-----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, S25U2QNa2z755wG2DTQ7IPLRPoPCpldBl3JlY0gFcSoitk/kzuiB+F1ZY91KLXdn veeNzHqiCvQsVJ5+5IqiQg== 0000950131-99-004964.txt : 19990817 0000950131-99-004964.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950131-99-004964 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SONIC FOUNDRY INC CENTRAL INDEX KEY: 0001029744 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 391783372 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-14007 FILM NUMBER: 99691125 BUSINESS ADDRESS: STREET 1: 754 WILLIAMSON ST CITY: MADISON STATE: WI ZIP: 53703 BUSINESS PHONE: 6082563133 MAIL ADDRESS: STREET 1: 754 WILLIAMSON ST CITY: MADISON STATE: WI ZIP: 53703 10QSB 1 FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended June 30, 1999 ------------- OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-14007 ------- SONIC FOUNDRY, INC. ------------------- (Exact name of small business issuer as specified in its charter) MARYLAND 39-1783372 ------------------------------- ----------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 754 Williamson Street, Madison, WI 53703 ---------------------------------------- (Address of principal executive offices) (608)256-3133 ------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by section 13 or 15(d) of the Exchange Act during the past 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 ----- _____ State the number of shares outstanding of each of the issuer's common equity as of the last practicable date: Outstanding Class August 9, 1999 ----- -------------- Common Stock, $0.01 par value 2,666,010 Transitional Small Business Disclosure Format (check one) Yes No X . _____ ----- SONIC FOUNDRY, INC. QUARTERLY REPORT ON FORM 10-QSB QUARTER ENDED JUNE 30, 1999 TABLE OF CONTENTS
PAGE NO. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets - June 30, 1999 (Unaudited) and 3 September 30, 1998 Statements of Operations (Unaudited) - three-months 5 ended June 30, 1999 and 1998, nine-months ended June 30, 1999 and 1998 Statements of Cash Flows (Unaudited) - nine-months 6 ended June 30, 1999 and 1998. Notes to Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Financial 8 Condition and Results of Operations PART II OTHER INFORMATION 17 EXHIBITS 19 SIGNATURES 21
2 Sonic Foundry, Inc. Balance Sheets
June 30, September 30, 1999 1998 ---------------------------------- Assets (Unaudited) Current assets: Cash and cash equivalents $ 2,911,423 $ 6,939,533 Marketable securities - 3,000,000 Accounts receivable, net of allowances of $648,636 and $73,344 at June 30, 1999 and September 30, 1998, respectively 3,141,288 1,690,175 Revenues in excess of billings for software license fees 325,000 705,263 Inventories 807,317 316,140 Prepaid expenses and other current assets 391,813 285,703 ---------------------------------- Total current assets 7,576,841 12,936,814 Property and equipment: Land 190,000 190,000 Buildings and improvements 1,725,846 1,491,228 Equipment 1,879,704 1,186,818 Furniture and fixtures 191,278 132,802 ---------------------------------- 3,986,828 3,000,848 Less accumulated depreciation 760,357 389,863 ---------------------------------- Net property and equipment 3,226,471 2,610,985 Capitalized software development costs, net 641,084 401,629 Other assets 604,507 261 ---------------------------------- Total assets $12,048,903 $15,949,689 ==================================
See accompanying notes. 3
June 30, September 30, 1999 1998 ---------------------------------- (Unaudited) Liabilities and stockholders' equity Current liabilities: Accounts payable $ 789,710 $ 828,086 Accrued liabilities 463,083 316,677 Current portion of long-term obligations 47,658 636,081 ------------------------------ Total current liabilities 1,300,451 1,780,844 Long-term obligations 666,275 77,472 Contingencies - - Stockholders' equity: Preferred Stock, $.01 par value, authorized 5,000,000 shares; none issued and outstanding - - 5% preferred stock, Series B, voting, cumulative, convertible, $.01 par value (liquidation preference at par), authorized 10,000,000 shares, issued and outstanding 7,584,904 at June 30, 1999 and 7,223,719 shares at September 30, 1998 75,849 72,237 Common stock, $.01 par value, authorized 20,000,000 shares; issued and outstanding 2,666,010 at June 30, 1999 and 2,665,935 shares at September 30, 1998 26,661 26,660 Common stock warrants 324,500 159,500 Additional paid-in capital 15,297,939 15,297,096 Accumulated deficit (5,642,772) (1,464,120) ------------------------------ Total stockholders' equity 10,082,177 14,091,373 ------------------------------ Total liabilities and stockholders' equity $12,048,903 $15,949,689 ==============================
