- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark one)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 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 January 31,
2001, was 12,350,230.
- -------------------------------------------------------------------------------
1
SONIC SOLUTIONS
FORM 10-Q
For the quarterly period ended December 31, 2000
Table of Contents
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Balance Sheets as of March 31, 2000
and December 31, 2000................................................................... 3
Condensed Statements of Operations for the
three and nine months ended December 31, 1999 and 2000.................................. 4
Condensed Statements of Cash Flows for the
three and nine months ended December 31, 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 6. Exhibits and Reports on Form 8-K........................................................ 14
Signatures.............................................................................. 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Sonic Solutions
Condensed Balance Sheets
(in thousands, except share amounts)
2000
---------------------------
March 31 December 31
------------- -----------
(unaudited)
ASSETS
------
Current Assets:
Cash and cash equivalents............................................................... $ 5,179 $ 2,336
Accounts receivable, net of allowance for returns and doubtful accounts of $930 and
$1,095 at March 31, 2000 and December 31, 2000, respectively........................ 4,635 3,553
Inventory............................................................................... 945 663
Prepaid expenses and other current assets............................................... 425 316
------------- -----------
Total current assets.................................................................... 11,184 6,868
Fixed assets, net........................................................................... 1,515 1,001
Purchased and internally developed software costs, net...................................... 1,876 1,428
Other assets................................................................................ 393 460
------------- -----------
Total assets............................................................................. $ 14,968 $ 9,757
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities................................................ $ 4,306 $ 3,951
Bank note payable....................................................................... 0 500
Deferred revenue and deposits........................................................... 1,224 1,054
Subordinated debt....................................................................... 600 215
Current portion of obligations under capital leases..................................... 78 27
------------- -----------
Total current liabilities............................................................... 6,208 5,747
Obligations under capital leases, net of current portion.................................... 10 0
------------- -----------
Total liabilities....................................................................... 6,218 5,747
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 December 31, 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 December 31,
2000, respectively........................................................................ 27,083 27,539
Accumulated deficit......................................................................... (18,839) (23,529)
------------- -----------
Total shareholders' equity.............................................................. 8,750 4,010
------------- -----------
Total liabilities and shareholders' equity.............................................. $ 14,968 $ 9,757
============= ===========
See accompanying notes to condensed financial statements.
3
Sonic Solutions
Condensed Statements of Operations
(in thousands, except per share amounts -- unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- -------------------
1999 2000 1999 2000
------- ------- ------- -------
Net revenue......................................................... $ 5,156 $ 3,378 $15,558 $12,468
Cost of revenue..................................................... 2,160 1,224 6,869 4,580
------- ------- ------- -------
Gross profit.................................................... 2,996 2,154 8,689 7,888
------- ------- ------- -------
Operating expenses:
Marketing and sales............................................. 2,335 1,976 6,679 6,667
Research and development........................................ 1,458 1,156 4,749 3,960
General and administrative...................................... 1,030 544 1,762 1,850
------- ------- ------- -------
Total operating expenses........................................ 4,823 3,676 13,190 12,477
------- ------- ------- -------
Operating loss.................................................. (1,827) (1,522) (4,501) (4,589)
Other expense, net.................................................. (106) (27) (200) (101)
------- ------- ------- -------
Loss before income taxes........................................ (1,933) (1,549) (4,701) (4,690)
Provision (benefit) for income taxes................................ 0 0 (97) 0
------- ------- ------- -------
Net loss........................................................ (1,933) (1,549) (4,604) (4,690)
Beneficial conversion feature given to preferred shareholders....... 110 0 110 0
Dividends paid to preferred shareholders............................ 13 0 41 8
------- ------- ------- -------
Net loss applicable to common shareholders...................... $(2,056) $(1,549) $(4,755) $(4,698)
======= ======= ======= =======
Basic and diluted loss per share applicable to common
shareholders................................................... $(0.19) $ (0.13) $ (0.47) $ (0.38)
======= ======= ======= =======
Weighted average shares used in computing per share amounts..... 10,799 12,351 10,061 12,301
======= ======= ======= =======
See accompanying notes to condensed financial statements.
