UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark one)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 2001 or
[_] 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 October 31,
2001, was 14,393,916.
================================================================================
i
SONIC SOLUTIONS
FORM 10-Q
For the quarterly period ended September 30, 2001
Table of Contents
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Balance Sheets as of March 31, 2001
and September 30, 2001........................................... 1
Condensed Statements of Operations for the three and six
months ended September 30, 2000 and 2001......................... 2
Condensed Statements of Cash Flows for the
three and six months ended September 30, 2000 and 2001........... 3
Notes to Condensed Financial Statements.......................... 4
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 8
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk...................................................... 12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................ 13
ITEM 3. Defaults Upon Senior Securities.................................. 13
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 13
ITEM 6. Exhibits and Reports on Form 8-K................................. 13
Signatures....................................................... 14
ii
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Sonic Solutions
Condensed Balance Sheets
(in thousands, except share amounts)
2001
-----------------------
ASSETS March 31 September 30
------ -------- ------------
(unaudited)
Current Assets:
Cash and cash equivalents ....................................................... $ 1,616 1,984
Accounts receivable, net of allowance for returns and doubtful
accounts of $1,005 and $892 at March 31, 2001 and September 30,
2001, respectively ......................................................... 4,185 3,140
Inventory ....................................................................... 492 401
Prepaid expenses and other current assets ....................................... 448 423
-------- --------
Total current assets ............................................................ 6,741 5,948
Fixed assets, net ..................................................................... 1,333 999
Purchased and internally developed software costs, net ................................ 3,094 2,604
Other assets .......................................................................... 570 562
-------- --------
Total assets ................................................................. $ 11,738 10,113
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities ..................................... $ 4,621 4,177
Deferred revenue and deposits ................................................ 1,595 2,543
Subordinated debt ............................................................ 57 0
Current portion of obligations under capital leases .......................... 10 0
-------- --------
Total current liabilities .................................................... 6,283 6,720
-------- --------
Commitments and contingencies
Shareholders' Equity:
Convertible preferred stock, no par value, 10,000,000 shares authorized; 700,000
and 716,609 shares issued and outstanding at March 31, 2001 and
September 30, 2001, respectively ................................................. 1,750 1,792
Common stock, no par value, 30,000,000 shares authorized; 13,056,646 and
14,393,916 shares issued and outstanding at March 31, 2001 and
September 30, 2001, respectively ................................................. 28,399 29,764
Accumulated deficit ................................................................... (24,694) (28,163)
-------- --------
Total shareholders' equity ................................................... 5,455 3,393
Total liabilities and shareholders' equity ................................... $ 11,738 10,113
======== ========
See accompanying notes to condensed financial statements.
1
Sonic Solutions
Condensed Statements of Operations
(in thousands, except share amounts - unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
September 30, September 30,
------------- -------------
2000 2001 2000 2001
---- ---- ---- ----
Net revenue...................................................... $ 4,089 3,974 9,090 8,178
Cost of revenue.................................................. 1,622 1,368 3,356 2,757
-------- -------- -------- --------
Gross profit............................................ 2,467 2,606 5,734 5,421
-------- -------- -------- --------
Operating expenses:
Marketing and sales..................................... 2,344 2,210 4,691 4,386
Research and development................................ 1,453 1,427 2,804 2,875
General and administrative.............................. 533 512 1,306 962
Business integration.................................... 0 247 0 630
-------- -------- -------- --------
Total operating expenses................................ 4,330 4,396 8,801 8,853
-------- -------- -------- --------
Operating loss.......................................... (1,863) (1,790) (3,067) (3,432)
Other income (expense), net...................................... (32) 6 (74) 5
-------- -------- -------- --------
Loss before income taxes................................ (1,895) (1,784) (3,141) (3,427)
Provision (benefit) for income taxes............................. 0 0 0 0
-------- -------- -------- --------
Net loss................................................ (1,895) (1,784) (3,141) (3,427)
Dividends paid to preferred shareholders......................... 0 18 8 30
-------- -------- -------- --------
Net loss applicable to common shareholders.............. $ (1,895) (1,802) (3,149) (3,457)
======== ======== ======== ========
Basic and diluted loss per share applicable to common
shareholders........................................ $ (0.15) (0.13) (0.26) (0.25)
======== ======== ======== ========
Weighted average shares used in computing per share
amounts............................................. 12,351 14,068 12,276 13,734
======== ======== ======== ========
See accompanying notes to condensed financial statements.