See accompanying notes 4 Sonic Foundry, Inc. Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended June 30, June 30, 1999 1998 1999 1998 --------------------------------------------------------------------------- Software license fees $ 4,222,812 $2,114,474 $ 9,739,101 $4,388,242 Cost of software license fees 992,624 570,096 2,514,254 1,254,292 --------------------------------------------------------------------------- 3,230,188 1,544,378 7,224,847 3,133,950 Selling and marketing expenses 3,175,205 743,364 7,218,000 2,062,842 General and administrative expenses 832,724 487,112 2,594,635 1,168,782 Product development expenses 544,260 269,060 1,759,782 506,091 --------------------------------------------------------------------------- 4,552,189 1,499,536 11,572,417 3,737,715 --------------------------------------------------------------------------- Income (loss) from operations (1,322,001) 44,842 (4,347,570) (603,765) Other income (expense): Interest expense (13,724) (44,192) (19,681) (101,928) Interest and other income 49,309 108,144 192,211 108,278 --------------------------------------------------------------------------- 35,585 63,952 172,530 6,350 --------------------------------------------------------------------------- Income (loss) before income taxes and extraordinary item (1,286,416) 108,794 (4,175,040) (597,415) Income tax expense - - - - --------------------------------------------------------------------------- Income (loss) before extraordinary item (1,286,416) 108,794 (4,175,040) (597,415) Extraordinary loss on early extinguishment of debt - (48,750) - (48,750) --------------------------------------------------------------------------- Net Income (loss) $(1,286,416) $ 60,044 $(4,175,040) $ (646,165) =========================================================================== Net Income (loss) per common share - Income (loss) before extraordinary item $ (0.48) $ 0.05 $ (1.57) $ (0.66) Extraordinary loss on early extinguishment of debt - (0.02) - (0.05) --------------------------------------------------------------------------- Basic $ (0.48) $ 0.03 $ (1.57) $ (0.71) =========================================================================== Diluted $ (0.48) $ 0.01 $ (1.57) $ (0.71) ===========================================================================
See accompanying notes. 5 Sonic Foundry, Inc. Statements of Cash Flows (Unaudited)
Nine months ended June 30, 1999 1998 ------------------------------------ Operating activities Net loss $(4,175,040) $ (646,165) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 375,701 136,202 Amortization of debt discount - 16,250 Amortization of capitalized software development costs 199,295 123,594 Extraordinary loss on early extinguishment of debt - 48,750 Loss on disposal of property and equipment 5,170 - Noncash charge for common stock warrants 74,280 - Changes in operating assets and liabilities: Accounts receivable (1,070,850) (1,122,770) Inventories (491,177) (132,975) Prepaid expenses and other assets (106,111) (161,312) Accounts payable and accrued liabilities 108,030 (27,258) ------------------------------------ Total adjustments (905,662) (1,119,519) ------------------------------------ Net cash used in operating activities (5,080,702) (1,765,684) Investing activities Purchases of property and equipment (1,000,138) (789,218) Proceeds from sale of marketable securities 3,000,000 - Proceeds from disposals of property and equipment 4,043 - Purchases of other investments (513,787) - Capitalized software development costs (438,750) (314,396) ------------------------------------ Net cash provided by (used in) investing activities 1,051,368 (1,103,614) Financing activities Proceeds from sale of common stock, net of issuance costs 844 13,917,558 Proceeds from debt 632,000 1,022,200 Payments on line of credit, net - (220,000) Payments on long-term debt (631,620) (1,031,600) ------------------------------------ Net cash provided by financing activities 1,224 13,688,158 ------------------------------------ Net increase (decrease) in cash (4,028,110) 10,818,860 Cash and cash equivalents at beginning of period 6,939,533 114,737 ------------------------------------ Cash and cash equivalents at end of period $ 2,911,423 $10,933,597 ==================================== Supplemental cash flow information: Interest paid $ 19,681 $ 84,409 Noncash transactions - Conversion of notes payable into common stock - 40,000 Preferred stock dividend 3,612 3,440
See accompanying notes. 6 1 Basis of Presentation and Significant Accounting Policies Interim Financial Data The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Company's annual report filed on Form 10- KSB for the fiscal year ended September 30, 1998. In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentation of the results of operations have been included. Operating results for the nine-month period ended June 30, 1999 are not necessarily indicative of the results that might be expected for the year ended September 30, 1999. 2 Net Income (Loss) Per Share The following table sets forth the computation of basic and diluted loss per share:
Nine Months Ended Three Months Ended June June 30, 30, 1999 1998 1999 1998 ---------------------------------------------------- Denominator Denominator for basic earnings per share - weighted average common 2,666,010 2,112,980 2,665,960 905,872 shares Effect of dilutive securities: Options and warrants - 357,235 - - Convertible series B preferred stock - 3,611,859 - - ---------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average common shares 2,666,010 6,082,074 2,665,960 905,872 ==================================================== Securities that could potentially dilute basic earnings per share in the future that are not included in the computation of diluted loss per share as their impact is antidilutive (treasury stock method) Options and warrants 670,026 - 576,104 368,906 Convertible Series B Preferred 3,792,453 - 3,672,058 3,439,866 Stock