4
Sonic Solutions
Condensed Statements of Cash Flows
(in thousands -- unaudited)
Nine Months Ended December 31,
--------------------------------
1999 2000
--------- --------
Cash flows from operating activities:
Net loss......................................................................... $(4,604) $(4,690)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.................................................... 2,224 1,671
Provision for returns and doubtful accounts, net of write-offs................... 650 165
Interest expense amortization.................................................... 0 117
Changes in operating assets and liabilities:
Accounts receivable.......................................................... (527) 917
Inventory.................................................................... (411) 282
Prepaid expenses and other current assets.................................... (246) 109
Other assets................................................................. (29) (67)
Accounts payable and accrued liabilities..................................... 256 (355)
Deferred revenue and deposits................................................ 12 (170)
--------- --------
Net cash used in operating activities.................................... (2,675) (2,021)
--------- --------
Cash flows from investing activities:
Purchase of fixed assets........................................................ (606) (304)
Additions to purchased and internally developed software........................ (618) (405)
--------- --------
Net cash used in investing activities.................................... (1,224) (709)
--------- --------
Cash flows from financing activities:
Proceeds from exercise of common stock options.................................. 33 82
Borrowings on line of credit.................................................... 422 500
Proceeds/(costs) associated with equity line financing.......................... 3,180 (124)
Payment of dividends............................................................ (41) (8)
Repayments of subordinated debt................................................. 20 (502)
Principal payments on capital leases............................................ (111) (61)
--------- --------
Net cash provided by (used in) financing activities...................... 3,503 (113)
--------- --------
Net decrease in cash and cash equivalents............................................ (396) (2,843)
Cash and cash equivalents, beginning of period....................................... 2,414 5,179
--------- --------
Cash and cash equivalents, end of period............................................. $ 2,018 $ 2,336
========= ========
Supplemental disclosure of cash flow information:
Interest paid during period..................................................... $ 93 $ 33
--------- --------
Income taxes paid during period................................................. $ 4 $ 0
--------- --------
Noncash financing and investing activities:
Issuance of preferred stock for subordinated debt............................. $ 500 $ 0
--------- --------
Issuance of warrants for subordinated debt.................................... $ 235 $ 0
--------- --------
Conversion of preferred stock to common stock................................. $ 950 $ 506
--------- --------
See accompanying notes to condensed financial statements.
5
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 Sonic Solutions'
(the "Company") 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 nine months ended December 31,
1999 and 2000 (in thousands, except per share data):
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------------- ----------------------------
1999 2000 1999 2000
------- ------ ------ ------
Net loss................................................. $(1,933) $(1,549) $(4,604) $(4,690)
Beneficial conversion feature given to preferred
shareholders............................................ 110 0 110 0
Dividends paid to preferred shareholders................. 13 0 41 8
------- ------ ------ ------
Net loss applicable to common shareholders............... $(2,056) $(1,549) $(4,755) $(4,698)
======= ====== ====== ======
Weighted average number of common shares outstanding..... 10,799 12,351 10,061 12,301
======= ====== ====== ======
Basic and diluted net loss per share applicable to
common shareholders..................................... $(0.19) $(0.13) $(0.47) $(0.38)
======= ====== ====== ======
As of December 31, 1999 and 2000, potentially dilutive shares totaling
1,311,514 and 1,034,943, 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
(3) Inventory
The components of inventory consist of (in thousands, unaudited):
March 31, December 31,
2000 2000
---- ----
Finished goods.......................................................... $387 $ 78
Work-in-process......................................................... 75 68
Raw materials........................................................... 483 517
---- ----
$945 $663
==== ====
(4) Credit Facilities
On May 4, 2000, we entered into a new Private Equity Line Agreement (the
"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 the 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, we filed a Registration Statement on Form S-1 to register for
resale the shares we may issue to Kingsbridge under the Agreement and on
November 13, 2000 the Registration 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.
In December 1996, we entered into a Loan and Security Agreement (the "Loan
Agreement") with Silicon Valley Bank. The Loan 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
November, 2000 and provides for up to $2,500,000 in available borrowings based
upon our eligible accounts receivable balances. 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 the Loan
Agreement is payable monthly at a rate of one percent in excess of the prime
rate. On December 31, 2000, $500,000 was outstanding under the Loan Agreement.
We were not in compliance with certain covenants under the Loan Agreement at
December 31, 2000; however, we obtained a waiver on these covenants through
February 28, 2001 from Silicon Valley Bank.
(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.
