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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, 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)
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 July 20,
2000, was 12,395,426.
================================================================================
1
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SONIC SOLUTIONS
FORM 10-Q
For the quarterly period ended June 30, 2000
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Balance Sheets as of March 31, 2000
and June 30, 2000........................................ 3
Condensed Statements of Operations for the
quarter ended June 30, 2000 and 2000..................... 4
Condensed Statements of Cash Flows for the
quarter ended June 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............ 9
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk.............................................. 12
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K......................... 13
Signatures............................................... 14
</TABLE>
2
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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>
2000
-------------------------------------
ASSETS March 31 June 30
------ ------------------ ----------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................................................... $ 5,179 3,657
Accounts receivable, net of allowance for returns and doubtful
accounts of $930 and $1,063 at March 31, 2000 and June 30,
2000, respectively.............................................................. 4,635 5,657
Inventory........................................................................... 945 1,008
Prepaid expenses and other current assets........................................... 425 331
-------- -------
Total current assets................................................................ 11,184 10,653
Fixed assets, net...................................................................... 1,515 1,351
Purchased and internally developed software costs, net................................. 1,876 1,727
Other assets........................................................................... 393 411
-------- -------
Total assets........................................................................ $ 14,968 14,142
======== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities............................................ $ 4,306 4,826
Deferred revenue and deposits....................................................... 1,224 1,245
Subordinated debt................................................................... 600 485
Current portion of obligations under capital leases................................. 78 62
-------- -------
Total current liabilities........................................................... 6,208 6,618
Obligations under capital leases, net of current portion.............................. 10 2
-------- -------
Total liabilities................................................................... 6,218 6,620
-------- -------
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 June 30, 2000, respectively....... 506 -
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 June 30, 2000, respectively....................................................... 27,083 27,607
Accumulated deficit.................................................................... (18,839) (20,085)
-------- -------
Total shareholders' equity.......................................................... 8,750 7,522
-------- -------
Total liabilities and shareholders' equity.......................................... $ 14,968 14,142
======== =======
</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>
<CAPTIONS>
Quarter Ended June 30,
----------------------
1999 2000
------ ------
<S> <C> <C>
Net revenue............................................................. $ 5,591 5,001
Cost of revenue......................................................... 2,672 1,734
------- ------
Gross profit....................................................... 2,919 3,267
------- ------
Operating expenses:
Marketing and sales................................................ 2,151 2,347
Research and development........................................... 1,600 1,351
General and administrative......................................... 368 773
------- ------
Total operating expenses........................................... 4,119 4,471
------- ------
Operating loss..................................................... (1,200) (1,204)
Other expense, net...................................................... (51) (42)
------- ------
Loss before income taxes........................................... (1,251) (1,246)
Provision (benefit) for income taxes.................................... (97) 0
------- ------
Net loss........................................................... (1,154) (1,246)
Dividends paid to preferred shareholders................................ 14 8
------- ------
Net loss applicable to common shareholders......................... $(1,168) (1,254)
======= ======
Basic and diluted loss per share applicable to common shareholders. $ (0.12) (0.10)
======= ======
Weighted average shares used in computing per share amounts........ 9,476 12,201
======= ======
</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,
----------------------
1999 2000
------- ------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................................. $(1,154) (1,246)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................ 678 610
Provision for returns and doubtful accounts, net of write-offs....................... 50 133
Interest expense amortization........................................................ - 50
Changes in operating assets and liabilities:
Accounts receivable............................................................. (436) (1,155)
Inventory....................................................................... 9 (63)
Prepaid expenses and other current assets....................................... (76) 94
Other assets.................................................................... 4 (18)
Accounts payable and accrued liabilities........................................ 299 520
Deferred revenue and deposits................................................... 32 21
------- ------
Net cash used in operating activities...................................... (594) (1,054)
------- ------
Cash flows from investing activities:
Purchase of fixed assets........................................................ (166) (120)
Additions to purchased and internally developed software........................ (225) (177)
------- ------
Net cash used in investing activities...................................... (391) (297)
------- ------
Cash flows from financing activities:
Proceeds from exercise of common stock options.................................. 13 82
Costs associated with equity line financing..................................... (40) (56)
Amortization of warrants........................................................ 30 -
Payment of dividends............................................................ (14) (8)
Repayments of subordinated debt................................................. - (165)
Principal payments on capital leases............................................ (37) (24)
------- ------
Net cash used by financing activities...................................... (48) (171)
------- ------
Net decrease in cash and cash equivalents............................................ (1,033) (1,522)
Cash and cash equivalents, beginning of period....................................... 2,414 5,179
------- ------
Cash and cash equivalents, end of period............................................. $ 1,381 3,657
======= ======
Supplemental disclosure of cash flow information:
Interest paid during period..................................................... $ 27 15
------- ------
Income taxes paid during period................................................. $ 2 2
------- ------
Noncash financing and investing activities:
Conversion of preferred stock to common stock................................. $ 25 506
======= ======
</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, 2000, filed with the Securities and Exchange
Commission (SEC).