7 3. Contingencies In June 1998 the Board of Directors approved the issuance of guarantees of certain obligations of certain officers of the Company. The guarantees were executed in June and July of 1998 to a bank in order to facilitate the issuance of loans to the officers. The guarantees carry an aggregate maximum limit of approximately $300,000. During the quarter ended March 31, 1999, the Company guaranteed the operating lease of another company in exchange for common stock of the lessee. The operating lease has a five-year term with aggregate base lease payments of approximately $500,000. In April 1999, the Company purchased additional shares of common stock in the company for $500,000. The Company owns less than 20% of the other company; accordingly, the investment is accounted for using the cost method. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and notes thereto included elsewhere in this form 10-QSB and the Company's annual report filed on form 10-KSB for the fiscal year ended September 30, 1998. In addition to historical information, this discussion contains forward-looking statements such as statements of the Company's expectations, plans, objectives and beliefs. These statements use such words as "may", "will", "expect", "anticipate", "believe", "plan", and other similar terminology. Actual results could differ materially due to changes in the market acceptance of Sonic Foundry's products, market introduction or product development delays, global and local business conditions, legislation and governmental regulations, competition, the Company's ability to effectively maintain and update its product portfolio, shifts in technology, political or economic instability in local markets, and currency and exchange rates. Overview The Company is a leading provider of audio software products designed to run under the Windows and Windows NT operating systems. The Company's current products allow musicians, audio engineers and home users the ability to create, edit and deliver audio files and record or master their own audio CD's. The Company has also developed, and expects to continue developing, production and encoding software tools for Internet and Intranet content developers. 8 The Company began shipment of Sound Forge, a Windows based audio editing software program developed by one of the Company's founders, in 1994. By 1996, the Company had released Sound Forge versions 3.0 and 4.0, which significantly expanded the effects and processes available in its editor, thereby meeting the needs of professional musicians and audio engineers. Additionally, the product line was expanded to include Sound Forge XP, a scaled down version of Sound Forge, as well as various plug-in products whose functions include noise reduction, spectrum analysis and batch conversion. In June 1997, the Company released CD Architect, an audio mastering software product and in May 1998, the Company released a music creation software product called ACID. ACID allows musicians, media professionals, Internet developers and others to compose royalty free, loop based music. The Company expects the product, which includes hundreds of pre-recorded loops, to have broad-based use among customers who create and enhance dance music, add background music to business and entertainment videos and develop web pages. Additionally, in October 1998, the Company introduced consumer versions of ACID for home entertainment use. Both ACID products are supported by loop library CD's which offer professionals and consumers a variety of music genres to choose from when composing music. In June 1998, the Company completed an initial public offering of 2,097,775 shares of common stock and 1,145,387 common stock purchase warrants. The Company is using and intends to continue using the net proceeds of the offering of $13,258,359 for development of new products, capital expenditures, sales and marketing, expansion of internal operations, potential acquisition activities and/or joint venture activities and working capital and general corporate purposes. In November 1998, the Company announced the beta release of Windows Media On- Demand Producer ("WMODP"), a product utilizing the Company's Vegas technology (a development allowing a software specific solution to audio and video authoring) and developed under contract with Microsoft Corporation. Designed for both the experienced web developer and new entrants to the streaming media market, WMODP delivers production and encoding features for Internet and Intranet content developers who are deploying media content in areas such as communication, entertainment and training. Microsoft began distributing the final release of this new encoding tool in February 1999 as a no-charge addition to the Windows Media tools available on the Microsoft Windows Media Technologies website. While no revenues will be realized directly from the agreement with Microsoft, the Company expects to generate greater brand recognition and access to Microsoft customers. The Company anticipates that certain users of WMODP will require more features than those found in WMODP. The Company retained the product rights to WMODP, allowing the Company to offer those users Stream Anywhere, a product with the same look and feel as the WMODP but with the ability to encode media in multiple formats including the RealNetworks RealSystem G2, MPEG-1, MP3 and Apple Quick-Time. Stream Anywhere was released as a free beta download