-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FB2BjNpj3XYbOjDkLc7d997H/iLd+eN3aYsIbhsWPwQQqp73+XmDdYb5W19S+vmQ EN5VdHVhC7gKDF4zP+StUA== 0001021408-00-000757.txt : 20000224 0001021408-00-000757.hdr.sgml : 20000224 ACCESSION NUMBER: 0001021408-00-000757 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 DATE AS OF CHANGE: 20000223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SONIC SOLUTIONS/CA/ CENTRAL INDEX KEY: 0000916235 STANDARD INDUSTRIAL CLASSIFICATION: 7373 IRS NUMBER: 930925818 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23190 FILM NUMBER: 544447 BUSINESS ADDRESS: STREET 1: 101 ROWLAND WAY STE 110 CITY: NOVATO STATE: CA ZIP: 94945 BUSINESS PHONE: 4158938000 MAIL ADDRESS: STREET 1: 101 ROWLAND WAY STREET 2: STE 110 CITY: NOVATO STATE: CA ZIP: 94945 10-Q 1 FORM 10-Q 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, 1999 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 February 11, 2000, was 11,259,720. 1 SONIC SOLUTIONS FORM 10-Q For the quarterly period ended December 31, 1999 Table of Contents Page PART I. FINANCIAL INFORMATION ITEM 1. Condensed Balance Sheets as of March 31, 1999 and December 31, 1999.................................... 3 Condensed Statements of Operations for the three and nine months ended December 31, 1998 and 1999.... 4 Condensed Statements of Cash Flows for the nine months ended December 31, 1998 and 1999.............. 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....................... 14 Signatures............................................. 15 2 PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS Sonic Solutions Condensed Balance Sheets (in thousands, except share amounts)
1999 ------------------------ ASSETS March 31 December 31 - - ------ --------- ------------ (unaudited) Current Assets: Cash and cash equivalents........................................................... $ 2,414 2,018 Accounts receivable, net of allowance for returns and doubtful accounts of $599 and $1,249 at March 31, 1999 and December 31, 1999, respectively................................................................ 5,403 5,280 Inventory........................................................................... 807 1,218 Prepaid expenses and other current assets........................................... 287 533 -------- ------- Total current assets................................................................ 8,911 9,049 Fixed assets, net...................................................................... 2,313 1,693 Purchased and internally developed software costs, net................................. 2,385 2,005 Other assets........................................................................... 156 185 -------- ------- Total assets........................................................................ $ 13,765 12,932 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------- Current Liabilities: Accounts payable and accrued liabilities............................................ $ 4,359 4,615 Bank note payable................................................................... 500 922 Deferred revenue and deposits....................................................... 1,318 1,330 Subordinated debt, current portion.................................................. 1,419 526 Current portion of obligations under capital leases................................. 148 99 -------- ------- Total current liabilities........................................................... 7,744 7,492 Subordinated debt, net of current portion.............................................. - 175 Obligations under capital leases, net of current portion............................... 89 27 -------- ------- Total liabilities................................................................... 7,833 7,694 -------- ------- Commitments and contingencies Shareholders' Equity: Convertible preferred stock, no par value, 10,000,000 shares authorized; 294,038 and 155,544 shares issued and outstanding at March 31, 1999 and December 31, 1999, respectively............................................... 956 506 Common stock, no par value, 30,000,000 shares authorized; 9,468,123 and 11,259,720 shares issued and outstanding at March 31, 1999 and December 31, 1999, respectively............................................... 18,121 22,481 Accumulated deficit.................................................................... (13,145) (17,749) -------- ------- Total shareholders' equity.......................................................... 5,932 5,238 -------- ------- Total liabilities and shareholders' equity.......................................... $ 13,765 12,932 ======== =======
See accompanying notes to condensed financial statements. 3 Sonic Solutions Condensed Statements of Operations (in thousands, except share amounts - unaudited)