(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, 1999 and 2000
(in thousands, except per share data, unaudited):
<TABLE>
<CAPTION>
Quarter ended June 30,
----------------------
1999 2000
------- ------
<S> <C> <C>
Net loss........................................................... $(1,154) (1,246)
Dividends paid to preferred shareholders........................... 14 8
------- ------
Net loss applicable to common shareholders......................... $(1,168) (1,254)
======= ======
Weighted average number of common shares
outstanding...................................................... 9,476 12,201
======= ======
Basic and diluted net loss per share applicable to
common shareholders.............................................. $ (0.12) (0.10)
======= ======
</TABLE>
As of June 30, 1999 and 2000, potentially dilutive shares totaling
2,309,257 and 845,010, 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 earnings per share as
their effect was anti-dilutive for those periods.
6
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(3) Inventory
The components of inventory consist of (in thousands, unaudited):
<TABLE>
<CAPTION>
March 31, June 30,
--------- --------
2000 2000
---- ----
<S> <C> <C>
Finished goods...........................
Work-in-process.......................... $ 387 487
Raw materials............................ 75 64
483 457
----- -----
$ 945 1,008
===== =====
</TABLE>
(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. Our ability to utilize this equity line
is subject to the effectiveness of a Registration Statement on Form S-1
registering any shares received by Kingsbridge from us for resale to the public.
We filed such a Registration Statement with the SEC on July 19, 2000.
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 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:
Revenues by Product Line:
<TABLE>
<CAPTION>
Quarter Ended June 30,
------------------------
1999 2000
-------- -------
<S> <C> <C>
Revenues
Consumer DVD $ - 534
Pro Audio/Video 5,591 4,467
------ -----
Total net revenue $5,591 5,001
====== =====
</TABLE>
7
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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>
Quarter Ended June 30,
-------------------------
1999 2000
------ ------
<S> <C> <C>
North America $2,889 2,663
Export:
Europe 1,400 1,335
Pacific Rim 1,134 977
Other international 168 26
------ -----
Total net revenue $5,591 5,001
====== =====
</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>
Percent of Total Percent of Total
Accounts Accounts
Receivable Receivable
Quarter Ended June 30, June 30, June 30,
------------------------ ------------------ ---------------
1999 2000 1999 2000
<S> <C> <C> <C> <C>
Customer A 9% 11% 9% 9%
Customer B 4% 12% 9% 11%
</TABLE>
(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 2002. We do not anticipate that SFAS No. 133 will have a material
impact on our financial statements.
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 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. The FASB Interpretation No. 44 was effective
beginning July 1, 2000. We are in the process of assessing any impact that the
adoption of FASB Interpretation No. 44 will have on our financial statements in
future quarters.
8
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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.