7
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:
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------- ---------------------------
1999 2000 1999 2000
--------------------------- ---------------------------
Revenues
Consumer DVD $ 598 $ 690 $ 890 $ 1,663
Pro Audio/Video 4,558 2,688 14,668 10,805
------ ------ ------- -------
Total net revenue $5,156 $3,378 $15,558 $12,468
====== ====== ======= =======
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:
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------- ---------------------------
1999 2000 1999 2000
--------------------------- ---------------------------
North America $2,850 $1,857 $ 8,254 $ 6,690
Export:
Europe 1,491 1,145 4,188 3,737
Pacific Rim 803 374 2,916 2,017
Other international 12 2 200 24
------ ------ ------- -------
Total net revenue $5,156 $3,378 $15,558 $12,468
====== ====== ======= =======
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:
Percent of Total Percent of Total
Revenues Revenues Accounts Accounts
Three Months Ended Nine Months Ended Receivable Receivable
December 31, December 31, ---------------- ----------------
------------------ ----------------- December 31, December 31,
1999 2000 1999 2000 1999 2000
------------------ ----------------- ---------------- ----------------
Customer A 11% 8% 11% 8% 9% 8%
Customer B 14% 8% 10% 14% 14% 7%
8
(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.
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 SAB101 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
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
Results of Operations
The following table sets forth certain items from the Company's statements
of operations as a percentage of net revenue for the three and nine months ended
December 31, 1999 and 2000:
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------- ---------------------------
1999 2000 1999 2000
--------------------------- ---------------------------
Net revenue................................. 100.0% 100.0 100.0% 100.0
Cost of revenue............................. 41.9 36.2 44.2 36.7
------ ----- ------ -----
Gross profit................................ 58.1 63.8 55.8 63.3
Operating expenses:
Marketing and sales..................... 45.3 58.5 42.9 53.5
Research and development................ 28.3 34.2 30.5 31.8
General and administrative.............. 20.0 16.1 11.4 14.8
------ ----- ------ -----
Total operating expenses.................... 93.6 108.8 84.8 100.1
------ ----- ------ -----
Operating loss.............................. (35.5) (45.0) (29.0) (36.8)
Other expense............................... (2.0) (0.8) (1.3) (0.8)
Provision (benefit) for income taxes........ 0.0 0.0 (0.6) 0.0
------ ----- ------ -----
Net loss.................................... (37.5)% (45.8) (29.7)% (37.6)
====== ===== ====== =====
Comparison of Third Quarters Ended December 31
NET REVENUE. Our net revenue decreased from $5,156,000 for the third
quarter ended December 31, 1999 to $3,378,000 for the third quarter ended
December 31, 2000, representing a decrease of 34%. For the nine months ended
December 31, 2000, net revenue decreased from $15,558,000 to $12,468,000
compared to the same period in the prior fiscal year, representing a decrease of
20%. The decrease in revenue for the three and nine months ended December 31,
2000 is due primarily to the decrease in sales of our professional audio and
video products. This decrease in sales for both the three and nine months ended
December 31, 2000 was partially offset by increases in sales of our DVD consumer
products, DVDit! and related products.
International sales accounted for 44.7% and 45.0% of our net revenue for
the third quarter ended December 31, 1999 and 2000, respectively. International
sales accounted for 46.9% and 46.3% of net revenue for the nine months ended
December 31, 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 41.9% for the third quarter ended December 31, 1999 to 36.2% for
the quarter ended December 31, 2000. Cost of revenue, as a percentage of net
revenue, decreased from 44.2% for the nine months ended December 31, 1999 to
36.7% for the nine months ended December 31, 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 decreased from
$2,335,000 for the third quarter ended December 31, 1999 to $1,976,000 for the
third quarter ended December 31, 2000. Marketing and sales expenses decreased
slightly from $6,679,000 for the nine months ended December 31, 1999 to
$6,667,000 for the nine months ended December 31, 2000. Marketing and sales
represented 45.3%, 58.5%, 42.9% and 53.5% of net revenue for the third quarters
ended December 31, 1999 and 2000 and the nine months ended December 31, 1999 and
2000, respectively. Our marketing and sales expenses decreased
11
for the third quarter ended December 31, 2000 primarily due to reduced expenses
related to advertising and marketing materials and lower dealer and employee
commission expense as a result of the mix of sales and lower sales quarter over
quarter. Marketing and sales expenses decreased slightly for the nine months
ended December 31, 2000 primarily due to reduced expenses related to dealer and
employee commissions which were offset with 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 December 31, 1999 to forty-three
at December 31, 2000. We include dealer and employee commissions in marketing
and sales expenses, and these decreased as a percentage of net revenue from 4.4%
in the third quarter ended December 31, 1999 to 4.0% in the third quarter ended
December 31, 2000.
