<PAGE>
As filed with the Securities and Exchange Commission on May 27, 1999
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SONIC SOLUTIONS
(Exact Name of Sonic Solutions as Specified in Its Charter)
<TABLE>
<S> <C> <C>
California 7373 93-0925818
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
101 Rowland Way, Ste 110, Novato, California 94945, (415) 893-8000
(Address, including zip code, and telephone number, including area code, of
Sonic Solutions' principal executive offices)
Robert J. Doris, Chief Executive Officer
101 Rowland Way, Ste 110, Novato, California 94945 (415) 893-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
August J. Moretti A. Clay Leighton
Heller Ehrman White & McAuliffe Sonic Solutions
2500 Sand Hill Road, Suite 100 101 Rowland Way, Ste. 110
Menlo Park, California 94025-7063 Novato, California 94945
Telephone: (650) 234-4229 Telephone: (415) 893-8000
Facsimile: (650) 234-4299 Facsimile: (415) 893-8008
Approximate date of commencement of proposed sale to the public: As soon as
practicable following the effectiveness of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration number of the earlier
effective registration statement for the same offering: [_] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_] _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
Title of Securities to be Price Offering Registration
to be Registered Registered Per Share(1) Price (2) Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value 1,800,000 $4.84 $8,712,000.00 $2,421.94
- --------------------------------------------------------------------------------------------------------------------
Total 1,800,000 $4.84 $8,712,000.00 $2,421.94
====================================================================================================================
</TABLE>
(1) In accordance with Rule 416 under the Securities Act of 1933, common stock
offered hereby shall also be deemed to cover additional securities to be
offered or issued to prevent dilution resulting from stock splits, stock
dividends or similar transactions.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended,
based on the average of the high and low prices of the common stock on the
Nasdaq National Market on May 26, 1999, as reported in The Wall Street
Journal.
----------------
Sonic Solutions hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until Sonic Solutions
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
PROSPECTUS
SONIC SOLUTIONS
1,800,000 Shares
Common Stock
This prospectus may be used only for the resale of up to 1,800,000 shares
of common stock, by Kingsbridge Capital. See "Selling Security Holder."
Kingsbridge may acquire these shares from us pursuant to the stock purchase
agreement which we executed with Kingsbridge on May 20, 1999. Kingsbridge will
receive all of the proceeds from the sale of the shares and will pay all
underwriting discounts and selling commissions, if any, applicable to the sale
of the shares. Under the stock purchase agreement, however, we will receive the
proceeds from the sale of the shares to Kingsbridge in an aggregate total amount
of up to $12,000,000. Pursuant to this prospectus we will pay the expenses
incurred in registering the shares, including legal and accounting fees.
Our common stock trades on the Nasdaq National Market under the symbol
"SNIC". On May 19, 1999, the closing price for our common stock, as reported on
the Nasdaq National Market, was $4.8125 per share.
Beginning on page 2, we have listed several "RISK FACTORS" which you should
consider. You should read the entire prospectus carefully before you make your
investment decision.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is May ______, 1999.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. Kingsbridge is offering to sell, and seeking
offers to buy, shares of Sonic Solutions' common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or of any sale of the shares.
In this prospectus, "Sonic Solutions", "Sonic", "we", "us" and "our" refer
to Sonic Solutions.
_________________________
i
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY INFORMATION........................................................ 1
RISK FACTORS............................................................... 2
USE OF PROCEEDS............................................................ 5
THE STOCK PURCHASE AGREEMENT............................................... 5
SELLING SECURITY HOLDER.................................................... 6
PLAN OF DISTRIBUTION....................................................... 7
THE BUSINESS............................................................... 8
COMPANY OPERATIONS......................................................... 19
PROPERTIES................................................................. 23
MARKET FOR SONIC SOLUTIONS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.. 23
SELECTED FINANCIAL DATA.................................................... 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................. 26
DIRECTORS.................................................................. 30
EXECUTIVE OFFICERS......................................................... 31
EXECUTIVE COMPENSATION..................................................... 33
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES..................................................................... 35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 36
DESCRIPTION OF CAPITAL STOCK............................................... 37
LEGAL MATTERS.............................................................. 38
EXPERTS.................................................................... 38
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
INDEPENDENT AUDITORS' REPORT............................................... F-2
ii
<PAGE>
-----------------------
SUMMARY INFORMATION
Forward Looking Statements made in this prospectus or in the documents
incorporated by reference herein that are not statements of historical fact are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. A number of risks and uncertainties, including those discussed
under the caption "Risk Factors" below and the documents incorporated by
reference herein could affect such forward-looking statements and could cause
actual results to differ materially from the statements made.
