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, 2001 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,
2002, was 14,768,897.
================================================================================
SONIC SOLUTIONS
FORM 10-Q
For the quarterly period ended December 31, 2001
Table of Contents
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Balance Sheets as of March 31, 2001
and December 31, 2001 .......................................... 1
Condensed Statements of Operations for the
three and nine months ended December 31, 2000 and 2001 ......... 2
Condensed Statements of Cash Flows for the
three and nine months ended December 31, 2000 and 2001 ......... 3
Notes to Condensed Financial Statements ........................ 4
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .................. 9
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk .................................................... 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings .............................................. 14
ITEM 2. Changes in Securities and Use of Proceeds ...................... 14
ITEM 6. Exhibits and Reports on Form 8-K ............................... 14
Signatures ..................................................... 15
ii
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Sonic Solutions
Condensed Balance Sheets
(in thousands, except share amounts)
2001
---------------------------
ASSETS March 31 December 31
------ ---------- -----------
(unaudited)
Current Assets:
Cash and cash equivalents .................................................. $ 1,616 10,862
Accounts receivable, net of allowance for returns and doubtful
accounts of $1,005 and $845 at March 31, 2001 and December 31,
2001, respectively ..................................................... 4,185 2,676
Inventory .................................................................. 492 519
Prepaid expenses and other current assets .................................. 448 401
---------- -----------
Total current assets ....................................................... 6,741 14,458
Fixed assets, net .............................................................. 1,333 855
Purchased and internally developed software costs, net ......................... 3,094 2,372
Other assets ................................................................... 570 465
---------- -----------
Total assets ........................................................... $ 11,738 18,150
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities ............................... $ 4,621 4,498
Deferred revenue and deposits .......................................... 1,595 10,657
Subordinated debt ...................................................... 57 0
Current portion of obligations under capital leases .................... 10 0
---------- -----------
Total current liabilities .............................................. 6,283 15,155
---------- -----------
Commitments and contingencies
Shareholders' Equity:
Convertible preferred stock, no par value, 10,000,000 shares authorized; 700,000
and 974,553 shares issued and outstanding at March 31, 2001 and
December 31, 2001, respectively .............................................. 1,750 2,832
Common stock, no par value, 30,000,000 shares authorized; 13,056,646 and
14,477,666 shares issued and outstanding at March 31, 2001 and
December 31, 2001, respectively .............................................. 28,399 29,749
Accumulated deficit ............................................................ (24,694) (29,586)
---------- -----------
Total shareholders' equity ............................................. 5,455 2,995
---------- -----------
Total liabilities and shareholders' equity ............................. $ 11,738 18,150
========== ===========
See accompanying notes to condensed statements.
1
Sonic Solutions
Condensed Statements of Operations
(in thousands, except share amounts - unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
December 31, December 31,
------------ ------------
2000 2001 2000 2001
---- ---- ---- ----
Net revenue .......................................................... $ 3,378 4,120 12,468 12,298
Cost of revenue ...................................................... 1,224 1,335 4,580 4,092
--------- --------- --------- ---------
Gross profit ................................................. 2,154 2,785 7,888 8,206
--------- --------- --------- ---------
Operating expenses:
Marketing and sales .......................................... 1,976 2,030 6,667 6,416
Research and development ..................................... 1,156 1,480 3,960 4,355
General and administrative ................................... 544 543 1,850 1,505
Business integration ......................................... 0 75 0 705
--------- --------- --------- ---------
Total operating expenses ..................................... 3,676 4,128 12,477 12,981
--------- --------- --------- ---------
Operating loss ............................................... (1,522) (1,343) (4,589) (4,775)
Other expense, net ................................................... (27) (122) (101) (117)
--------- --------- --------- ---------
Loss before income taxes ..................................... (1,549) (1,465) (4,690) (4,892)
Provision for income taxes ........................................... 0 0 0 0
--------- --------- --------- ---------
Net loss ..................................................... (1,549) (1,465) (4,690) (4,892)
Dividends paid to preferred shareholders ............................. 0 40 8 70
--------- --------- --------- ---------
Net loss applicable to common shareholders ................... $ (1,549) (1,505) (4,698) (4,962)
========= ========= ========= =========
Basic and diluted loss per share applicable to common
shareholders ............................................. $ (0.13) (0.10) (0.38) (0.36)
========= ========= ========= =========
Weighted average shares used in computing per share
amounts .................................................. 12,351 14,437 12,301 13,968
========= ========= ========= =========
See accompanying notes to condensed statements.