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,
1999 and 2000:
<TABLE>
<CAPTION>
Quarter Ended June 30
---------------------
1999 2000
---- ----
<S> <C> <C>
Net revenue..................... 100.0% 100.0%
Cost of revenue................. 47.8 34.7
------ ------
Gross profit.................... 52.2 65.3
Operating expenses:
Marketing and sales......... 38.5 46.9
Research and development.... 28.6 27.0
General and administrative.. 6.6 15.5
------ ------
Total operating expenses........ 73.7 89.4
------ ------
Operating loss.................. (21.5) (24.1)
Other expense................... (0.9) (0.8)
Provision (benefit) for income (1.7) -
taxes.......................... ------ ------
Net loss........................ (20.7)% (24.9)%
====== ======
</TABLE>
Comparison of First Quarters Ended June 30
NET REVENUE. Our net revenue decreased from $5,591,000 for the first quarter
ended June 30, 1999 to $5,001,000 for the first quarter ended June 30, 2000,
representing an decrease of 11%. The decrease in revenue 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 48.3% and 46.8% of our net revenue for the
first quarter ended June 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 47.8% for the first quarter ended June 30, 1999 to 34.7% for the
quarter ended June 30, 2000. The decrease in cost of revenue is primarily due
to the shift in sales product mix towards higher margin professional DVD systems
and towards our DVDit! (Consumer DVD) product. In general we have been selling
less hardware as a percentage of revenue in our professional systems and our
DVDit! product includes no hardware.
MARKETING AND SALES. Our marketing and sales expenses increased from
$2,151,000 for the first quarter ended June 30, 1999 to $2,347,000 for the first
quarter ended June 30, 2000. Marketing and sales represented 38.5% and 46.9% of
net revenue for the first quarter ended June 30, 1999 and 2000, respectively.
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 DVDit! and our DVD Creator product lines and
our enhanced participation at major tradeshows. Our marketing and sales
headcount increased from thirty-nine at June 30, 1999 to forty-two at June 30,
2000. Included in our marketing and sales expenses are dealer and employee
commission expenses, which as a percentage of net revenue decreased from 4.8%
for the first quarter ended June 30, 1999 to 4.0% for the first quarter ended
June 30, 2000.
RESEARCH AND DEVELOPMENT. Our research and development expenses decreased
from $1,600,000 for the first quarter ended June 30, 1999 to $1,351,000 for the
first quarter ended June 30, 2000. Our research and
10
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development expenses represented 28.6% and 27.0% of net revenue for the first
quarter ended June 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 increased
from thirty-three at June 30, 1999 to thirty-four at June 30, 2000.
GENERAL AND ADMINISTRATIVE. Our general and administrative expense increased
from $368,000 for the first quarter ended June 30, 1999 to $773,000 for the
first quarter ended June 30, 2000. Our general and administrative expenses
represented 6.6% and 15.5% of net revenue for the first quarter ended June 30,
1999 and 2000, respectively. The increase in general and administrative
expenses 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 to
audio professionals and distributors who are experiencing liquidity difficulties
due to a decline in their business. We anticipate that general and
administrative expenses (exclusive of the bad debt expense) 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, 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 first quarter
ended June 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 our eligible accounts receivable balances. The current bank credit line
will expire on September 28, 2000. 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 of one and one quarter percent in excess of the prime
rate. On June 30, 2000, there were no borrowings outstanding under this
agreement.
In October, 1999, we renegotiated our financing arrangement with Hambrecht
& Quist Guaranty Finance. The agreement we reached involved the restructuring of
$1,500,000 debt into 153,846 shares of Series C Convertible Preferred Stock and
$1,000,000 of debt. The interest rate on the restructured debt is 7.25% and the
debt and interest are payable in monthly installments through April 30, 2001. In
connection with this agreement, we issued warrants to purchase 120,000 common
shares at an exercise price of $2.50. These warrants expire on April 30, 2006.