from the Company's web site in March 1999 and is expected to be sold in its 9 final form by the end of fiscal 1999. The Company has made, and may continue to make, investments in related areas such as high-speed Internet access cable modem companies. In May 1999 the Company introduced its first office focused product, Audio Anywhere, by combining the company's existing ACID style and Sound Forge XP products. By designing Audio Anywhere for use with Microsoft PowerPoint and FrontPage applications the Company created a solution for users needing to enhance electronic presentations and Web pages with custom sound and musical accompaniment. The Company took advantage of the marketing power of Microsoft by officially launching the product along with Microsoft's introduction of Office 2000 and taking part in various office store promotional and rebate programs in June 1999. The Company invested significant resources in sales, marketing, research and other operating activities during the last several years. During the quarter ended December 31, 1998, the Company initiated a marketing campaign for its consumer products, - ACID Music, ACID DJ and ACID Rock. Many of these initiatives, including in-store promotions, radio ads, trade shows, print ads and other promotions, continued or were expanded upon during the last two quarters. Additionally, the Company took part in a series of promotional programs, including rebates, store demos, fliers, and end cap displays to promote the Company's Audio Anywhere product in conjunction with the introduction of the Microsoft Office 2000 introduction. The Company believes some of the benefits of these expenditures are being realized now but expects the full impact to take one to two years. The Company believes that its success depends largely on developing brand recognition early in a product's life cycle, building superior technology and quality into its products, and extending its technological lead on the competition. Accordingly, the Company expects operating costs to increase in the near future, especially in periods of new product or market introductions. In light of the Company's limited operating history and rapid improvements in technology and marketing of its products, the Company believes that its revenues and operating results, including its gross profit and operating expenses as a percentage of total net revenues, will vary significantly from period to period. The Company's efforts in developing OEM bundling arrangements with hardware and software developers have contributed, and are expected to continue contributing, to this variability. Such OEM transactions typically have higher margins and volumes than traditional distribution methods and may be material in certain periods. Results of Operations Software License Fees Revenues consist of fees charged for the licensing of Windows based software products including Sound Forge, Sound Forge XP, CD Architect, ACID, Audio Anywhere and 10 various plug-in products and music libraries. Software license fees are recognized upon delivery, net of allowances for estimated returns, provided that no significant obligations of the Company remain and collection of the resulting receivable is deemed probable. Revenues from software license agreements with OEMs are recognized when the software product has been delivered to the OEM, the fee to the Company is fixed and determinable, and collectibility is probable. Additionally, revenues include fees recorded pursuant to long-term contracts, using the percentage of completion method of accounting, when significant customization or modification is required. Software license fees increased by $2,109,000, or 100%, to $4,223,000 for the three-month period ended June 30, 1999 from $2,114,000 during the three-month period ended June 30, 1998. Software license fees increased by $5,351,000, or 122%, to $9,739,000 for the nine-month period ended June 30, 1999 from $4,388,000 during the nine-month period ended June 30, 1998. The increases resulted primarily from retail sales of the ACID consumer products released in October 1998 and the introduction of Audio Anywhere into the office superstore market in May 1999. Software license fees to customers outside of North America accounted for 8.0% and 14.1% of software license fees for the three-month periods ended June 30, 1999 and 1998, respectively and were 14.2% and 13.6% of software license fees for the nine-month periods ended June 30, 1999 and 1998, respectively. The reduced percentage of revenues from sources outside North America for the quarter ended June 30, 1999 reflect entry into the domestic office superstore market by the Company's Audio Anywhere product. Cost of Software License Fees Cost of software license fees increased by $423,000 to $993,000 for the three- month period ended June 30, 1999 from $570,000 during the three-month period ended June 30, 1998 and were 23.5% and 27.0% of software license fees during the 1999 and 1998 periods, respectively. Cost of software license fees increased by $1,260,000 to $2,514,000 for the nine-month period ended June 30, 1999 from $1,254,000 during the nine-month period ended June 30, 1998 and were 25.8% and 28.6% of software license fees during the 1999 and 1998 periods, respectively. The majority of the decreases as a percentage of net software license fees resulted primarily from a shift in mix