2
Sonic Solutions
Condensed Statements of Cash Flows
(in thousands -- unaudited)
Nine Months Ended
-----------------
December 31,
------------
2000 2001
---- ----
Cash flows from operating activities:
Net loss ......................................................................... $ (4,690) (4,892)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization .................................................... 1,671 1,910
Provision for returns and doubtful accounts, net of write-offs ................... 165 (160)
Interest expense amortization .................................................... 117 2
Changes in operating assets and liabilities:
Accounts receivable .......................................................... 917 1,669
Inventory .................................................................... 282 (27)
Prepaid expenses and other current assets .................................... 109 47
Other assets ................................................................. (67) 105
Accounts payable and accrued liabilities ..................................... (355) (123)
Deferred revenue and deposits ................................................ (170) 9,062
--------- ---------
Net cash provided by (used in) operating activities ...................... (2,021) 7,593
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets ..................................................... (304) (308)
Additions to purchased and internally developed software ..................... (405) (402)
--------- ---------
Net cash used in investing activities .................................... (709) (710)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of common stock options ............................... 82 140
Borrowings on line of credit ................................................. 500 0
Proceeds (costs) associated with equity line financing ....................... (124) 1,292
Proceeds from issuance of preferred stock .................................... 0 1,000
Payment of dividends ......................................................... (8) 0
Repayments of subordinated debt .............................................. (502) (59)
Principal payments on capital leases ......................................... (61) (10)
--------- ---------
Net cash provided by (used in) financing activities ...................... (113) 2,363
--------- ---------
Net increase (decrease) in cash and cash equivalents ............................. (2,843) 9,246
Cash and cash equivalents, beginning of period ................................... 5,179 1,616
--------- ---------
Cash and cash equivalents, end of period ......................................... $ 2,336 10,862
========= =========
Supplemental disclosure of cash flow information:
Interest paid during period .................................................. $ 33 2
--------- ---------
Noncash financing and investing activities:
Issuance of preferred stock dividend ........................................ 0 70
--------- ---------
Conversion of preferred stock to common stock ............................... 506 0
--------- ---------
See accompanying notes to condensed financial statements.
3
Sonic Solutions
Notes to Condensed Financial Statements
(unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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 Solution's Form 10-K for the year ended March 31, 2001, filed with the
Securities and Exchange Commission ("SEC").
Revenue Recognition
We have adopted Statement of Position ("SOP") 97-2, Software Revenue
Recognition, as amended by SOP 98-9, Software Revenue Recognition, with Respect
to Certain Arrangements. SOP 97-2 generally requires revenue earned of software
arrangements involving multiple elements such as software products, upgrades,
enhancements, post-contract customer support, installation and training to be
allocated to each element based on the relative fair values of the elements. The
fair value of an element must be based on vendor-specific objective evidence.
SOP 98-9 requires recognition of revenue using the "residual method" in a
multiple element arrangement when fair value does not exist for one or more of
the delivered elements in the arrangement. Under the "residual method", the
total fair value of the undelivered element is deferred and subsequently
recognized in accordance with SOP 97-2. The difference between the total
software arrangement fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements. Deferred revenue, which
primarily relates to maintenance and support, is recognized ratably over the
term of the maintenance contract.
If the arrangement involves significant production, customization, or
modification of software essential to the functionality of the software, the
revenue is generally recognized under the percentage-of-completion method of
contract accounting. Progress toward completion is generally measured by
achieving certain standards and objectively verifiable milestones present in
each project.
(2) Basic and diluted loss per share
As of December 31, 2000 and 2001, potentially dilutive shares totaling
1,034,943 and 3,772,578, 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.
