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, 1998 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 30,
1998, was 8,443,091.
- --------------------------------------------------------------------------------
1
SONIC SOLUTIONS
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Balance Sheets as of March 31, 1998
and June 30, 1998.............................. 3
Condensed Statements of Operations for the
quarter ended June 30, 1997 and 1998........... 4
Condensed Statements of Cash Flows for the
quarter ended June 30, 1997 and 1998........... 5
Notes to Condensed Financial Statements........ 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 9
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.............. 15
Signatures.................................... 16
2
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Sonic Solutions
Condensed Balance Sheets
(in thousands, except share amounts)
1998
----------------------------
ASSETS March 31 June 30
------ -------- -------
(unaudited)
Current Assets:
Cash and cash equivalents........................................................... $ 2,479 2,048
Accounts receivable, net of allowances for returns and doubtful
accounts of $617 and $589 at March 31, 1998 and June 30,
1998, respectively................................................................. 3,198 3,083
Inventory............................................................................. 634 954
Prepaid expenses and other current assets............................................. 317 172
Refundable income taxes............................................................... 148 148
-------- -------
Total current assets.............................................................. 6,776 6,405
Fixed assets, net...................................................................... 2,766 2,577
Purchased and internally developed software costs, net................................. 2,944 2,838
Other assets........................................................................... 144 180
-------- -------
Total assets...................................................................... $ 12,630 12,000
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities............................................ $ 3,315 3,895
Bank note payable................................................................... 500 500
Deferred revenue and deposits....................................................... 1,036 1,039
Subordinated debt, current portion.................................................. 623 540
Current portion of obligations under capital leases................................. 138 140
-------- -------
Total current liabilities......................................................... 5,612 6,114
Subordinated debt, net of current portion.............................................. 1,364 1,387
Obligations under capital leases, net of current portion............................... 236 200
-------- -------
Total liabilities................................................................. 7,212 7,701
-------- -------
Commitments and contingencies
Shareholders' Equity:
Preferred stock, no par value, 30,000,000 shares authorized; 461,538
shares issued and outstanding at March 31, 1998
and June 30, 1998, respectively...................................................... 1,500 1,500
Common stock, no par value, 30,000,000 shares authorized; 8,302,230
and 8,443,091 shares issued and outstanding at March 31, 1998
and June 30, 1998, respectively...................................................... 15,204 15,420
Accumulated deficit.................................................................... (11,286) (12,621)
-------- -------
Total shareholders' equity........................................................ 5,418 4,299
-------- -------
Total liabilities and shareholders' equity.......................................... $ 12,630 12,000
======== =======
See accompanying Notes to Condensed Financial Statements.
3
Sonic Solutions
Condensed Statements of Operations
(in thousands, except per share amounts -- unaudited)
Quarter Ended June 30,
----------------------
1997 1998
------ ------
Net revenue............................................................. $ 5,924 4,235
Cost of revenue......................................................... 2,385 2,018
------- ------
Gross profit....................................................... 3,539 2,217
------- ------
Operating expenses:
Marketing and sales................................................ 1,952 1,761
Research and development........................................... 1,498 1,316
General and administrative......................................... 373 373
------- ------
Total operating expenses........................................... 3,823 3,450
------- ------
Operating loss..................................................... (284) (1,233)
Other expense........................................................... (121) (102)
------- ------
Loss before income taxes........................................... (405) (1,335)
Provision for income taxes.............................................. - -
------- ------
Net loss........................................................... $ (405) (1,335)
======= ======
Basic and diluted net loss per common share........................ ($0.05) (0.16)
======= ======
Shares used in computing per share amounts......................... 7,596 8,374
======= ======
See accompanying Notes to Condensed Financial Statements.