Three Months Ended Nine Months Ended -------------------- ------------------- December 31, December 31, -------------------- ------------------- 1998 1999 1998 1999 --------- -------- --------- ------- Net revenue......................................................... $ 5,795 5,156 $15,404 15,558 Cost of revenue..................................................... 2,277 2,160 6,796 6,869 ------- ------- ------- ------- Gross profit.................................................... 3,518 2,996 8,608 8,689 ------- ------- ------- ------- Operating expenses: Marketing and sales............................................. 1,837 2,335 5,345 6,679 Research and development........................................ 1,269 1,458 3,798 4,749 General and administrative...................................... 376 1,030 1,151 1,762 ------- ------- ------- ------- Total operating expenses........................................ 3,482 4,823 10,294 13,190 ------- ------- ------- ------- Operating income (loss)......................................... 36 (1,827) (1,686) (4,701) Other expense, net.................................................. (79) (106) (249) (200) ------- ------- ------- ------- Loss before income taxes........................................ (43) (1,933) (1,935) (4,701) Provision (benefit) for income taxes................................ - - - (97) ------- ------- ------- ------- Net loss........................................................ (43) (1,933) (1,935) (4,604) ======= ======= ======= ======= Basic and diluted loss per share applicable to common shareholders.............................................. ($0.01) (0.19) ($0.23) (0.47) ======= ======= ======= ======= Weighted average shares used in computing per share amounts.................................................... 9,127 10,799 8,720 10,061 ======= ======= ======= =======
See accompanying notes to condensed financial statements. 4 Sonic Solutions Condensed Statements of Cash Flows (in thousands -- unaudited)
Nine Months Ended ----------------- December 31, ------------ 1998 1999 ------ ------ Cash flows from operating activities: Net loss............................................................................. ($1,935) (4,604) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization...................................................... 1,940 2,224 Provision for returns and doubtful accounts, net of write-offs..................... (50) 650 Changes in operating assets and liabilities: Accounts receivable............................................................. (1,194) (527) Inventory....................................................................... (328) (411) Prepaid expenses and other current assets....................................... 218 (246) Other assets.................................................................... (31) (29) Accounts payable and accrued liabilities........................................ 778 256 Deferred revenue and deposits................................................... 234 12 ------ ------ Net cash used in operating activities........................................... (368) (2,675) ------- ------ Cash flows from investing activities: Purchase of fixed assets........................................................... (485) (606) Additions to purchased and internally developed software........................... (523) (618) ------- ----- Net cash used in investing activities........................................... 1,008) (1,224) ------- ------- Cash flows from financing activities: Proceeds from exercise of common stock options..................................... 35 33 Borrowings on line of credit....................................................... 420 422 Repayments on line of credit....................................................... (420) - Proceeds associated with equity line financing..................................... 2,358 3,180 Redemption of warrants............................................................. (83) 0 Payment of dividends............................................................... (45) (41) Repayments of subordinated debt.................................................... (185) (20) Principal payments on capital leases............................................... (102) (111) ------- ------ Net cash provided by financing activities....................................... 1,978 3,503 ------- ------ Net increase (decrease) in cash and cash equivalents................................. 602 (396) Cash and cash equivalents, beginning of period....................................... 2,479 2,414 ------- ------ Cash and cash equivalents, end of period............................................. $3,081 2,018 ======= ====== Supplemental disclosure of cash flow information: Interest paid during period........................................................ $ 56 93 ------- ------ Income taxes paid during period.................................................... $ 9 ------- ------ Noncash financing and investing activities: Conversion of preferred stock to common stock...................................... 408 950 ------- ------ Issuance of preferred stock for subordinated debt........................... - 500 Issuance of warrants for subordinated debt - 235