4
(3) Inventory
The components of inventory consist of (in thousands):
March 31, December 31,
--------- ------------
2001 2001
---- ----
Finished goods ................................. $ 182 254
Work-in-process ................................ 48 0
Raw materials .................................. 262 265
----- ----
$ 492 519
===== ====
(4) Credit Facility
On May 4, 2000, we entered into a private equity line agreement with
Kingsbridge Capital Limited ("Kingsbridge"). 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, at the approximate
time of a draw, discounted by an amount 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. On July 19, 2000, we filed a
registration statement on From S-1 to register for resale the shares we may
issue to Kingsbridge under the private equity line 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. During the first nine months ended
December 31, 2001, we drew down $1,400,000 from the equity line for which we
issued 1,337,270 shares of common stock. As of December 31, 2001, we could still
issue an additional 849,307 shares under this private equity line agreement.
(5) Equity Financing - Convertible Preferred Stock
In December 2001, we issued 250,000 shares of Series E Convertible
Preferred Stock (the Preferred Stock) to Sanshin Electronics Co., Ltd.
("Sanshin") in conjunction with their $1 million equity investment in Sonic
Solutions on December 3, 2001. In addition to the equity investment, it was
agreed that the distributor agreement by and between Sanshin and Sonic Solutions
would be extended. The rights, preferences, and privileges of the holders of the
Preferred Stock are as follows:
. Dividends are cumulative and are payable only upon declaration by Sonic
Solutions' Board of Directors at an annual rate of $0.16 per share, until
such shares have been converted into common stock. Such distributions shall
be payable quarterly in arrears for each calendar quarter of each fiscal
year.
. Holders have a liquidation preference of $4.00 per share plus all accrued
but unpaid dividends, in the event of any liquidation, dissolution or
winding up of the corporation, either voluntary or involuntary.
. Each share has voting rights equal to the number of shares of common stock
into which such shares could be converted.
5
. Each share is convertible at any time into one share of common stock
subject to certain antidilution provisions.
(6) Significant Customer Information and Segment Reporting
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," 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 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
statements 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:
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- -------------------
2000 2001 2000 2001
--------- -------- -------- --------
Revenues
DVD creation software $ 690 1,632 1,663 4,107
Professional systems 2,688 2,488 10,805 8,191
------- ------ ------- -------
Total net revenue $ 3,378 4,120 12,468 12,298
======= ====== ======= =======
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.
6
Revenues by Geographic Location:
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- -------------------
2000 2001 2000 2001
--------- -------- -------- --------
North America $ 1,857 2,345 6,690 6,462
Export:
Europe 1,145 669 3,737 2,474
Pacific Rim 374 1,056 2,017 3,282
Other international 2 50 24 80
------- ----- ------ ------
Total net revenue $ 3,378 4,120 12,468 12,298
======= ===== ====== ======
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:
Revenues Revenues
-------- --------
Three Months Ended Nine Months Ended
December 31, December 31,
2000 2001 2000 2001
------ ------ ------ ------
Customer A 8% 7% 8% 7%
Customer B 8% 2% 14% 6%
Customer C 0% 11% 0% 10%
Customers B and C are also current distributors and shareholders of the company.
(7) Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 143, "Accounting for Asset Retirement Obligations"
("SFAS No. 143"), in August 2001, and Statement of Financial Accounting Standard
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
No. 144"), in October 2001. SFAS No. 143 requires that the fair value of an
asset retirement obligation be recorded as a liability in the period in which it
incurs a legal obligation. SFAS No. 144 serves to clarify and further define the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". SFAS No. 144 does not apply to
goodwill and other intangible assets that are not amortized. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002 and SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. Sonic Solutions
expects to adopt SFAS No. 144 effective January 1, 2002, and SFAS No. 143
effective January 1, 2003. The effect of adopting these statements is not
expected to have a material effect on Sonic Solutions' consolidated financial
position or results of operations.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations be accounted for
under the purchase method for business combinations initiated after June 30,
2001 and for which the date of acquisition is July 1, 2001 or later. Use of the
pooling-of-interest method is no longer permitted. SFAS No. 141 also specifies
7
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill. SFAS No. 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 must be adopted
starting with fiscal years beginning after December 15, 2001. The impact of
adopting SFAS No. 141 and SFAS No. 142 on Sonic Solutions has not been
determined.