We also enhanced the conversion rate of Hambrecht & Quist's existing Series C
Convertible Preferred Stock so that each share of Series C Convertible Preferred
Stock is convertible into 1.625 shares of Common Stock. The beneficial
conversion feature, warrants and new debt were recorded at their relative fair
values. We recorded $345,000 of deferred financing costs attributable to this
finance restructuring with Hambrecht & Quist Guaranty. This amount is being
amortized using the effective interest rate method to interest expense over the
term of the financing facility (18 months). The fair value of the warrants was
estimated using the Black-Scholes option pricing model and the following
assumptions: volatility of .50, risk free interest rate of 6% and expected life
equal to the contractual terms. We filed a Form S-3 Registration Statement under
the Securities Act of 1933 to register the shares of the common stock which
underlie the Series C Convertible Preferred Stock and the 120,000 shares of our
common stock which underlie the warrants issued to Hambrecht & Quist
11
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Guaranty. This Registration Statement on Form S-3 became effective on March 17,
2000. During the quarter ended June 30, 2000 all shares of the Series C
Convertible Preferred Stock were converted into common stock.
On May 20, 1999, we obtained an equity-based line of credit by entering into a
new stock purchase agreement with Kingsbridge Capital. Under this arrangement,
we were able to draw up to $12,000,000 in cash in exchange for common stock.
Pricing of the common stock issued under this arrangement was 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. The availability of the
credit line, and the amounts and timing of draws under the line were subject to
a number of conditions. 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 and on August 12, 1999 the Registration Statement became
effective. During the fiscal year ended March 31, 2000, we drew $7,408,000 from
the credit line for which we issued 1,800,000 shares of common stock. Because of
limitations on the total number of shares that could be issued under this line
of credit, this facility is no longer available to us and was terminated on
March 14, 2000.
On May 4, 2000, we entered into a new Private Equity Line Agreement with
Kingsbridge Capital. Under this Agreement, we may draw cash in exchange for our
common stock. The total of all draws may not exceed $20,000,000 in cash, 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 subject to
discounts ranging from 8% to 12%. On July 19, 2000 we filed a Registration
Statement on Form S-1 to register for resale to the public shares that
Kingsbridge may receive from us under this credit line. This Registration
Statement has not yet become effective, and we will be unable to draw on this
credit line until the Registration Statement is effective. Also, the amounts and
timing of draws under the line are subject to a number of other conditions and
restrictions, which are discussed in more detail in the Registration Statement.
While we anticipate that the Registration Statement will become effective in the
near future, and that conditions will be such that this line of credit will be
available to us, we cannot be sure of this.
Our operating activities have used cash of $594,000 and $1,054,000 for the
first quarter ended June 30, 1999 and 2000, respectively. Cash was used
primarily to fund the operating losses and to support the increase in accounts
receivables. In addition to our operating losses and increases in accounts
receivable, 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 new equity based line of credit with Kingsbridge (when and if 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 June 30, 2000, we had cash and cash equivalents of $3,657,000 and
working capital of $4,035,000.
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.
12
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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
Exhibit Description
------- --- ---------------------------------------------------------
4.1 (1) Private equity line agreement between Sonic Solutions and
Kingsbridge Capital Limited dated as of May 4, 2000
4.2 (1) Registration Rights Agreement between Sonic Solutions and
Kingsbridge Capital Limited dated as May 4, 2000
23.1 (2) Consent of Heller Ehrman White & McAuliffe
23.2 (2) Consent of KPMG LLP
24 (2) Power of Attorney
27.1 Financial Data Schedule
(1) Incorporated by reference to exhibits to Annual Report on Form 10-K for the
Fiscal Year Ended March 31, 2000.
(2) Incorporated by reference to exhibits to Registration Statement on Form S-1
filed on July 19, 2000.
(b) Reports on Form 8-K
None.
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<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 11th day of August, 2000.
SONIC SOLUTIONS
Signature Date
--------- -----
/s/ Robert J. Doris August 11, 2000
-------------------------------------------
Robert J. Doris
President and Director (Principal Executive
Officer)
/s/ A. Clay Leighton August 11, 2000
-------------------------------------------
A. Clay Leighton
Senior Vice President of Worldwide
Operations and Finance
and Chief Financial Officer (Principal
Financial Accounting Officer)
14