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, 1999, filed with the Securities and Exchange Commission. (2) Basic and diluted loss per share SFAS No. 128 "Earnings Per Share" requires the presentation of basic net income per share, and for companies with complex capital structures, diluted net income per share. The following table sets forth the computations of shares and net loss per share, applicable to common shareholders used in the calculation of basic and diluted net loss per share for the three and nine months ended December 31, 1998 and 1999 (in thousands, except per share data):
Three Months Ended Nine Months Ended ----------------------------- ----------------------------- December 31, December 31, ----------------------------- ----------------------------- 1998 1999 1998 1999 ------------- ------------- ------------- ------------- Net loss................................................. ($43) (1,933) ($1,935) (4,604) Beneficial conversion feature given to preferred shareholders............................................ 0 110 0 110 Dividends paid to preferred shareholders................. 15 13 45 41 ------ ------- -------- ------- Net loss applicable to common shareholders............... (58) (2,056) (1,980) (4,755) ====== ======= ======= ====== Weighted average number of common shares outstanding..... 9,127 10,799 8,720 10,061 ====== ====== ===== ======= Basic and diluted net loss per share applicable to common shareholders..................................... ($0.01) (0.19) ($0.23) (0.47) ======= ====== ======= =======
As of December 31, 1998 and 1999, potentially dilutive shares totaling 935,775 and 1,311,514, respectively, for convertible preferred stock and options with exercise prices less than the average market price that could dilute basic earnings per share in the future, were not included in earnings per share as their effect was anti-dilutive for those periods. 6 (3) Inventory The components of inventory consist of (in thousands): March 31, December 31, --------- ------------ 1999 1999 ----- ----- Finished goods................................. $ 315 394 Work-in-process................................ 187 122 Raw materials.................................. 305 702 ----- ----- $ 807 1,218 ===== ===== (4) Income Taxes We account 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) Debt Restructuring In October, 1999, we renegotiated our financing arrangement with Hambrecht & Quist Guaranty Finance. The agreement we reached involved the restructuring of $1,500,000 debt into 153,846 shares of Series C Convertible Preferred Stock and $1,000,000 of debt. The interest rate on the restructured debt is 7.25% and the debt and interest is payable in monthly installments beginning on November 1, 1999 and continuing through April 30, 2001. In connection with this agreement, we issued warrants to purchase 120,000 common shares at an exercise price of $2.50. These warrants expire on April 30, 2006. The incremental conversion feature and the warrants were recorded at their relative fair values. We also changed the conversion rate of our Series C Convertible Preferred Stock so that each share of Series C Convertible Preferred Stock is convertible into 1.625 shares of Common Stock. We recorded $345,000 of deferred financing costs attributable to this finance restructuring with Hambrecht & Quist Guaranty. This amount is being amortized using the effective interest rate method to interest expense over the term of the financing facility (18 months). The value of the warrants was estimated using the Black-Scholes option pricing model and the following assumptions: volatility of .50, dividend yield rate of 6% (for the preferred stock), risk free interest rate of 6% and expected life equal to the contractual terms. The fair value of the preferred stock was valued using the intrinsic value of the beneficial conversion feature. In accordance with EITF 98-S the relative fair value of the warrants and the beneficial conversion feature have been charged to common stock. We have filed a Form S-3 Registration Statement under the Securities Act of 1933 to register the shares of the common stock which underlie the Series C Convertible Preferred Stock and the 120,000 shares of our common stock which underlie the warrants issued to Hambrecht & Quist Guaranty Finance. During the nine months ended December 31, 1999, 292,340 shares of the Preferred Stock were converted into common stock. (6) Segment Reporting In 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which was adopted by us in 1998. SFAS No. 131 requires companies to report financial and descriptive information about its reportable operating segments, including segment profit or loss, certain specific revenue and expense items and segment assets, as well as information about the revenues derived from our products and services, the countries in which we earn revenue and hold assets, and major customers. We operate in the audio and video media market and derive substantially all our revenue from the sales of two workstation products. We organize our operations based on designing, developing, manufacturing, selling and supporting these products. Our chief operating decision maker is the Chief Executive Officer (CEO) and the CEO allocates resources based on financial information, including gross margins and operating losses, reported in a manner consistent with the accompanying financial statements. Sales, gross profit, and operating losses are not allocated or specific to individual products or departments within the organization. Accordingly, we have a single reportable segment. As such, we are required to disclose the following geographic information:
Three Months Ended Nine Months Ended ------------------ ----------------- December 31, December 31, ------------ ------------ 1998 1999 1998 1999 ------------- ------------ ------------ ------------- North America................... $3,276 2,850 $ 8,062 8,254 Export: Europe..................... 1,396 1,491 3,923 4,188 Pacific Rim................ 963 803 3,212 2,916 Other international........ 160 12 207 200 ------ ----- ------- ------ $5,795 5,156 $15,404 15,558 Total net revenue ====== ===== ======= ======
7 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 periods presented. Our accounting system does not capture meaningful revenue information by product line. Accordingly, such information has not been disclosed. (7) Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative instruments and hedging activities". We are required to adopt SFAS No. 133 in the first quarter of fiscal year 2002. We do not anticipate that SFAS No. 133 will have a material impact on our financial statements. In December 1998, the AICPA issued Statement of Position (SOP) 98-9, "Modification of SOP 97-2 Software Revenue Recognition with Respect to Certain Transactions". This amendment clarified the specification of what was considered vendor specific objective evidence of fair value for the various elements in a multiple element arrangement. We adopted SOP 98-9 during our first quarter ended June 30, 1999 and the amendment did not have a material impact on our operating results, financial position, or cash flow for the three and nine months ended December 31, 1999. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW; CERTAIN FACTORS THAT MAKE FUTURE RESULTS DIFFICULT TO PREDICT; CERTAIN ITEMS TO REMEMBER WHEN READING OUR FINANCIAL STATEMENTS Our quarterly operating results vary significantly depending on the timing of new product introductions and enhancements by ourselves and by our competitors. Our results also depend on the volume and timing of orders which are difficult to forecast. Because our customers generally order on an as- needed basis, and we normally ship products within one week after receipt of an order, we don't have an order backlog which can assist us in forecasting results. For all these reasons, our results of operations for any quarter are a poor indicator of the results to be expected in any future quarter. A large portion of our quarterly revenue is usually generated in the last few weeks of the quarter. Since our ongoing operating expenses are relatively fixed, and we plan our expenditures based primarily on sales forecasts, if revenue generated in the last few weeks of a quarter do not meet our forecast, operating results can be very negatively affected. We capitalize our software development costs in accordance with Statement of Financial Accounting Standard No. 86. Such capitalized costs are amortized to cost of revenue over the estimated economic life of the product, which is generally three years. In September, 1999, we began shipments of two new products; both are included in our DVD product line. The two new products are DVDit! and DVD Fusion. DVDit! is a simplified DVD-Video authoring application which provides DVD authoring capabilities to consumer, "prosumer," and some professional users. DVD Fusion, which is part of our DVD Creator professional DVD-Video product line, provides video producers and editors a comprehensive set of tools for encoding, authoring and proofing DVD-Video titles derived from projects created on non-linear video editing systems such as those provided by Avid Technology and Media 100. Because DVDit! is aimed at a broader market than our traditional professional products we are building a distribution capability for it. There are three elements to this effort. . We are adding dealers and distributors for DVDit!, some of which already carry some of our professional products, but many of which do not. In the near term we are targeting dealers and distributors specializing in digital video applications. In the longer term we plan to target dealers and distributors who participate in the broader personal computer marketplace. . We are entering into "bundling" arrangements with various other companies in which copies of DVDit! are included or "bundled" with shipments of those companies' products. These companies (we refer to them as "OEM Partners") are motivated to include our software as a value added offering for their customers. We are motivated to enter into bundling arrangements because it generates revenue for us as well as creates a large installed base of customers to whom we can sell upgraded or enhanced versions of our products. To facilitate such bundling arrangement we have designed different limited-feature versions of DVDit!. Currently we are shipping two such versions - DVDit!-LE ("Limited Edition") and DVDit!-SE ("Standard Edition") - and have announced the future availability of another version - DVDit!-PE ("Professional Edition"). . We have initiated a web-based retail store for our DVDit! products. Our web store is intended both to meet retail demand for our DVDit! products as well as to service upgrade orders for our products, in particular, the upgrade orders which derive from our bundle shipments by our OEM Partners. Building distribution for DVDit! will be a time-consuming and expensive process. Since this is a new kind of product for us, there is significant risk that our efforts, or at least some of them, will not be successful. 9 Results of Operations The following table sets forth certain items from the Company's statements of operations as a percentage of net revenue for the three and nine months ended December 31, 1998 and 1999:
Three Months Ended Nine Months Ended ------------------ ----------------- December 31, December 31, ------------ ------------ 1998 1999 1998 1999 ------ ------ ------- ------- Net revenue..... 100.0% 100.0% 100.0% 100.0% Cost of revenue. 39.3 41.9 44.1 44.2 ----- ----- ------ ----- Gross profit.... 60.7 58.1 55.9 55.8 Operating expenses: Marketing and 31.7 45.3 34.7 42.9 sales......... Research and 21.9 28.3 24.7 30.5 development... General and 6.4 20.0 7.5 11.4 administrative ----- ----- ------ ----- Total operating 60.0 93.6 66.9 84.8 expenses....... ----- ----- ------ ----- Operating 0.7 (35.5) (11.0) (29.0) income (loss).. Other expense... (1.4) (2.0) (1.6) (1.3) Provision - - - (0.6) (benefit) for ----- ----- ------ ----- income taxes... Net loss........ (0.7)% (37.5)% (12.6)% (29.7)% ===== ===== ====== =====
Comparison of three and nine months ended December 31 NET REVENUE. Our net revenue decreased from $5,795,000 for the quarter ended December 31, 1998 to $5,156,000 for the quarter ended December 31, 1999, representing a decrease of 11%. For the nine months ended December 31, 1999, net revenue increased from $15,404,000 to $15,558,000 compared to the same period in the prior fiscal year. The decrease in net revenue for the three months ended December 31, 1999 is primarily due to the decrease in sales of our audio products which was partially offset by sales of our DVD systems, including our two newer products -- DVDit! and DVD Fusion. The increase in net revenue for the nine months ended December 31, 1999 is primarily due to increased sales of our DVD systems (including DVDit! and DVD Fusion). International sales accounted for 43.5% and 44.7% of our net revenue for the quarters ended December 31, 1998 and 1999, respectively. International sales accounted for 47.7% and 46.9% of net revenue for the nine months ended December 31, 1998, and 1999, respectively. See Note 5 of Notes to Condensed Financial Statements. International sales have historically represented between 43% and 52% of our quarterly 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, increased from 39.3% for the quarter ended December 31, 1998 to 41.9% for the quarter ended December 31, 1999. For the nine months ended December 31, 1999, our cost of revenue, as a percentage of net revenue, was approximately constant at 44.1% when compared to 44.2% in the same period in the prior fiscal year. Cost of revenue can vary based upon the mix of products sold during the quarter. MARKETING AND SALES. Our marketing and sales expenses increased from $1,837,000 for the quarter ended December 31, 1998 to $2,335,000 for the quarter ended December 31, 1999 and increased from $5,345,000 for the nine months ended December 31, 1998 to $6,679,000 for the nine months ended December 31, 1999. Marketing and sales represented 31.7%, 45.3%, 34.7% and 42.9% of net revenue for the quarters ended December 31, 1998 and 1999 and the nine months ended December 31, 1998 and 1999, 10 respectively. Our marketing and sales headcount increased from thirty-six at December 31, 1998 to thirty-nine at December 31, 1999. Our marketing and sales expenses increased primarily due to increases in salary expenses as a result of the increase in headcount, and increases in advertising and marketing costs related to our DVD product lines. Included in our marketing and sales expenses are dealer and employee commission expenses, which as a percentage of net revenue decreased from 5.5% for the quarter ended December 31, 1998 to 4.4% for the quarter ended December 31, 1999. RESEARCH AND DEVELOPMENT. Our research and development expenses increased from $1,269,000 for the quarter ended December 31, 1998 to $1,458,000 for the quarter ended December 31, 1999 and increased from $3,798,000 for the nine months ended December 31, 1998 to $4,749,000 for the nine months ended December 31, 1999. Our research and development expenses represented 21.9%, 28.3%, 24.7% and 30.5% for the quarter and nine months ended December 31, 1998 and 1999, respectively. We capitalize 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. 