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 adopted SFAS No. 133 in the first
quarter of fiscal year 2002. SFAS No. 133 did not have a material impact on our
financial statements.
(8) Subsequent Event
During January 2002, we drew down $1,000,000 from the Kingsbridge equity
line for which we issued 159,276 shares of common stock.
8
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, 2001 and our other
filings with the Securities and Exchange Commission.
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 for our professional systems product line
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 do not have an order backlog which
can assist us in forecasting results. For all these reasons, our results of
operations for our professional systems product line for any quarter are a poor
indicator of the results to be expected in any future quarter.
A large portion of our quarterly professional systems 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 does
not meet our forecast, operating results can be very negatively affected.
9
Results of Operations
The following table sets forth certain items from Sonic Solutions'
statements of operations as a percentage of net revenue for the three and nine
months ended December 31, 2000 and 2001:
Three Months Ended Nine Months Ended
------------------ -----------------
December 31, December 31,
------------ ------------
2000 2001 2000 2001
---- ---- ---- ----
Net revenue .............................. 100.0% 100.0 100.0 100.0
Cost of revenue .......................... 36.2 32.4 36.7 33.3
----- ----- ----- ------
Gross profit ............................. 63.8 67.6 63.3 66.7
Operating expenses:
Marketing and sales ................. 58.5 49.3 53.5 52.2
Research and development ............ 34.2 35.9 31.8 35.4
General and administrative .......... 16.1 13.2 14.8 12.2
Business integration ................ 0.0 1.8 0.0 5.7
----- ----- ----- -----
Total operating expenses ................. 108.8 100.2 100.1 105.5
----- ----- ----- -----
Operating loss ........................... (45.0) (32.6) (36.8) (38.8)
Other expense ............................ (0.8) (3.0) (0.8) (1.0)
Provision for income taxes ............... 0.0 0.00 0.0 0.00
----- ----- ----- -----
Net loss ................................. (45.8)% (35.6) (37.6) (39.8)
===== ===== ===== =====
Comparison of Three Months and Nine Months Ended December 31
NET REVENUE. Our net revenue increased from $3,378,000 for the third
quarter ended December 31, 2000 to $4,120,000 for the third quarter ended
December 31, 2001, representing an increase of 22%. For the nine months ended
December 31, 2001, net revenue decreased from $12,468,000 to $12,298,000
compared to the same period in the prior fiscal year, representing a decrease of
1%. The increase in revenue for the three months ended December 31, 2001 is due
primarily to the increase in sales of our DVD creation software products. Sales
of our DVD creation software products increased from $690,000 to $1,632,000 for
the third quarter ended December 31, 2001, representing an increase of 137%. Our
professional systems sales decreased from $2,688,000 to $2,488,000 for the third
quarter ended December 31, 2001, representing a decrease of 7%. Decreases in
sales of our professional system products were partially offset in the third
quarter ended December 31, 2001 by sales of Daikin Industries, Ltd. ("Daikin")
related products which we acquired in February, 2001. Beginning with the
December 2001 quarter, we recognized a new revenue stream associated with
customization and development contracts. Although the revenue recognized from
this new stream accounted for less than 10% of total revenue, we anticipate
strong revenue growth in this area in the future quarters.
The decrease in revenue for the nine months ended December 31, 2001 is
primarily due to the decrease in our professional systems sales which decreased
from $10,805,000 to $8,191,000, representing a decrease of 24%. Decreases in
sales of our professional system products were partially offset for the nine
months ended December 31, 2001 by sales of the Daikin related products. The
decrease was also partially offset by the increase in revenue in sales of our
DVD creation software products. Our DVD creation software products increased
from $1,663,000 to $4,107,000 for the nine months ended December 31, 2001,
representing an increase of 147%. We anticipate that we could continue to
experience declines in sales of our professional systems in the future, however,
we anticipate continued growth in sales of our DVD creatio software products.