4
Sonic Solutions
Condensed Statements of Cash Flows
(in thousands -- unaudited)
Quarter Ended June 30,
------------------------
1997 1998
------ ------
Cash flows from operating activities:
Net loss........................................................................... ($405) (1,335)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization................................................... 491 634
Provision for returns and doubtful accounts..................................... 41 (28)
Changes in operating assets and liabilities:
Accounts receivable........................................................... (592) 143
Inventory..................................................................... (327) (320)
Refundable income taxes....................................................... 9 -
Prepaid expenses and other current assets..................................... 154 145
Other assets.................................................................. 139 (36)
Accounts payable and accrued liabilities...................................... 892 580
Deferred revenue and deposits................................................. 43 3
------- ------
Net cash provided by (used in) operating activities........................ 445 (214)
------- ------
Cash flows from investing activities:
Purchase of fixed assets........................................................... (419) (158)
Additions to purchased and internally developed software........................... (398) (181)
Purchase of short-term investments................................................. (2,513) -
------- ------
Net cash used in investing activities........................................... (3,330) (339)
------- ------
Cash flows from financing activities:
Proceeds from exercise of common stock options..................................... 3 4
Borrowings on line of credit....................................................... - 210
Repayments on line of credit....................................................... - (210)
Proceeds from equity line financing................................................ - 240
Redemption of warrants............................................................. - (28)
Repayments of subordinated debt.................................................... - (60)
Principal payments (proceeds) on capital leases.................................... 55 (34)
------- ------
Net cash provided by financing activities....................................... 58 122
------- ------
Net decrease in cash and cash equivalents............................................ (2,827) (431)
Cash and cash equivalents, beginning of period....................................... 4,806 2,479
------- ------
Cash and cash equivalents, end of period............................................. $ 1,979 2,048
======= ======
Supplemental disclosure of cash flow information:
Interest paid during period........................................................ $ 59 28
------- ------
Income taxes paid during period.................................................... $ 1 6
------- ------
Noncash financing and investing activities:
Assets acquired through capital lease............................................ $ 71 -
------- ------
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 the Company's Form
10-K for the year ended March 31, 1998, filed with the Securities and Exchange
Commission.
(2) BASIC AND DILUTED LOSS PER SHARE
The Financial Accounting Standards Board (FASB) recently issued SFAS No.
128, Earnings Per share. SFAS No. 128 requires the presentation of basic net
income per share, and for companies with complex capital structures, diluted net
income per share. Prior periods should be restated to conform to SFAS No. 128,
however, as the Company had a net loss in the prior period, basic and diluted
per share are the same as the previously presented primary loss per share.
Excluded from the computation of diluted loss per share for the quarter
ended June 30, 1998 are options to acquire 675,068 shares of common stock with a
weighted average exercise price of $2.82 because their effects would be anti-
dilutive.
The following table sets forth the computations of shares and net loss used
in the calculation of basic and diluted net loss per share for the quarters
ended June 30, 1997 and 1998 (in thousands, except per share data):
Quarter Ended June 30,
--------------------------------
1997 1998
-------- -------
Net loss........................................................... ($405) (1,335)
====== ======
Weighted average number of shares outstanding...................... 7,596 8,374
------ ------
7,596 8,374
Shares used in per share calculation.............................. ====== ======
Basic and diluted net loss per common share........................ ($0.05) (0.16)
====== ======
6
(3) INVENTORY
The components of inventory consist of (in thousands):
March 31, June 30,
--------- --------
1998 1998
----- -----
Raw materials........................................................... $ 468 725
Work-in-process......................................................... 130 208
Original equipment manufacturers goods.................................. 36 21
----- ----
$ 634 954
===== ====
(4) INCOME TAXES
The Company accounts for income taxes under the asset and liability method
of accounting. Under the asset and liability method, deferred tax assets and
liabilities are recognized based on the future tax consequences attributable to
differences between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases.
(5) INDUSTRY AND GEOGRAPHIC INFORMATION
The Company markets its products in the United States and in foreign
countries through its sales personnel, dealers, and distributors. Export sales
account for a significant portion of the Company's net revenue and are
summarized by geographic area as follows (in thousands):
June 30,
--------
1997 1998
----- ------
North America............................ $2,458 2,175
Export:
Europe.............................. 1,391 1,252
Pacific Rim......................... 1,633 778
Other international................. 442 30
------ -----
Total net revenue $5,924 4,235
====== =====
Foreign based assets were insignificant as of March 31, 1998 and June 30,
1998.
(6) NEW ACCOUNTING PRONOUNCEMENTS
SFAS 131 "Disclosures About Segments of an Enterprise and Related
Information", is effective for years beginning after December 15, 1997. The
Company will adopt this standard at fiscal year end, as it is not required for
interim reporting.
SFAS No. 130 establishes standards for the reporting and disclosure of
comprehensive income and its components which will be presented in association
with a company's financial statements. Comprehensive income is defined as the
change in a business enterprise's equity during a period arising from
transactions, events or circumstances relating to nonowner sources, such as
foreign currency
7
translation adjustments and unrealized gains or losses on available-for-sale
securities. It includes all changes in equity during a period except those
resulting from investments by or distributions to owners. It is expected that
the effects of this standard will not have a material effect on the operations
of the Company.