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.) Our research and development expenses increased primarily due to increases in salary expenses as a result of the increase in headcount. Headcount increased from twenty-nine at December 31, 1998 to thirty-three at December 31, 1999. Our research and development expenses also increased due to consulting expenses associated with introductions of new products, including our DVDit! product. Consulting expenses can fluctuate significantly from period to period depending upon the status of hardware and software development projects and our schedule of new product introductions. GENERAL AND ADMINISTRATIVE. Our general and administrative expense increased from $376,000 for the quarter ended December 31, 1998 to $1,030,000 for the quarter ended December 31, 1999 and from $1,151,000 for the nine months ended December 31, 1998 to $1,762,000 for the nine months ended December 31, 1999. Our general and administrative expenses represented 6.4%, 20.0%, 7.5% and 11.4% of net revenue for the quarter ended December 31, 1998 and 1999 and the nine months ended December 31, 1998 and 1999, respectively. Included in general and administrative expense for the quarter ended December 31, 1999 is a charge to bad debt expense of $600,000 which represents an additional reserve for sales to audio professionals and distributors who are experiencing liquidity difficulties due to a decline in their business. We anticipate that general and administrative expenses (exclusive of the bad debt expense) will increase in the future as costs increase and our operations expand. OTHER EXPENSE, NET. The "Other Expense" item on our statement of operations includes primarily the net amount of interest or other financing charges we have incurred due to borrowings reduced by the interest we earn on cash balances and short term investments. For the quarter and nine months ended December 31, 1999 and 1998, we incurred interest and other financing charges related to financing agreements we had with entities associated with Hambrecht & Quist, as well as borrowings under our bank credit line. PROVISION FOR INCOME TAXES. In accordance with Statement of Financial Accounting Standards No. 109, no provision was made for income taxes for the quarter ended December 31, 1998 and 1999, respectively. For the nine months ended December 31, 1999 a benefit was recorded (during the quarter ended June 30, 1999) to reflect the refund due us following the conclusion of an Internal Revenue Service audit. During the fiscal year ended March 31, 1996, we exhausted our ability to carryback tax losses. LIQUIDITY AND CAPITAL RESOURCES. In December, 1996 we entered into a Loan and Security Agreement with Silicon Valley Bank. This Agreement, which we sometimes refer to as our "bank credit line", has been modified or renewed at various times since December 1996. The current bank credit line (renewed in September, 1999) provides for up to $2,500,000 in available borrowings based upon our eligible accounts receivable balances. This bank credit line provides for a variety of covenants, including among other things, that we maintain certain financial ratios. The bank credit line is collateralized by a security interest in substantially all of our assets. Interest on borrowings under this agreement is payable 11 monthly at a rate of one and one quarter percent in excess of the prime rate. On December 31, 1999 $922,000 was outstanding under this agreement. The Company was in compliance with its debt covenants under this agreement at December 31, 1999. In December, 1996, we also obtained a $5,100,000 financing facility with entities associated with Hambrecht & Quist. This facility included subordinated debt as well as equipment lease financing. We received $3,000,000 of subordinated debt from Hambrecht & Quist Transition Capital, LLC and $1,100,000 of subordinated debt from Hambrecht & Quist Guaranty Finance, LLC pursuant to the above facility. The remaining $1,000,000 of the facility was used to fund a master lease line for financing of future capital asset purchases. The facility with the Hambrecht & Quist entities is secured by an interest in our fixed assets and substantially all of our other assets but is subordinate to our bank credit line. In connection with this financing facility we issued warrants to purchase 260,200 common shares to entities associated with Hambrecht & Quist. The Hambrecht & Quist entities were entitled to exercise the 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, all of the $7.00 warrants were exercised on a "net" basis, and the warrant holder received 40,266 shares of common stock. We recorded $549,000 of deferred interest attributable to the value of the warrants, which was amortized using the effective interest rate method to interest expense over the term of the financing facility. The value of the warrants was estimated using the Black-Scholes option pricing model and the following assumptions: volatility of .75, risk free interest rate of 6.3% and expected life equal to the contractual terms. In March, 1998, we renegotiated our financing arrangement with Hambrecht & Quist Guaranty Finance. The agreement we reached involved the restructuring of $3,000,000 debt into $1,500,000 of convertible preferred stock and $1,500,000 of debt. The interest rate on such restructured debt was 7.25% payable monthly and the note was due in October 1999. We filed a Form S-3 Registration Statement under the Securities Act of 1933 to register the 461,538 shares of our common stock which underlie the Series C Convertible 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 changed to $3.25. We accounted for this transaction by revaluing the new warrant, using comparable assumptions as the original warrant grant and the resultant value of $90,000 is being amortized to interest expense over the new loan period. In June, 1998, 90,000 of the $3.25 warrants were exercised on a "net exercise" basis, and warrant holder received 29,691 shares of common stock. During the 1999 fiscal year 167,500 shares of the Preferred Stock were converted into common stock. 