10
International sales accounted for 45.0% and 43.1% of our net revenue for
the third quarter ended December 31, 2000 and 2001, respectively. International
sales accounted for 46.3% and 47.5% of net revenue for the nine months ended
December 31, 2000 and 2001, respectively. See Note 6 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.
COST OF REVENUE. Our cost of revenue, as a percentage of net revenue
decreased from 36.2% for the third quarter ended December 31, 2000 to 32.4% for
the quarter ended December 31, 2001. Cost of revenue, as a percentage of net
revenue, decreased from 36.7% for the nine months ended December 31, 2000 to
33.3% for the nine months ended December 31, 2001. The decrease in cost of
revenue percentage is primarily due to the shift in sales product mix towards
higher margin DVD creation software sales and to the reduction of hardware as a
percentage of revenue in our professional systems. Additionally, the Daikin
products we acquired in February 2001 carry a higher margin as they are
primarily software products. We anticipate that in future periods we will
continue to experience reductions in our cost of revenue as a percentage of net
revenue, as our product mix continues to shift to sales of the higher margin
software-only products.
MARKETING AND SALES. Our marketing and sales expenses increased from
$1,976,000 for the third quarter ended December 31, 2000 to $2,030,000 for the
third quarter ended December 31, 2001. Marketing and sales expenses decreased
from $6,667,000 for the nine months ended December 31, 2000 to $6,416,000 for
the nine months ended December 31, 2001. Marketing and sales represented 58.5%
and 49.3% of net revenue for the third quarters ended December 31, 2000 and
2001, respectively, and 53.5% and 52.2% of net revenue for the nine months ended
December 31, 2000 and 2001, respectively. Our marketing and sales expenses
increased in the third quarter ended December 31, 2001 primarily due to
increases in advertising and marketing costs related to our DVD creation
software products. Our marketing and sales expenses decreased for the nine
months ended December 31, 2001 primarily due to a decrease in sales commissions
expense as a result of the shift in mix of sales. Our marketing and sales
headcount increased from forty-three at December 31, 2000 to forty-five at
December 31, 2001.
RESEARCH AND DEVELOPMENT. Our research and development expenses increased
from $1,156,000 for the third quarter ended December 31, 2000 to $1,480,000 for
the third quarter ended December 31, 2001 and increased from $3,960,000 for the
nine months ended December 31, 2000 to $4,355,000 for the nine months ended
December 31, 2001. Our research and development expenses represented 34.2% and
35.9% of net revenue for the quarters ended December 31, 2000 and December 31,
2001, respectively, and 31.8% and 35.4% of net revenue for the nine months ended
December 31, 2000 and 2001, respectively. Research and development expenses
increased for the third quarter and nine months ended December 31, 2001
primarily due to the increase in our headcount. Our research and development
headcount increased from thirty-one at December 31, 2000 to forty-six at
December 31, 2001.
GENERAL AND ADMINISTRATIVE. Our general and administrative expense remained
constant at $544,000 for the third quarter ended December 31, 2000 and $543,000
for the third quarter ended December 31, 2001 and decreased from $1,850,000 for
the nine months ended December 31, 2000 to $1,505,000 for the nine months ended
December 31, 2001. Our general and administrative expenses represented 16.1% and
13.2% of net revenue for the quarters ended December 31, 2000 and 2001,
respectively, and 14.8% and 12.2% of net revenue for the nine months ended
December 31, 2000 and 2001, respectively. Included in general and administrative
expenses for the nine months ended December 31, 2000 is a charge to provision
for returns and doubtful accounts of $170,000, taken in the quarter ended June
30, 2000, which represented an additional reserve for sales to audio
professionals and distributors who were experiencing liquidity difficulties due
to a decline in their business. Our general and administrative headcount has
remained constant with nine employees at December 31, 2000 and 2001. We
anticipate that general
11
and administrative expenses (exclusive of the bad debt expense) will increase in
the future as costs increase and our operations expand.