Sonic Solutions
We develop workstations used by professionals to edit and process audio and
video information. Our products are computer based, and usually include both
plug-in hardware and applications software installed on a personal computer.
Our customers use various kinds of peripheral devices -- for example, disk
drives, streaming tape drives, and audio and video tape recorders -- along with
our products. Although we do not manufacture or sell the personal computer or
peripheral devices used with our products, we typically talk about the complete
configuration of personal computer, Sonic hardware, Sonic software, and
peripherals as a Sonic workstation.
We currently market two workstation product lines: SonicStudio(TM) and DVD
Creator(TM). SonicStudio is a line of professional audio workstations that our
customers use to prepare audio for release on digital audio compact discs, for
release with video and film entertainment, and for broadcast on radio. DVD
Creator is a line of DVD-Video/Audio production workstations which supports the
preparation and assembly of video and audio assets for release on the new DVD-
Video disc format and the upcoming DVD-Audio disc format.
We recently announced products which we intend to release later this year
that we designed for use by consumers and semi-professional customers. This is
somewhat of a departure for Sonic Solutions. We discuss this new initiative
below under the heading "THE BUSINESS - DVDit!".
Our products generally include application software and specialized
hardware installed on a personal computer. Our products are designed to improve
the productivity and effectiveness of media professionals, enabling them to
process and manipulate more material in a given amount of time and to achieve
results which would have been impossible using traditional linear analog or
digital technology.
The Offering
We and Kingsbridge entered into a stock purchase agreement on May 20, 1999.
Pursuant to that agreement, we are entitled to sell from time to time up to
$12,000,000 of common stock to Kingsbridge. That agreement also requires us to
file a registration statement covering the resale of up to 1,800,000 shares by
Kingsbridge. This prospectus is part of that registration statement.
<TABLE>
<S> <C>
Common Stock offered by Kingsbridge................... 1,800,000 shares of Common Stock
Offering Price........................................ Determined at the time of resale by Kingsbridge.
Common Stock outstanding as of March 31, 1999......... 9,468,123 shares.
Use of Proceeds....................................... Sonic Solutions will not receive any of the proceeds
from sales by Kingsbridge pursuant to this
prospectus. Any proceeds from the sale of shares by
us to Kingsbridge will be used for general corporate
purposes.
Nasdaq National Market Symbol......................... SNIC
</TABLE>
1
<PAGE>
Summary Consolidated Financial Information
<TABLE>
<CAPTION>
Years Ended March 31,
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
(in thousands except share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue.................................... 20,154 13,944 15,911 19,881 21,899
Gross profit................................... 12,478 6,600 8,479 9,672 12,352
Operating income (loss)........................ 3,236 (4,902) (5,095) (5,225) (1,557)
Net income (loss).............................. 2,534 (3,557) (5,191) (5,876) (1,859)
Basic income (loss) per share.................. 0.35 (0.48) (0.69) (0.76) (0.21)
Weighted average shares used in computing per
share amounts................................. 7,351 7,447 7,542 7,761 8,896
Diluted income (loss) per share................ 0.33 (0.48) (0.69) (0.76) (0.21)
Weighted average shares used in computing per
share amounts................................. 7,726 7,447 7,542 7,761 8,896
BALANCE SHEET DATA:
Working capital................................ 13,529 8,384 6,263 1,164 1,167
Total assets................................... 21,712 16,107 15,889 12,630 13,765
Preferred stock................................ -- -- -- 1,500 956
Shareholders' equity........................... 16,332 12,912 8,430 5,418 5,932
</TABLE>
RISK FACTORS
Purchasing Sonic's shares involves a high degree of risk. In this section
of the prospectus we discuss some specific risks associated with an investment
in our Company. There are risks other than the ones mentioned here, and we do
not mean to imply that the risks we discuss here are the only risks associated
with an investment in our Company.
