencing liquidity
difficulties due to a decline in their business.
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 quarters and six months ended September 30,
1999 and 2000, we incurred interest and other financing charges related to
financing agreements we had with entities associated with Hambrecht & Quist.
PROVISION FOR INCOME TAXES. In accordance with Statement of Financial
Accounting Standards No. 109, a benefit was recorded for the first quarter ended
June 30, 1999 and no provision was made for income taxes for the six months
ended September 30, 2000. 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 2000 fiscal year, we exhausted our ability to
carryback some of our tax losses resulting from operations in the fiscal year
ended March 31, 1996.
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 was renewed in
September, 1999 and provides for up to $2,500,000 in available borrowings based
upon
12
<PAGE>
our eligible accounts receivable balances. The current bank credit line was due
to expire on September 28, 2000 but has been extended through November 30, 2000.
We are currently in the process of negotiating a new credit line and we
anticipate that the covenants and terms will be similar to the previous credit
line. Our bank credit line involves a variety of covenants, including the
requirement 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 of one
and one quarter percent in excess of the prime rate. On September 30, 2000,
there were no borrowings outstanding under this agreement.
On May 4, 2000, we entered into a Private Equity Line Agreement (the
"Equity Line") with Kingsbridge Capital (please see discussion above, under Item
No. 4, "Equity Financing"). Under the Equity Line, we may sell our common stock
to Kingsbridge in return for cash in one or more transactions (referred to as
"draws"). The total of all draws may not exceed $20,000,000, or 19.9% of our
outstanding common stock. The pricing of individual draws is based on the market
price of our common stock around the time of a draw discounted by amounts
ranging from 8% to 12%. Our right to utilize the Equity Line, and the size and
timing of individual draws, are subject to a number of specific conditions,
including the requirement that Sonic maintain an effective Registration
Statement with the Securities Exchange Commission (the "Commission"),
registering the shares that Kingsbridge may receive from us for resale to the
public. On July 19, 2000 we filed a Registration Statement on Form S-1 with the
Commission to register the shares we may issue to Kingsbridge under this Equity
Line and on November 13, 2000 the Statement became effective. As mentioned
previously, the amounts and timing of draws under the Equity Line are subject to
a number of conditions and restrictions, which are discussed in more detail in
the Registration Statement. While we anticipate that the conditions will be such
that the Equity Line will be available to us, we cannot be sure of this.
Our operating activities have used cash of $2,033,000 and $1,349,000 for
the six months ended September 30, 1999 and 2000, respectively. For the six
months ended September 30, 1999, cash was used primarily to fund our operating
loss and to support an increase in accounts receivables. For the six months
ended September 30, 2000, cash was used primarily to fund our operating loss and
pay down our trade payables. In addition to our operating losses, we utilized
cash during both quarters to purchase new fixed assets, pay down debt
obligations and to develop and purchase software that was added to capitalized
software.
We believe that existing cash, cash equivalents and short term investments,
available credit and cash generated from operations, plus cash available through
the Equity Line (assuming it becomes available to us - see discussion above)
will be sufficient to meet our cash requirements at least through the end of
fiscal year 2001.
As of September 30, 2000, we had cash and cash equivalents of $2,947,000
and working capital of $2,523,000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is confined to cash and cash equivalents, which
have maturities of less than three months. The securities in the investment
portfolio are not leveraged, and are, due to their very short term nature,
subject to minimal interest rate risk. We invest cash and cash equivalents in
money market funds.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on September 5, 2000, at the
Company's headquarters, the Company shareholders voted to:
1. Approve Robert J. Doris, Robert M. Greber, Peter J. Marguglio, 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 12,350,230 shares eligible
to vote at the meeting: 11,279,796 voted in favor and 485,895 withheld
for the approval of Robert J. Doris; 11,300,136 voted in favor and
465,555 withheld for the approval of Robert M. Greber; 11,284,186 voted
in favor and 481,505 withheld for the approval of Peter J. Marguglio,
and; 11,304,886 voted in favor and 460,895 withheld for the approval of
Mary C. Sauer.
2. Approve the adoption of the Company's 2000 Stock Option Plan and to
approve (I) the issuance of up to 3,000,000 shares initially available
for issuance thereunder, and (ii) annual increases in the number of
shares issualbe under the plan in an amount up to 5% of the number of
shares of Common Stock outstanding on the last day of each fiscal year,
750,000 shares or a lesser amount set by the Baord of Directors. Out of
a total of 12,350,230 shares eligible to vote at the meeting: 3,211,968
voted in favor, 799,698 voted against, 262,778 abstained and 7,491,247
were "broker non-votes".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
------- -----------------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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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 14th day of November, 2000.
SONIC SOLUTIONS
Signature Date
--------- ----
/s/ Robert J. Doris November 14, 2000
---------------------
Robert J. Doris
President and Director
(Principal Executive Officer)
/s/ A. Clay Leighton November 14, 2000
---------------------
A. Clay Leighton
Senior Vice President of
Worldwide Operations and Finance
and Chief Financial Officer
(Principal Financial
Accounting Officer)
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