toward higher margin stand-alone software sales versus products bundled with purchased third party CD recordable disk drives. Initial order quantities of Audio Anywhere exceeded the company's available assembly capacity and necessitated outside fulfillment. Such costs partially offset reduced material costs both in absolute dollars and as a percentage of software license fees. The remainder of the increase in absolute dollars related to the increased volume of software products sold during the period. Selling and Marketing Expenses 11 Selling and marketing expenses increased by $2,432,000 to $3,175,000 during the three-month period ended June 30, 1999 from $743,000 during the three-month period ended June 30, 1998 and were 75.2% and 35.2% as a percentage of software license fees, respectively. Selling and marketing expenses increased by $5,155,000 to $7,218,000 during the nine-month period ended June 30, 1999 from $2,063,000 during the nine-month period ended June 30, 1998 and were 74.1% and 47.0% as a percentage of software license fees, respectively. Increased selling and marketing costs in absolute dollars were impacted in large part by marketing and promotional expenses incurred to introduce the ACID consumer products and Audio Anywhere into the electronics and office retail markets. The Company began investing heavily on promoting its ACID consumer products upon introduction in October 1998, including trade shows, print and radio advertisements, concert promotions, store demos and other marketing related activities. In June 1999, the Company took part in the promotional campaign introducing Microsoft's Office 2000 product. During the promotion, the Company offered rebates applied against the purchase price of Audio Anywhere to office superstore customers that bought Office 2000. In return, the Company received favorable shelf placement, in store displays, inclusion in fliers and performed in-store demonstrations of the product. Both absolute dollars and costs as a percentage of software license fees were impacted by European trade show and other marketing costs incurred by the Company's recently established sales and marketing office in Delft, Netherlands. The remaining increase related to personnel costs to support the growth in revenues from existing products and for future product releases. General and Administrative Expenses General and administrative expenses increased by $346,000 to $833,000 during the three-month period ended June 30, 1999 from $487,000 during the three-month period ended June 30, 1998 and were 19.7% and 23.0% as a percentage of software license fees, respectively. General and administrative expenses increased by $1,426,000 to $2,595,000 during the nine-month period ended June 30, 1999 from $1,169,000 during the nine-month period ended June 30, 1998 and were 26.6% as a percentage of software license fees for both periods. The increase in absolute dollars related to wages and related recruitment and benefit costs, professional fees, facility costs, and other expenses. These costs were required to build an infrastructure to support existing and future products and to satisfy reporting and other requirements of a public company. Product Development Expenses Product development expenses increased by $275,000 to $544,000 during the three- month period ended June 30, 1999 from $269,000 during the three-month period ended June 30, 1998. Product development expenses as a percentage of software license fees were 12.9% and 12.7% for the 1999 and 1998 periods, respectively. Product development 12 expenses increased by $1,254,000 to $1,760,000 during the nine-month period ended June 30, 1999 from $506,000 during the nine-month period ended June 30, 1998 and were 18.1% and 11.5% as a percentage of software license fees, respectively. In accordance with SFAS Number 86, the Company capitalizes the cost of development of software products that have reached the level of technological feasibility. The Company's ACID product fell into this category during both of the three-month and nine-month periods ended June 30, 1998, resulting in capitalization of $66,000 and $314,000 of development costs, respectively. Development of the Company's Vegas product reached the beta stage in March 1999 resulting in capitalization of $337,000 and $438,000 during the three and nine-month periods ended June 30, 1999, respectively. The addition of software engineers to accelerate development of the Company's expanding line of software products caused the remaining increase in product development costs between the two periods. Income Tax Expense (Benefit) No Federal or State tax expense was recorded during either of the three or nine- month periods ended June 30, 1998 or 1999 due to the Company's Federal and State net operating loss position. No deferred tax benefit was recorded in the quarter ended June 30, 1999 as the Company continues to record a valuation allowance equal to the balance of net deferred tax assets. Liquidity and Capital Resources Cash was used in operating activities of $5,081,000 and $1,766,000 for the nine- month periods ended June 30, 1999 and 1998, respectively. A loss of $646,000 contributed to the use of cash during the 1998 period while a loss of $4,175,000, driven primarily by new product and market introductions, was the primary factor in the use of cash during the 1999 period. Additional