In October 1997, the American Institute of Certified Public Accountants issued
SOP 97-2, Software Revenue Recognition. The statement provides specific
industry guidance and stipulates that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post contract customer support, installation, or training. Under
SOP 97-2, the determination of fair value is based on objective evidence which
is specific to the vendor. If such evidence of fair value for each element of
the arrangement does not exist, all revenue from the arrangement is deferred
until such time that evidence of fair value does exist or until all elements of
the arrangement are delivered. Revenue allocated to software products,
specified upgrades and enhancements is generally recognized upon delivery of the
related products, upgrades and enhancements. Revenue allocated to post contract
customer support is generally recognized ratably over the term of the support,
and revenue allocated to service elements is generally recognized as the
services are performed. SOP 97-2 has been adopted by the Company effective
April 1, 1998 and is not expected to have any material effect on revenue
recognition.
(7) IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that has date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could potentially result
in a system failure or miscalculations causing disruptions of operations
including among other things, a temporary inability to process transactions,
send invoices, or engage in other similar normal business activities. The
Company has ensured that its software is already year 2000 compliant and that
the current versions of its product lines are year 2000 compliant, and as such
this issue is not expected to have a material effect on the operations of the
Company. Nevertheless, the Company cannot predict the effect of the year 2000
problem on the vendors, customers and other entities with which the Company
transacts business, or with whose products the Company's products interact and
there can be no assurance that the effect of the year 2000 issue on such
entities will not adversely effect the Company's operations. The Company
believes that all current versions of its product lines are Year 2000 compliant.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW; CERTAIN FACTORS THAT MAY IMPACT FUTURE RESULTS
The Company commenced shipments of its Digital Audio Workstation, the
SonicStudio, in the first calendar quarter of 1989. Sales of the SonicStudio
product line including Sonic developed software and Sonic manufactured hardware,
third party developed software and hardware peripheral devices and associated
maintenance fees, together with sales of Sonic MediaNet accounted for virtually
all of the Company's net revenue during the three fiscal years ended March 31,
1996, approximately 50% of the Company's net revenue during the fiscal year
ended March 31, 1997 and approximately 40% of the Company's net revenue during
the fiscal year ended March 31, 1998. The Company believes there is little
growth in the overall market for professional audio equipment. Sales of
products by Sonic have depended upon the substitution of digital audio
workstations for other existing technologies, and Sonic's ability to maintain or
increase sales will continue to depend in large part on the continued
substitution of digital audio workstations for other technologies. In June,
1996, the Company began shipments of its DVD Creator system. The Company's
future success will depend in large part on sales of the DVD Creator system and
related products which accounted for approximately 50% of the Company's net
revenue in the fiscal year ended March 31, 1997, and approximately 60% of the
Company's net revenue in the fiscal year ended March 31, 1998. In June, 1998,
the Company began shipments of its DesktopDVD system. Sales of DVD Creator
systems, DesktopDVD systems and related products accounted for approximately 57%
of the Company's net revenue in the first quarter ended June 30, 1998.
SonicStudio is an integrated assembly of software, signal processing cards and
other Sonic manufactured hardware, as well as peripheral devices such as disk
drives and CD printers which are purchased as complete or largely complete
devices from other manufacturers. SonicStudio is integrated with a Macintosh
computer which is not typically provided by the Company. For the fiscal years
ended March 31, 1996, 1997 and 1998, the percentage of net revenue of peripheral
devices has declined from approximately 20% to 2% to 0% as the Company has de-
emphasized the sale of OEM hardware.
In February of 1994, the Company began shipments of Sonic MediaNet, a high
performance, fully distributed networking system designed specifically to handle
digital audio, digital video, high resolution graphics and other multimedia data
types, for use with applications other than SonicStudio. In the fiscal years
ended March 31, 1996, 1997 and 1998, Sonic MediaNet net revenue constituted
approximately 16%, 9% and 4% of Company net revenue.
DVD Creator is a premastering system for DVD discs incorporating the three
functions necessary to produce a finished DVD premaster image: video encoding,
audio encoding and authoring. DVD Creator is sold both as a single workstation
or as a workgroup with separate subsystems linked together via the Company's
Sonic MediaNet networking system. During June, 1996, the Company began shipping
the first installation phase of the DVD Creator system.