12 In December, 1997, we secured a $7,000,000 equity-based line of credit by entering into a stock purchase agreement with Kingsbridge Capital Ltd. ("Kingsbridge"). Under this arrangement, we had the right to draw up to a total of $7,000,000 in cash in exchange for common stock. Pricing of the common stock issued was based on the market price of Sonic Solutions' common stock at the time of a draw subject to a 14% discount and a 4% commission payable in common stock. The availability of the credit line, and the amounts and timing of draws under the line were subject to a number of conditions. In January, 1998, we filed a Form S-3 Registration Statement under the Securities Act of 1933 to register the resale of shares issued under this credit line. During the fiscal year ended March 31, 1998, we drew $1,450,000 from this credit line for which we issued 606,130 shares of common stock to Kingsbridge and 12,000 shares to Trinity Capital Advisors. During the fiscal year ended March 31, 1999, we drew an additional $2,358,000 from this credit line for which we issued 903,870 shares of common stock. On May 20, 1999, we secured a new equity-based line of credit by entering into a new stock purchase agreement with Kingsbridge. Under the new arrangement, we may draw up to $12,000,000 in cash in exchange for common stock; provided, however, that in any event we can not sell more than a total of 1,800,000 shares to Kingsbridge under this arrangement, unless we obtain shareholder approval. Pricing of the common stock issued under this arrangement is based on the market price of our common stock at the time of a draw, discounted by 10% or 12% depending upon the price of our common stock. The availability of the credit line, and the amounts and timing of draws under the line were subject to a number of conditions. On May 27, 1999, we filed a Registration Statement on Form S-1 to register for resale the shares we may issue to Kingsbridge under this credit line and on August 12, 1999 the Statement became effective. During the quarter ended December 31, 1999, we drew $1,500,000 from this new credit line for which we issued 482,962 shares of common stock. Our operating activities have used cash of $368,000 and $2,675,000 for the nine months ended December 31, 1998 and 1999, respectively. Cash was used primarily to fund the operating loss and to support the increase in accounts receivables for the nine months ended December 31, 1998. Cash was used primarily to fund the operating loss, to support the increase in accounts receivables, and to support the increase in inventory, for the nine months ended December 31, 1999. We believe that existing cash, cash equivalents and short term investments, cash generated from operations, and cash available from the new equity-based line of credit will be sufficient to meet the Company's cash and investment requirements at least through the middle of fiscal 2001. As of December 31, 1999, the Company had cash and cash equivalents of $2,018,000 and net working capital of $1,557,000. IMPACT OF YEAR 2000 ISSUE. We have not experienced any major system failures or disruptions of operations as a result of the Year 2000 issue. In addition, we did not incur significant incremental costs to become Year 2000 compliant. FORWARD LOOKING STATEMENTS. Certain statements in this Report, including statements contained 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 Sonic Solutions 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 limited to the following: general economic and business conditions; charges and costs related to acquisitions; and the ability of Sonic Solutions 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. 13 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. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant, Sonic Solutions, has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Novato, State of California, on the 14th day of February, 2000. SONIC SOLUTIONS Signature Date - - -------- ----- /s/ Robert J. Doris February 14, 2000 - - ------------------- Robert J. Doris President and Director (Principal Executive Officer) /s/ A. Clay Leighton February 14, 2000 - - -------------------- A. Clay Leighton Senior Vice President of Worldwide Operations and Finance and Chief Financial Officer (Principal Financial Accounting Officer) 15 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS MAR-31-2000 APR-01-1999 DEC-31-1999 2,018 0 6,529 1,249 1,218 9,049 8,521 6,828 12,932 7,492 0 0 506 22,479 0 12,932 15,558 15,558 6,869 13,190 0 0 200 (4,701) (97) (4,604) 0 0 0 (4,604) (0.47) (0.47)
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