2
Sonic Solutions
Condensed Statements of Cash Flows
(in thousands -- unaudited)
Six Months Ended September 30,
-----------------------------
2000 2001
---- ----
Cash flows from operating activities:
Net loss .......................................................................... $(3,141) (3,427)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ..................................................... 1,209 1,281
Provision for returns and doubtful accounts, net of write-offs .................... 109 (113)
Interest expense amortization ..................................................... 89 2
Changes in operating assets and liabilities:
Accounts receivable ......................................................... 475 1,158
Inventory ................................................................... 231 91
Prepaid expenses and other current assets ................................... 6 25
Other assets ................................................................ (6) 8
Accounts payable and accrued liabilities .................................... (240) (444)
Deferred revenue and deposits ............................................... (81) 948
------- -------
Net cash used in operating activities..................................... (1,349) (471)
------- -------
Cash flows from investing activities:
Purchase of fixed assets ..................................................... (216) (201)
Additions to purchased and internally developed software ..................... (282) (256)
------- -------
Net cash used in investing activities .................................... (498) (457)
------- -------
Cash flows from financing activities:
Proceeds from exercise of common stock options ............................... 82 0
Proceeds (costs) associated with equity line financing ....................... (81) 1,365
Payment of dividends ......................................................... (8) 0
Repayments of subordinated debt .............................................. (332) (59)
Principal payments on capital leases ......................................... (46) (10)
------- -------
Net cash provided by (used in) financing activities ...................... (385) 1,296
------- -------
Net increase (decrease) in cash and cash equivalents .............................. (2,232) 368
Cash and cash equivalents, beginning of period .................................... 5,179 1,616
------- -------
Cash and cash equivalents, end of period .......................................... $ 2,947 1,984
======= =======
Supplemental disclosure of cash flow information:
Interest paid during period................................................... $ 24 2
------- -------
Noncash financing and investing activities:
Issuance of preferred stock dividend...................................... 0 30
------- -------
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 the Company's Form 10-K for the year ended March 31, 2001, filed with the
Securities and Exchange Commission (SEC).
(2) Basic and diluted loss per share
As of September 30, 2000 and 2001, potentially dilutive shares totaling
152,759 and 66,619, 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.
(3) Inventory
The components of inventory consist of (in thousands):
March 31, September 30,
--------- -------------
2001 2001
---- ----
Finished goods......................................................... $ 182 154
Work-in-process........................................................ 48 43
Raw materials.......................................................... 262 204
----- -----
$ 492 401
===== =====
(4) Credit Facility
On May 4, 2000, we entered into a new Private Equity Line Agreement with
Kingsbridge Capital. Under this Agreement, we may receive ("draw") cash from
Kingsbridge in exchange for our common stock. The total of all draws under this
Agreement may not exceed $20,000,000 in cash nor involve issuance of more than
19.9% of our outstanding common stock. Pricing of each draw is based on the
market price of our common stock, 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
4
Kingsbridge from us for resale to the public. 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. During the first six months ended September 30,
2001, we drew down $1,400,000 from the equity line for which we issued 1,337,270
shares of common stock.
(5) Significant Customer Information and Segment Reporting
Statement of 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 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 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 Six Months Ended
------------------
September 30, September 30,
-------------------- ------- ------------------
2000 2001 2000 2001
--------- --------- ------- ------- ---------
Revenues
Consumer DVD $ 439 1,309 973 2,475
Pro Audio/Video 3,650 2,665 8,117 5,703
------ ----- ----- -----
Total net revenue $4,089 3,974 9,090 8,178
====== ===== ===== =====
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.
5
Revenues by Geographic Location:
Three Months Ended Six Months Ended
September 30, September 30,
----------------------- --------------------
2000 2001 2000 2001
-------- -------- --------- --------
North America $2,170 2,165 4,833 4,117
Export:
Europe 1,257 717 2,592 1,805
Pacific Rim 662 1,080 1,640 2,226
Other international - 12 25 30
------- ------ ----- -----
Total net revenue $4,089 3,974 9,090 8,178
======= ====== ===== =====
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 Six Months Ended
September 30, September 30,
---------- ---------- ----------- ---------
2000 2001 2000 2001
---------- ---------- ----------- ---------
Customer A 3% 10% 7% 8%
Customer B 21% 3% 16% 8%
(6) 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. The Company
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 the Company's 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
6
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 criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill, noting that any purchase price allocable to an assembled
workforce may not be accounted for separately. 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 to the Company 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.
7
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 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 does not meet our forecast,
operating results can be very negatively affected.