increases in working capital including accounts receivable, inventory, other assets and accounts payable of $1,560,000 and $1,444,000 also impacted cash used in operations for the nine-month periods ended June 30, 1999 and 1998, respectively. The impact of noncash charges such as depreciation, amortization and issuance of common stock warrants for the nine-month periods ended June 30, 1999 and 1998 totaled $649,000 and $276,000, respectively. Cash provided by (used in) investing activities of $1,051,000 and ($1,104,000) for the nine-month periods ended June 30, 1999 and 1998, respectively, included net purchases of fixed assets of $1,000,000 and $789,000, respectively. Leasehold expenditures for the company's administrative and engineering offices in 1998 and purchases of computers, furniture and other assets were the primary fixed asset additions. Investing activities also included capitalized software development efforts of $439,000 and $314,000 for the nine-month periods ended June 30, 1999 and 1998, respectively and a $514,000 investment in 13 common stock of a cable modem company. The primary generator of cash provided by investing activities in the nine months ended June 30, 1999 were the proceeds from the sale of marketable securities of $3,000,000. Cash provided by financing activities of $1,000 and $13,688,000 for the nine- month periods ended June 30, 1999 and 1998, were impacted by proceeds from debt of $632,000 and $1,022,000, respectively and from payments on debt of $632,000 and $1,252,000, respectively. The 1998 period was also impacted by the issuance of $13,918,000 of common stock from a private placement and the Company's initial public offering completed in June 1998. The Company received the proceeds of a $40,000 unsecured note in August 1997 from relatives of a Company officer. The note paid interest monthly at 15% per annum and was convertible into Common Stock at $5.00 per share at the election of the Company. The Company exercised its right and converted the note into 8,000 shares of Common Stock in October 1997. In June 1998, the Company completed an initial public offering, including over allotment shares, of 2,097,775 shares of common stock at a price of $7.50 per share and 1,145,387 common stock purchase warrants at a price of $0.10 each. The net proceeds to the Company from the offering, after deduction of underwriting discounts and other expenses relating to the offering, were approximately $13,258,359. The Company has used and intends to continue using the net proceeds for development of new products, capital expenditures, sales and marketing, expansion of internal operations, acquisition activities and/or joint venture activities and working capital and general corporate purposes. In March 1999, the Company completed the refinancing of a mortgage with a bank on its sales and marketing facility of $632,000. The agreement provides for monthly payments of interest and principal of $5,050 based on an interest rate of 7.375% percent per annum. Simultaneously, the Company entered into a back-up revolving line of credit agreement. The agreement allows for maximum borrowings of $5,000,000 or a lesser amount based on the level of customer accounts receivable and inventory acceptable to the bank. The agreement, if drawn upon, would require monthly interest payments calculated at a rate equal to the 30 day London Interbank Offer (LIBOR) plus 2.25%, initially 7.19% per annum. Principal amounts are due January 31, 2000. For advances to be available, the Company must maintain certain financial covenants including minimum tangible net worth, current and debt ratios, as well as restrictions on the level of capital acquisitions, payment of dividends, issuance of additional indebtedness and others. The Company has not borrowed any amounts under the line of credit facility. Effective June 30, 1999 the Company reached an agreement with the bank terminating the credit facility. 14 Although the Company has no substantial commitments for capital expenditures, management anticipates there will be a need for increased capital expenditures and lease commitments in the next 12 months consistent with the anticipated growth in operations and infrastructure. The Company has significantly increased its operating expenses since its inception and expects the need for significant investment in marketing and other support staff and associated costs to continue. The Company is also exploring acquisition and other opportunities in related lines of business. To fund these initiatives at an appropriate level, management believes it will be necessary to supplement proceeds from the initial public offering. There can be no assurance that additional equity or debt capital can be obtained on terms satisfactory to the company. Year 2000 Impact The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. The Year 2000 issue creates risk for the Company from unforeseen problems in its own computer systems and from third parties, including customers, vendors, and manufacturers, with whom the Company deals. Failures of the Company's and/or third parties' computer systems could have a material impact on the Company's ability to conduct its business. The Company believes its software products are year 2000 compliant. The Company's products obtain date information, such as creation dates and modification dates, directly