In June, 1998, the Company introduced and began shipments of its DesktopDVD
system. Sonic DesktopDVD is the first DVD production system designed
specifically for corporate applications. DesktopDVD is designed to meet the
needs of customers who wish to create DVD-based client presentations,
merchandising and promotional materials, advertising comps, consumer kiosks,
interactive training and multimedia productions. Sonic DesktopDVD is a single
workstation which includes MPEG variable bit-rate and constant bit-rate video
encoding and Dolby Digital stereo audio encoding which make use of on-board, DSP
and RISC multi-processing technology. The introduction and acceptance of
DesktopDVD is subject to a number of risks related to hardware and software
development, marketing, distribution and sales programs, and customer support.
The introduction of the DesktopDVD system involves the release of new plugin
processor cards and other hardware to support audio and video encoding and
decoding. As with any new high-technology product, there can be no assurance
that, despite testing by the Company, customers will not find errors or "bugs"
in the hardware or application
9
software after the systems have been installed in the field. These errors or
bugs could cause delays in future shipment of DesktopDVD systems or require
design modifications which could adversely affect the Company's competitive
position and results of operations. There also can be no assurance that the
Company has correctly identified the corporate opportunity or that the Company
will be able to establish the necessary distribution channels to sell and
support DesktopDVD and other systems for corporate applications. If the Company
has failed to correctly identify the corporate opportunity, or fails to develop,
market, sell or support the product, the Company's results of operations could
be materially adversely affected.
The Company's quarterly operating results vary significantly depending on the
timing of new product introductions and enhancements by the Company and its
competitors and on the volume and timing of orders, which are difficult to
forecast. Customers generally order on an as-needed basis, and the Company
normally ships products within one week after receipt of an order. The results
of operations for any quarter are not necessarily indicative of the results to
be expected for any future period. A disproportionate percentage of the
Company's quarterly net revenue is typically generated in the last few weeks of
the quarter. A significant portion of the Company's operating expenses is
relatively fixed, and planned expenditures are based primarily on sales
forecasts. As a result, if revenue generated in the last few weeks of a quarter
do not meet with the Company's forecast, operating results may be materially
adversely affected.
The Company capitalizes a portion of its software development costs in
accordance with Statement of Financial Accounting Standard No. 86. Such 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 first quarter ended June 30,
1997 and 1998:
Quarter Ended June 30
--------------------------
1997 1998
------ ------
Net revenue..................... 100.0% 100.0%
Cost of revenue................. 40.3 47.6
----- ------
Gross profit.................... 59.7 52.4
Operating expenses:
Marketing and sales......... 33.0 41.6
Research and development.... 25.2 31.1
General and administrative.. 6.3 8.8
----- ------
Total operating expenses........ 64.5 81.5
----- ------
Operating loss.................. (4.8) (29.1)
Other expense................... (2.0) (2.4)
Provision for income taxes...... 0.0 0.0
----- ------
Net loss........................ (6.8)% (31.5)%
===== ======
COMPARISON OF FIRST QUARTERS ENDED JUNE 30
NET REVENUE. Net revenue decreased from $5,924,000 for the first quarter
ended June 30, 1997 to $4,235,000 for the first quarter ended June 30, 1998,
representing a decrease of 28.5%. The decrease in revenue is primarily due to
the decrease in sales of DVD systems. In the quarter ending June 1997, the
Company experienced strong demand for its DVD Creator systems due to the
beginning of the launch of consumer DVD players and titles in the first half of
1997. In the quarter ending June 1998, the Company began shipments of its
DesktopDVD systems, but was unable to produce enough systems to fill all the
orders it received. The Company also experienced a decline in sales of
SonicStudio systems.
International sales accounted for 58.5% and 48.6% of net revenue for the first
quarter ended June 30, 1997 and 1998, respectively. See Note 5 of Notes to
Condensed Financial Statements. International sales as a percentage of net
revenue decreased primarily due to weakness in the Pacific Rim economies. The
Company expects that international sales will continue to represent a
significant percentage of future revenue.
COST OF REVENUE. Cost of revenue, as a percentage of net revenue, increased
from 40.3% for the first quarter ended June 30, 1997 to 47.6% for the first
quarter ended June 30, 1998. Cost of revenue for the first quarter ended June
30, 1998 increased primarily due to increased software amortization charges,
and expedite and other charges associated with the first build of the DesktopDVD
systems.