8
Results of Operations
The following table sets forth certain items from the Company's statements
of operations as a percentage of net revenue for the three and six months ended
September 30, 2000 and 2001:
Three Months Ended Six Months Ended
------------------ ----------------
September 30, September 30,
------------- -------------
2000 2001 2000 2001
---- ---- ---- ----
Net revenue................................ 100.0% 100.0 100.0 100.0
Cost of revenue............................ 39.7 34.4 36.9 33.7
----- ----- ----- -----
Gross profit............................... 60.3 65.6 63.1 66.3
Operating expenses:
Marketing and sales.................... 57.3 55.6 51.6 53.6
Research and development............... 35.5 35.9 30.8 35.2
General and administrative............. 13.0 12.9 14.5 11.8
Business integration................... 0.0 6.2 0.0 7.7
----- ----- ----- -----
Total operating expenses................... 105.8 110.6 96.9 108.3
----- ----- ----- -----
Operating loss............................. (45.5) (45.0) (33.8) (42.0)
Other expense.............................. (0.8) 0.2 (0.8) 0.1
Provision (benefit) for income
taxes...................................... 0.0 0.0 0.0 0.0
----- ----- ----- -----
Net loss................................... (46.3)% (44.9) (34.6) (41.9)
===== ===== ===== =====
Comparison of Second Quarters Ended September 30
NET REVENUE. Our net revenue decreased from $4,089,000 for the second
quarter ended September 30, 2000 to $3,974,000 for the second quarter ended
September 30, 2001, representing a decrease of 3%. For the six months ended
September 30, 2001, net revenue decreased from $9,090,000 to $8,178,000 compared
to the same period in the prior fiscal year, representing a decrease of 10%. The
decrease in revenue for the three and six months ended September 30, 2001 is due
primarily to the decrease in sales of our pro audio and video products. This
decrease was partially offset by increases in sales of our consumer DVD
products. Our professional audio and video sales decreased from $3,650,000 to
$2,665,000 and from $8,117,000 to $5,703,000 for the second quarter and for the
six months ended September 30, 2001, representing a decrease of 27% and 30%,
respectively. Decreases in sales of our professional audio and DVD products were
partially offset in the second quarter and six months ended September 30, 2001
by sales of Daikin related products which we acquired in February, 2001. Sales
of our consumer DVD products increased from $439,000 to $1,309,000 and from
$973,000 to $2,475,000 for the second quarter and for the six months ended
September 30, 2001, representing an increase of 198% and 154%, respectively. We
may continue to experience declines in sales of our professional audio and DVD
systems in the future, however, we anticipate growth in sales of our consumer
DVD products.
International sales accounted for 46.9% and 45.5% of our net revenue for
the second quarter ended September 30, 2000 and 2001, respectively.
International sales accounted for 46.8% and 49.7% of net revenue for the six
months ended September 30, 2000 and 2001, 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.
9
COST OF REVENUE. Our cost of revenue, as a percentage of net revenue
decreased from 39.7% for the second quarter ended September 30, 2000 to 34.4%
for the quarter ended September 30, 2001. Cost of revenue, as a percentage of
net revenue, decreased from 36.9% for the six months ended September 30, 2000 to
33.7% for the six months ended September 30, 2001. The decrease in cost of
revenue percentage is primarily due to the shift in sales product mix towards
higher margin consumer DVD systems and to the reduction of hardware as a
percentage of revenue in our professional DVD 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 decreased from
$2,344,000 for the second quarter ended September 30, 2000 to $2,210,000 for the
second quarter ended September 30, 2001. Marketing and sales expenses decreased
from $4,691,000 for the six months ended September 30, 2000 to $4,386,000 for
the six months ended September 30, 2001. Marketing and sales represented 57.3%,
55.6%, 51.6% and 53.6% of net revenue for the second quarters ended September
30, 2000 and 2001 and the six months ended September 30, 2000 and 2001,
respectively. Our marketing and sales expenses decreased primarily due to
decreases in advertising and marketing costs related to our DVD product lines.
Our marketing and sales headcount increased from forty-one at September 30, 2000
to forty-five at September 30, 2001.
RESEARCH AND DEVELOPMENT. Our research and development expenses decreased
slightly from $1,453,000 for the second quarter ended September 30, 2000 to
$1,427,000 for the second quarter ended September 30, 2001 and increased
slightly from $2,804,000 for the six months ended September 30, 2000 to
$2,875,000 for the six months ended September 30, 2001. Our research and
development expenses represented 35.5% and 35.9% of net revenue for the quarters
ended September 30, 2000 and September 30, 2001, respectively, and, 30.8% and
35.2% of net revenue for the six months ended September 30, 2000 and 2001,
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 remained
relatively consistent throughout the periods. Our research and development
headcount increased from thirty-three at September 30, 2000 to forty at
September 30, 2001.
GENERAL AND ADMINISTRATIVE. Our general and administrative expense
decreased slightly from $533,000 for the second quarter ended September 30, 2000
to $512,000 for the second quarter ended September 30, 2001 and from $1,306,000
for the six months ended September 30, 2000 to $962,000 for the six months ended
September 30, 2001. Our general and administrative expenses represented 13.0%
and 12.9% of net revenue for the quarters ended September 30, 2000 and 2001,
respectively, and, 14.4% and 11.8% of net revenue for the six months ended
September 30, 2000 and 2001, respectively. Included in general and
administrative expenses in the quarter ended June 30, 2000 is a charge to
provision for returns and doubtful accounts of $170,000, which represented an
additional reserve for sales to audio professionals and distributors who were
experiencing liquidity difficulties due to a decline in their business. We
anticipate that general and administrative expenses (exclusive of the bad debt
expense) will increase in the future as costs increase and our operations
expand.