from the computer's operating system. Microsoft Corporation has stated that their operating systems will continue to operate into the twenty-first century. With regard to the Company's internal processing and operational systems, the Company has designed a Year 2000 readiness plan including the following steps: (i) conducting an inventory of the Company's internal systems, including information technology systems and non-information technology and the systems acquired or to be acquired by the Company from third parties; (ii) assessing and prioritizing any required remediation; (iii) remediating any problems by repairing or, if appropriate, replacing the non-compliant systems; (iv) testing of all remediated systems for Year 2000 compliance; and (v) developing contingency plans that may be employed in the event that any system used by the Company is unexpectedly affected by an unanticipated Year 2000 problem. The Company has completed the inventory and assessment phases of this plan. Although the Company has not discovered any material operational issues or costs associated with preparing internal systems for the Year 2000, there can be no assurance that the Company will not experience material adverse effects from undetected errors or the failure of such 15 systems to be Year 2000 compliant. Any such failures could have a material adverse effect on the Company's business, financial condition and results of operations. In addition to assessing its own systems, the Company has reviewed its dependence on its vendors, service providers and third party business partners. The Company believes there are numerous sources and alternatives to vendors for which it relies on for products or services. Further, no customer accounts for more than 10% of the Company's revenues. Despite the Company's lack of dependence, there can be no guarantee that the Company will not be adversely impacted by non-compliance of one or more vendors, service providers or customers. The actual impact on the Company resulting from non-compliance of these entities cannot be determined at this time. To date, the Company has expended an immaterial amount in conjunction with its Year 2000 readiness plan. The Company further expects that the cost of completing the Year 2000 readiness plan, including replacement of any necessary computer systems, will not be material. 16 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings There have been no material changes to the legal proceeding as set forth in the quarterly report for the period ended March 31, 1999 on Form 10-QSB 2. Changes in Securities (a) None (b) None (c) None (d) The information in this paragraph 2(d) relates to the registrant's Registration Statement on Form SB-2, Registration No. 333-46005 (the "Registration Statement"). The managing underwriters for the offering of the securities sold pursuant to the Registration Statement (the Offering) were Dirks & Company, Inc. and Security Capital Trading, Inc. (the Underwriters). The Offering commenced on April 22, 1998, and was completed on June 10, 1998, following the Underwriters' partial exercise of their option to purchase shares of stock and warrants to cover over allotments (the Over-Allotment Option). The following chart sets forth the securities sold pursuant to the Offering, the offering price and the aggregate offering price of the amount sold.
Amount Offering Security Sold Price Amount -------- ---- ----- ------ Common Stock 2,097,775 $7.50 $15,733,312.50 Warrants 1,145,387 0.10 114,538.70 -------------- Total $15,847,851.20 Expenses of Offering: Underwriting Discount $ 1,378,763.05 Underwriting Non-Accountable Expense Allowance Expense Allowance 475,435.54 Other Expenses 735,294.00 -------------- Net Proceeds $13,258,358.61 --------------
Use of Proceeds From the effective date of the Registration Statement through June 30, 1999, the Company applied an aggregate of $1,600,000 toward repayment of indebtedness, 17 $2,300,000 towards facility and other capital expenditures and $6,400,000 toward product development, selling and marketing, expansion of internal operations, working capital and general corporate purposes. The Company believes that none of the proceeds were paid, directly or indirectly, to (i) directors or officers of the Company or their affiliates, (ii) persons owning ten percent or more of the common stock or (iii) affiliates of the Company. To date, the Company believes that it has used the net proceeds of the Offering in a manner consistent with the use of proceeds described in the Registration Statement and the Prospectus dated April 22, 1998. The remaining net proceeds of the Offering in the amount of $2,900,000 have been invested in cash and cash equivalents. 3. Defaults upon Senior Securities - None 4. Submission of Matters to a vote of Security Holders - None 5. Other Information - None 6. Exhibits and Reports on Form 8-k (a) Exhibit (see exhibit list) (b) Reports on Form 8-k - None 18 ITEM 6(a) EXHIBIT LIST NUMBER DESCRIPTION - ------ ----------------------------------------------------------------- 3.1 Amended and Restated Articles of Incorporation of the Registrant, filed as Exhibit No. 3.1 to the Registration Statement, and hereby incorporated by reference. 3.2 Amended and Restated By-Laws of the Registrant, filed as Exhibit No. 3.2 to the Registration Statement, and hereby incorporated by reference. 