BUSINESS INTEGRATION EXPENSE. In conjunction with the Daikin acquisition
completed in February 2001, we incurred expenses to transition the business to
our management. As such, these expenses did not exist during the three or nine
months ended December 31, 2000. We now believe this transition has been
completed. Business integration expenses primarily consisted of engineering
consulting expenses per the consulting agreement we entered into with Daikin
dated February 27, 2001.
OTHER EXPENSE, NET. Other expense, net on our statement of operations for
the quarter and nine months ended December 31, 2001 includes a write-down on the
carrying amount of a preferred stock investment we held in an unrelated company,
partially offset by the interest we earned on cash balances and short term
investments. Other expense, net for the quarter and nine months ended December
31, 2000 includes primarily the interest and other financing charges related to
financing agreements we had with entities associated with Hambrecht & Quist
offset in part by the interest we earned on cash balances and short term
investments.
PROVISION FOR INCOME TAXES. In accordance with Statement of Financial
Accounting Standards No. 109, no provision was made for the quarters ended
December 31, 2000 and 2001 and no provision was made for income taxes for the
nine months ended December 31, 2000 and 2001.
LIQUIDITY AND CAPITAL RESOURCES. On May 4, 2000, we secured an equity-based
line of credit by entering into a private equity line agreement with
Kingsbridge. Under the private equity line agreement, we may draw up to
$20,000,000 worth of our common stock, but not to exceed that number of shares
of common stock which equals 19.9% of our outstanding shares. When we sell
shares to Kingsbridge the price per share is set by a formula at a discount from
the market price of our common stock around the time of the sale to Kingsbridge.
That discount ranges from 8% to 12%. Our ability to sell stock to Kingsbridge is
contingent upon a number of terms and conditions, including for example,
continued listing on NASDAQ, effectiveness of a registration statement,
continued accuracy of representations and warranties made to Kingsbridge and
lack of material adverse changes to our business. The quantity and timing of
sales that we are able to make under the private equity line agreement are also
limited by the market price and trading volume of our stock. Because of these
limitations the credit line arrangement, pursuant to the private equity line
agreement with Kingsbridge, may be unavailable or insufficient to meet our cash
needs in the future. On July 19, 2000 we filed a registration statement on Form
S-1 to register for resale the shares we may issue to Kingsbridge under this
credit line and on November 13, 2000 the registration statement became
effective. During the first quarter ended June 30, 2001, we drew $700,000 from
the credit line for which we issued 683,600 shares of common stock. During the
second quarter ended September 30, 2001, we drew $700,000 from the credit line
for which we issued 653,670 shares of common stock. No draws pursuant to the
private equity line agreement were made during the third quarter ended December
31, 2001. As of December 31, 2001, we could still issue an additional 849,307
shares under this private equity line agreement.
In December 2001, Sonic Solutions announced that Sanshin Electronics Co.,
Ltd. made a $1 million equity investment in Sonic Solutions on December 3, 2001.
Sanshin acquired 250,000 shares of Series E Preferred Stock which converts into
common stock at $4.00 per share and carries a cumulative dividend of 4% annually
until such time as the shares of Series E Preferred Stock have been converted
into shares of common stock. In addition to the equity investment, it was agreed
that the distributor agreement by and between Sanshin and Sonic Solutions would
be extended.
Our operating activities used cash of $2,021,000 for the nine months ended
December 31, 2000 and generated cash of $7,593,000 for the nine months ended
December 31, 2001. During the nine months ended December 31, 2000, cash used in
operations included a net loss of $4,690,000
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including depreciation and amortization of $1,671,000 and interest expense
amortization of $117,000 and provision for doubtful accounts of $165,000. Cash
used in operations was affected by changes in assets and liabilities including
decreases in accounts receivables of $917,000, inventories of $282,000, accounts
payable and accrued liabilities of $355,000 and deferred revenue and deposits of
$170,000. Accounts receivable decreased for the nine months ended December 31,
2000 primarily due to improved receivable collections, inventories decreased due
to better utilization of our outsourcing program, accounts payable and accrued
liabilities decreased due to paydown of trade payables and deferred revenue and
deposits decreased primarily due to amortization of deferrals into revenue.