MARKETING AND SALES. Marketing and sales expenses decreased from $1,952,000
for the first quarter ended June 30, 1997 to $1,761,000 for the first quarter
ended June 30, 1998. Marketing and sales represented 33.0% and 41.6% of net
revenue for the first quarter ended June 30, 1997 and 1998, respectively. The
Company's marketing and sales headcount decreased from thirty-four at June 30,
1997 to twenty-eight at June 30, 1998. Included in the marketing and sales
expense is dealer and employee commission expense, which as a percentage of net
revenue was constant at about 5.6% of revenue for the first quarter ended June
30, 1997 and for the first quarter ended June 30, 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased from
$1,498,000 for the first quarter ended June 30, 1997 to $1,316,000 for the first
quarter ended June 30, 1998.
11
Research and development expenses represented 25.2% and 31.1% of net revenue for
the first quarter ended June 30, 1997 and 1998, respectively. The Company
capitalizes a portion of its software development costs in accordance with
Statement of Financial Accounting Standards No. 86. Research and development
expenses decreased in dollar amount primarily due to decreases in headcount and
consulting and prototype expenses. Headcount for research and development
decreased from thirty-seven at June 30, 1997 to twenty-six at June 30, 1998.
Consulting and prototype expenses were incurred in association with the
development of the DVD Creator system during the first quarter ended June 30,
1997 and in association with the development of the DesktopDVD system during the
first quarter ended June 30, 1998. Consulting and prototype expenses can
fluctuate significantly from period to period depending upon the status of
hardware development projects.
GENERAL AND ADMINISTRATIVE. General and administrative expense was $373,000
for the first quarter ended June 30, 1997 and $373,000 for the first quarter
ended June 30, 1998. General and administrative expenses represented 6.3% and
8.8% of net revenue for the first quarter ended June 30, 1997 and 1998,
respectively. The Company anticipates that general and administrative expenses
will increase in the future as the Company's operations expand.
OTHER EXPENSE. Other expense for the first quarter ended June 30, 1997 and
1998 was primarily due to the interest expense associated with the debt
financing agreements with entities associated with Hambrecht & Quist and with
borrowings under the bank line of credit, which was partially offset by the
interest income received on investments. Also included in other expense for the
first quarter ended June 30, 1998 was an amount due to Hambrecht & Quist for
dividend payments due on outstanding preferred stock.
PROVISION FOR INCOME TAXES. In accordance with Statement of Financial
Accounting Standards No. 109, no provision was made for incomes taxes for the
first quarter ended June 30, 1997 and 1998, respectively. A valuation allowance
has been provided for deferred tax assets for which recovery would depend upon
future taxable income. During the fiscal year ended March 31, 1996, the Company
exhausted its loss carryback capabilities, therefore, no benefit was recorded
for the first quarter ended June 30, 1997 and 1998.
LIQUIDITY AND CAPITAL RESOURCES. In December, 1996, the Company entered into
a Loan and Security Agreement with Silicon Valley Bank. The current agreement
provides for up to $1,500,000 in available borrowings based upon the Company's
eligible accounts receivable balances, and expires in May, 1999. This Agreement
provides for a variety of covenants, including among other things, that the
Company maintain certain financial ratios and is collateralized by a security
interest in substantially all of the Company's assets. Interest on borrowings
under this agreement is payable monthly at a rate between three-quarters percent
and two and one half percent in excess of the prime rate. On June 30, 1998
$500,000 was outstanding.
In December, 1996, the Company obtained a $5,100,000 financing facility with
entities associated with Hambrecht & Quist. The facility included subordinated
debt and equipment financing. In December, 1996, the Company received
$3,000,000 from Hambrecht & Quist Transition Capital, LLC and $1,100,000 from
Hambrecht & Quist Guaranty Finance, LLC, pursuant to the above facility. The
remaining $1,000,000 was a master lease line for financing of future capital
asset purchases. The facility with the Hambrecht & Quist entities is secured by
an interest in the Company's fixed assets and substantially all of the assets of
the Company subordinate to the Silicon Valley Bank Agreement. In connection
with the financing facility, the Company issued warrants to purchase 260,200
common shares to entities associated with Hambrecht & Quist. Under the original
agreement, the Hambrecht & Quist entities could exercise their warrants with
respect to 130,100 shares at an exercise price of $10.00 at any time on or
before December 24, 2004, and with respect to 130,100 shares at an exercise
price of $7.00 at any time on or after December 24, 1997 and before December 24,
2004. In December, 1997, the Hambrecht and Quist entities exercised their
warrants with respect to 130,100 shares at an exercise price of $7.00 per share
on a "net exercise" basis. Based on the "net exercise" provisions of the
warrant, the Hambrecht & Quist entities received 40,266 shares of the Company's
Common Stock. The Company recorded $549,000 of deferred interest, which is being
amortized to interest expense over the term of the financing facility,
12
attributable to the value of the warrants. The value of the warrants was
estimated using the following assumptions for fiscal 1998 and 1997; volatility
of .75, risk free interest rate of 6.3% and expected life equal to the
contractual terms.