BUSINESS INTEGRATION EXPENSE. In conjunction with the Daikin acquisition
completed in February 2001, we incurred expenses to transition the business to
our management. We anticipate that the integration expenses will continue to
decrease in the December quarter and
10
be eliminated in the March quarter. Business integration expenses primarily
consisted of engineering consulting expenses per the Daikin Consulting Agreement
dated February 27, 2001.
OTHER INCOME AND EXPENSE. Other income on our statement of operations
includes the interest we earned on cash balances and short term investments.
Other expense includes primarily the 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, no provision was made for the quarters ended
September 30, 2000 and 2001 and no provision was made for income taxes for the
six months ended September 30, 2000 and 2001.
LIQUIDITY AND CAPITAL RESOURCES. On May 4, 2000, we secured a new equity-
based line of credit by entering into a new stock purchase agreement with
Kingsbridge Capital. Under the new 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 equity line agreement are also limited
by the market price and trading volume of our stock. Because of these
limitations, at the time we need cash in the future, the equity line arrangement
with Kingsbridge may be unavailable or insufficient to meet our cash needs. 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 Statement became effective. We filed a Post-Effective
Amendment to our Registration Statement on November 9, 2001. We may not be able
to utilize the Kingsbridge equity line arrangement until the Post-Effective
Amendment is declared effective by the Securities and Exchange Commission.
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.
Our operating activities used cash of $1,349,000 and $471,000 for the six
months ended September 30, 2000 and 2001, respectively. During the six months
ended September 30, 2000, cash used in operations included a net loss of
$3,141,000 including depreciation and amortization of $1,209,000 and interest
expense amortization of $89,000. Cash used in operations was affected by changes
in assets and liabilities including decreases in accounts receivables of
$475,000, inventories of $231,000, accounts payable and accrued liabilities of
$240,000 and deferred revenue and deposits of $81,000. Accounts receivable
decreased for the six months ended September 30, 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 six months ended September 30, 2001, cash used in operations
included a net loss of $3,427,000 including depreciation and amortization of
$1,281,000 and a charge to the provision for returns and doubtful accounts of
$113,000 . Cash used in operations was affected by changes in assets and
liabilities including decreases in account receivables of $1,158,000,
inventories of $91,000, accounts payable and accrued liabilities of $444,000,
and increases in deferred revenue and deposits of $948,000. Account receivables
decreased primarily due to lower sales and stronger receivable collections,
inventories decreased due to better utilization of our outsourcing program,
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 other customers for which revenue will be recognized in future periods.
During the six months ended September 30, 2000 and 2001, our current ratio has
decreased primarily due to the increase in our deferred revenue and deposits. In
11
addition to our operations, we utilized cash during both quarters to purchase
new fixed assets, pay down debt obligations 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 first quarter of fiscal year 2003.
As of September 30, 2001, we had cash and cash equivalents of $1,984,000
and negative working capital of $772,000
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 deriviatives 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.
12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No disclosure is required or applicable pursuant to Item 102 of Regulation
S-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on September 4, 2001, at the
Company's headquarters, the Company shareholders voted to:
1. Approve Robert J. Doris, Robert M. Greber, R. Warren Langley, Peter J.
Marguglio, and Mary C. Sauer to continue to serve as directors for the
ensuing year end until their successors are elected. The vote for the
nominated directors was as follows: out of a total of 13,762,111
shares eligible to vote at the meeting: 10,814,696 voted in favor and
134,688 withheld for the approval of Robert J. Doris; 10,812,421 voted
in favor and 136,963 withheld for the approval of Robert M. Greber;
10,822,821 voted in favor and 126,563 withheld for the approval of R.
Warren Langley; 10,803,546 voted in favor and 145,838 withheld for the
approval of Peter J. Marguglio, and; 10,758,421 voted in favor and
190,963 withheld for the approval of Mary C. Sauer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant, Sonic Solutions, has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Novato,
State of California, on the 14th day of November, 2001.
SONIC SOLUTIONS
Signature Date
--------- ----
/s/ Robert J. Doris November 14, 2001
--------------------
Robert J. Doris
President and Director (Principal
Executive Officer)
/s/ A. Clay Leighton November 14, 2001
--------------------
A. Clay Leighton
Senior Vice President of Worldwide
Operations and Finance and Chief
Financial Officer (Principal Financial
Accounting Officer)
14