During the nine months ended December 31, 2001, cash used in operations
included a net loss of $4,892,000 including depreciation and amortization of
$1,910,000 and a net charge to the provision reserve for doubtful accounts of
$160,000. Cash used in operations was affected by changes in assets and
liabilities including decreases in account receivables of $1,669,000, accounts
payable and accrued liabilities of $123,000, and increases in deferred revenue
and deposits of $9,062,000. Account receivables decreased primarily due to
stronger receivable collections and accounts payable and accrued liabilities
decreased due to paydown of trade payables. The increase in deferred revenue and
deposits is due to payments from OEM and licensing customers for which revenue
will be recognized in future periods. During the nine months ended December 31,
2000 and 2001, our current ratio has decreased primarily due to the increase in
our deferred revenue and deposits. In addition to our operations, we utilized
cash during both quarters to purchase new fixed assets and to fund the
development of capitalized software.
We believe that existing cash, cash equivalents and short term investments,
cash generated from operations, plus cash available through the equity based
line of credit with Kingsbridge will be sufficient to meet our cash requirements
at least through the third quarter of fiscal year 2003.
As of December 31, 2001, we had cash and cash equivalents of $10,862,000
and negative working capital of $697,000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is limited. All of our international sales are
denominated in US dollars with the exception of the payments made to us by
Daikin pursuant to the distribution agreement entered into on February 27, 2001
and payments made to Daikin by us pursuant to the consulting agreement entered
into on February 27, 2001. To date we have not engaged in any hedging
activities.
We do not use derivatives or equity investments for cash investment
purposes. Cash equivalents consist of short-term, highly-liquid investments with
original maturities of three months or less and are stated at cost which
approximates market value. Cash equivalents consist of money market funds.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 3, 2001 we sold 250,000 shares of Series E Preferred Stock to
Sanshin Electronic Co., Ltd. for $1,000,000. The Series E Preferred Stock was
sold to Sanshin pursuant to the exemption provided by Section 4(2) of the
Securities Act of 1933. Sanshin, the only investor, provided representations to
Sonic Solutions that enabled Sonic Solutions to rely on this exemption,
including the following: Sanshin's status as an accredited investor, its
sophistication and its intention to hold the securities. Each share of Series E
Preferred Stock is convertible at the option of the holder into one share of
common stock subject to adjustment for certain dilutive events, such as stock
splits. The Series E Preferred Stock carries a cumulative dividend of 4%
annually until such time as the shares of Series E Preferred Stock have been
converted into shares of common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
(i) Item 5: On December 10, 2001, Sonic Solutions filed a report on
Form 8-K, announcing that Sanshin Electronics Co., Ltd. made a $1 million equity
investment in Sonic Solutions on December 3, 2001. Sanshin acquired 250,000
shares of Series E Preferred Stock which converts into common stock at $4.00 per
share and carries a cumulative dividend of 4% annually until such time as the
shares of Series E Preferred Stock have been converted in shares of common
stock. In addition to the equity investment, it was agreed that the distributor
agreement by and between Sanshin and Sonic Solutions would be extended.
(ii) Item 5: On December 19, 2001, Sonic Solutions filed a report on
Form 8-K, announcing that it entered into a licensing agreement with Adobe
Systems Incorporated ("Adobe"). Under the terms of the licensing agreement,
Adobe will license the technology underlying Sonic Solutions' desktop DVD
authoring applications, including Sonic Solutions' AuthorScript formatting
engine. Sonic Solutions will continue its focus on home and consumer markets, as
well as on systems for Hollywood studios, professional post production and
high-end corporate applications.
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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 February, 2002.
SONIC SOLUTIONS
Signature Date
--------- ----
/s/ Robert J. Doris February 12, 2002
--------------------
Robert J. Doris
President and Director (Principal
Executive Officer)
/s/ A. Clay Leighton February 12, 2002
--------------------
A. Clay Leighton
Senior Vice President of Worldwide
Operations and Finance and Chief
Financial Officer (Principal
Financial Accounting Officer)
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