4.1 Specimen Common Stock Certificate, filed as Exhibit No. 4.1 to the Registration Statement, and hereby incorporated by reference. 4.2 Form of Warrant Agreement, including Warrant Certificate, filed as Exhibit No. 4.2 to the Registration Statement, and hereby incorporated by reference. 4.3 Form of Representatives' Warrant Agreement, including Specimen Representatives' Warrant Certificate, filed as Exhibit No. 4.3 to the Registration Statement, and hereby incorporated by reference. 10.1 Registrant's 1995 Stock Option Plan, filed as Exhibit No. 10.1 to the Registration Statement, and hereby incorporated by reference. 10.2 Registrant's Non-Employee Directors' Stock Option Plan, filed as Exhibit No. 10.2 to the Registration Statement, and hereby incorporated by reference. 10.3 Commercial Lease between Registrant and The Williamson Center, LLC regarding 740 and 744 Williamson Street, Madison, Wisconsin dated January 20, 1998, filed as Exhibit No. 10.3 to the Registration Statement, and hereby incorporated by reference. 10.4 Employment Agreement between Registrant and Rimas Buinevicius dated as of November 30, 1997 and effective as of January 1, 1997, filed as Exhibit No. 10.4 to the Registration Statement, and hereby incorporated by reference. 10.5 Employment Agreement between Registrant and Monty R. Schmidt dated as of November 30, 1997 and effective as of January 1, 1997, filed as Exhibit No. 10.5 to the Registration Statement, and hereby incorporated by reference. 10.6 Employment Agreement between Registrant and Curtis J. Palmer dated as of November 30, 1997 and effective as of January 1, 1997, filed as Exhibit No. 10.6 to the Registration Statement, and hereby incorporated by reference. 10.7 Digital Audio System License Agreement between Registrant and Dolby 19 Laboratories Licensing Corporation dated July 28, 1997, filed as Exhibit No. 10.7 to the Registration Statement, and hereby incorporated by reference. 10.8 Digital Audio System License Agreement between Registrant and Dolby Laboratories Licensing Corporation dated July 28, 1997, filed as Exhibit No. 10.8 to the Registration Statement, and hereby incorporated by reference. 10.9 Start-up Agreement between Registrant and Ingram Micro Inc. dated October 16, 1997, filed as Exhibit No. 10.9 to the Registration Statement, and hereby incorporated by reference. 10.10 Form of Lock-up Agreement between Registrant and all directors, officers, and non-selling stockholders, filed as Exhibit No. 10.10 to the Registration Statement, and hereby incorporated by reference. 10.11 Form of Lock-up Agreement between Registrant and all selling stockholders, filed as Exhibit No. 10.11 to the Registration Statement, and hereby incorporated by reference. 10.12 Software License Agreement, effective as of September 29, 1998, between Registrant and Hewlett-Packard Company - CONFIDENTIAL MATERIAL FILED SEPARATELY. 10.13 Commercial Lease between Registrant and Seven J's, Inc. regarding 627 Williamson Street, Madison, Wisconsin dated March 26, 1999, filed as Exhibit No. 10.13 to the Quarterly Report on form 10-QSB for the period ended March 31, 1999. 10.14 Loan Agreement, dated March 3, 1999 between Registrant and Associated Bank South Central, filed as Exhibit No. 10.14 to the Quarterly Report on form 10-QSB for the period ended March 31, 1999. 10.15 Business Note Agreement, dated March 3, 1999 between Registrant and Associated Bank South Central, filed as Exhibit No. 10.15 to the Quarterly Report on form 10-QSB for the period ended March 31, 1999. 10.16 Termination Statement, effective June 30, 1999 between Registrant and Associated Bank South Central. 27.1 Financial Data Schedule 20 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Sonic Foundry, Inc. ------------------- (Registrant) August 16, 1999 By: /s/ Rimas P. Buinevicius ------------------------ Rimas P. Buinevicius Chairman and Chief Executive Officer August 16, 1999 By: /s/ Kenneth A. Minor ------------------------ Kenneth A. Minor Chief Financial Officer August 16, 1999 By: /s/ Frederick Kopko ------------------------ Frederick Kopko Secretary 21 EX-10.16 2 TERMINATION STATEMENT TERMINATION STATEMENT Sonic Foundry, Inc. ("Borrowers") and Associated Bank South Central ("Bank") hereby mutually agree to terminate the Loan Agreement between Borrower and Bank dated as of March 3, 1999. Termination shall be effective as of June 30, 1999. Borrower's obligation to reimburse Bank for all costs and expenses incurred by the Bank shall survive the termination of the Loan Agreement. BORROWER: BANK: Sonic Foundry, Inc. Associated Bank South Central By: /s/ Curtis J. Palmer By: /s/ Dennis J. Sampson ------------------------------- ------------------------------- Name: Curtis J. Palmer Name: Dennis J. Sampson Title: Chief Technical Officer Title: Senior Vice President Attest: /s/ Kenneth Minor --------------------------- Name: Kenneth Minor Title: Chief Financial Officer EX-27 3 FINACIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30, 1999 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS SEP-30-1999 OCT-01-1998 JUN-30-1999 2,911,423 0 3,789,924 648,636 807,317 7,576,841 3,986,828 760,357 12,048,903 1,300,451 666,275 0 75,849 26,661 9,979,667 12,048,903 9,739,101 9,739,101 2,514,254 2,514,254 11,572,417 0 19,681 (4,175,040) 0 (4,175,040) 0 0 0 (4,175,040) (1.57) (1.57)
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