In December, 1997, the Company secured a $7,000,000 equity-based line of
credit. Under this arrangement, the Company has the right to draw up to a total
of $7,000,000 in cash in exchange for the Company's common stock. Pricing of
the common stock issued will be based on the market price of the Company's
common stock at the time of a draw. The timing and amount of individual draws
are at the sole discretion of the Company, subject to a number of conditions.
The line will remain in place for a period of approximately 24 months. The
Company filed a registration statement for the resale of shares issued under
this arrangement in January, 1998. During the fiscal year ended March 31, 1998,
the Company drew down $1,450,000 on this equity-based line of credit and issued
606,130 shares of common stock. During the quarter ended June 30, 1998, the
Company drew down $250,000 on this equity-based line of credit and issued
107,170 shares of common stock.
In March, 1998, the Company renegotiated its financing arrangement with
Hambrecht & Quist Guaranty Finance. The agreements reached involve the
restructuring of $3,000,000 debt into $1,500,000 of convertible preferred stock
and $1,500,000 of lower interest debt due in October 1999. The Company filed a
Form S-3 Registration Statement under the Securities Act of 1933 to register the
resale of the 461,538 shares of the Company's Common Stock which underlie the
Series C Preferred Stock issued to Hambrecht & Quist Guaranty Finance. In
connection with the agreement, the exercise price of 90,000 of the $10.00
warrants issued in connection with the original arrangement reached in December
1996 was lowered to $3.25. In June, 1998, 90,000 of the $3.25 warrants were
exercised on a "net exercise" basis, and the warrant holder received 29,691
shares of Common Stock.
The Company's operating activities have generated cash of $445,000 in the
first quarter ended June 30, 1997 and used cash of $214,000 in the first quarter
ended June 30, 1998. Cash was generated in the first quarter ended June 30, 1997
primarily due to increase in trade payables. Cash was used in the first quarter
ended June 30, 1998 primarily to fund the operating loss, which was partially
offset by the raising of $250,000 of equity through the equity line of credit.
The management of the Company believes that existing cash, cash equivalents and
short term investments, cash generated from operations, and cash available from
the equity based line of credit will be sufficient to meet the Company's cash
and investment requirements at least through the first quarter of fiscal 2000.
As of June 30, 1998, the Company had cash and cash equivalents of $2,048,000
and net working capital of $291,000.
IMPACT OF YEAR 2000 ISSUE. The year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could potentially result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in other similar normal business activities. The Company has ensured that its
software is already year 2000 compliant, as such this issue is not expected to
have a material effect on the operations of the Company. Nevertheless, the
Company cannot predict the effect of the year 2000 problem on the vendors,
customers and other entities with which the Company transacts business, or with
whose products the Company's products interact and there can be no assurance
that the effect of the year 2000 issue on such entities will not adversely
effect the Company's operations. The Company believes that all current versions
of its product lines are Year 2000 compliant.
FORWARD LOOKING STATEMENTS. Certain statements in this Form 10-Q, including
statements contained herein under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations", constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements express or implied by such forward-
looking statements. Such factors include, but are not
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limited to the following: general economic and business conditions; charges and
costs related to acquisitions; and the ability of the Company to develop and
market products for the markets in which it operates, to successfully integrate
its acquired products and services, to adjust to changes in technology, customer
preferences, enhanced competition and new competitors in the markets in which it
operates.
This Management's discussion and analysis should be read in conjuction with
the Management's discussion and analysis that accompanies the Company's report
on Form 10-K for the fiscal year ended March 31, 1998.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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 12th day of August, 1998.
SONIC SOLUTIONS
Signature Date
--------- ----
/s/ Robert J. Doris August 12, 1998
- -----------------------------
Robert J. Doris
President and Director (Principal
Executive Officer)
/s/ A. Clay Leighton August 12, 1998
- -----------------------------
A. Clay Leighton
Vice President of Finance and
Chief Financial Officer (Principal
Financial Accounting Officer)
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