RESEARCH AND DEVELOPMENT. Our research and development expenses decreased
from $1,458,000 for the third quarter ended December 31, 1999 to $1,156,000 for
the third quarter ended December 31, 2000 and decreased from $4,749,000 for the
nine months ended December 31, 1999 to $3,960,000 for the nine months ended
December 31, 2000. Our research and development expenses represented 28.3% and
34.2% of net revenue for the quarters ended December 31, 1999 and December 31,
2000, respectively; they represented 30.5% and 31.8% of net revenue for the nine
months ended December 31, 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
employee expenses due to reduction in headcount and 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-three at December 31, 1999 to thirty-one at December 31, 2000.
GENERAL AND ADMINISTRATIVE. Our general and administrative expense
decreased from $1,030,000 for the third quarter ended December 31, 1999 to
$544,000 for the third quarter ended December 31, 2000 and increased from
$1,762,000 for the nine months ended December 31, 1999 to $1,850,000 for the
nine months ended December 31, 2000. Our general and administrative expenses
represented 20.0% and 16.1% of net revenue for the quarters ended December 31,
1999 and 2000, respectively; they represented, 11.4% and 14.8% of net revenue
for the nine months ended December 31, 1999 and 2000, respectively. Included in
general and administrative expense for the quarter and nine months ended
December 31, 1999, is a charge to bad debt expense of $600,000 which represented
an additional reserve for sales to audio professionals and distributors who were
experiencing liquidity difficulties due to a decline in their business. Included
in general and administrative expenses for the nine months ended December 31,
2000 is a charge to bad debt expense of $170,000 (taken 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 continuing to
experience 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 nine months ended
December 31, 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 nine months
ended December 31, 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.
12
LIQUIDITY AND CAPITAL RESOURCES. In December 1996, we entered into a Loan
and Security Agreement (the "Loan Agreement") with Silicon Valley Bank. The
Loan 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 November, 2000 and provides for up to $2,500,000 in
available borrowings based upon our eligible accounts receivable balances. 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 the Loan Agreement is payable monthly at a rate of one percent in excess
of the prime rate. On December 31, 2000, $500,000 was outstanding under the
Loan Agreement. We were not in compliance with certain covenants under the Loan
Agreement at December 31, 2000; however, we obtained a waiver on these covenants
through February 28, 2001 from Silicon Valley Bank.
On May 4, 2000, we entered into a Private Equity Line Agreement (the
"Equity Line") with Kingsbridge Capital. 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 ("SEC"),
registering the shares that Kingsbridge may receive from us for resale to the
public. In order to activate the Equity Line, on July 19, 2000 we filed a
Registration Statement on Form S-1 with the SEC to register the shares we may
issue to Kingsbridge under this Equity Line and on November 13, 2000 the
Registration 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 conditions will be such that the Equity Line
will be available to us, we cannot be sure of this.
Our operating activities used cash of $2,675,000 and $2,021,000 for the
nine months ended December 31, 1999 and 2000, respectively. For the nine months
ended December 31, 1999, cash was used primarily to fund our operating loss, to
support an increase in accounts receivables, and to support an increase in
inventory. For the nine months ended December 31, 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 will be sufficient to meet our cash requirements at least
through the middle of fiscal year 2002.
As of December 31, 2000, we had cash and cash equivalents of $2,336,000 and
working capital of $1,121,000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to financial market risk is confined to cash and cash
equivalents. We invest cash and cash equivalents in money market funds, which
have maturities of less than three months. These securities are not leveraged,
and are, due to their very short term nature, subject to minimal interest rate
risk.
13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
On December 5, 2000, we filed in the United State District Court in the
Northern District of California San Jose Division, a Complaint for Injunctive
Relief and Damages; Demand for Jury Trial, against Spruce Technologies, Inc.,
and Kirk E. Paulsen (Case No. C00-21224 JW ADR). On December 13, 2000, we filed
a Form 8-K to disclose the filing and included a copy of the full complaint as
an attachment to the Form.
14
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 February, 2001.
SONIC SOLUTIONS
Signature Date
--------- ----
/s/ Robert J. Doris February 14, 2001
- ----------------------------------------------------------
Robert J. Doris
President and Director (Principal Executive Officer)
/s/ A. Clay Leighton February 14, 2001
- ----------------------------------------------------------
A. Clay Leighton
Senior Vice President of Worldwide Operations and
Finance and Chief Financial Officer
(Principal Financial Accounting Officer)
15