You should read this section of the prospectus especially closely. You
should consider carefully whether an investment in our Company is an appropriate
investment for you. We do not intend to issue any dividends in the foreseeable
future, so the only purpose of investment in Sonic's shares is to enjoy a
potential increase in the shares' value. Because of the risks mentioned here,
and other risks not mentioned specifically here, it is possible that Sonic's
shares will decline in value in the future. For at least some period of time in
the future Sonic's shares may decline in value. If you cannot afford to lose
the value of your investment, in either the short or long term, purchasing Sonic
shares is not appropriate for you.
We have a history of losses and we may not be profitable in the future.
Sonic was unprofitable during four of the last five fiscal years. We were
unprofitable during each quarter of the 1997 and 1998 fiscal years, and during
the first three quarters of the 1999 fiscal year. We think it is likely that we
will be unprofitable during some or all of the quarters of the 2000 fiscal year.
We may not be profitable at any time in the future.
Repayment of debt will seriously deplete our cash balances.
At the end of the 1999 fiscal year (March 31, 1999) Sonic had $2,414,000 in
cash. We had an outstanding balance due on a bank credit line in the amount of
$500,000 as well as debt in the amount of
2
<PAGE>
$1,500,000 due Hambrecht and Quist in October of 1999. Repayment of these debts
will seriously deplete our cash balances, and might therefore cause us to cease
or significantly curtail our operations.
We have a history of negative operating cash flows and expect this to
continue. We will need additional financing in order to continue to operate.
During the last three fiscal years our Company ran a negative operating
cash flow prior to financing activities. This means that without access to
outside capital we would have had to cease or significantly curtail operations.
We believe that our Company will continue to run a negative operating cash flow
for the foreseeable future, and will continue to need to obtain additional
financing to continue to operate. If we are unable to obtain such financing,
then we will have to cease or significantly curtail operations.
Our stock purchase agreement may be unavailable or insufficient to meet our
future cash needs.
During fiscal year 1999 we sold stock to Kingsbridge under a then existing
stock purchase agreement to obtain $2,358,000. The purpose of this prospectus
is to facilitate additional sales of stock under a new stock purchase agreement
with Kingsbridge. While we believe that the arrangements we are making will
permit us to raise cash as required, the proposed arrangement with Kingsbridge
is subject to a number of restrictions which could restrict our ability to sell
stock to Kingsbridge. These restrictions are discussed elsewhere in this
prospectus (see "Plan of Distribution"). The risk to Sonic is that at the time
we will need cash, the stock sale arrangement with Kingsbridge will be
unavailable or insufficient to meet our cash needs.
If new digital formats are unsuccessful, it is unlikely that we will
generate sufficient revenues to recover our development cost.
Our business involves new digital audio and video formats, such as DVD-
Video and DVD-Audio. In order to prepare for a new format, we need to incur
substantial development costs to develop professional tools that will be
marketable only if the new format is successful. If the new format is not
successful, it is likely that we will not generate sufficient revenues to
recover our development costs.
We may have to incur significant product redesign costs if chip
manufacturers discontinue or redesign their products.
Our products are based on integrated circuits or "chips" produced by other
companies. If these chip manufacturers discontinue or redesign the chips we use
for our products, then we will likely incur significant redesign costs for our
own products.
Our reliance on outsourcing and single suppliers makes us vulnerable to
supplier operational problems.
Our outsourcing program commits responsibility for almost all of our
manufacturing activities to a single supplier. In addition, we often use
components that are only available from a single source. Reliance on a single
supplier for manufacturing or for certain manufacturing components makes us
vulnerable to operating or financial problems encountered by those suppliers.
Our products depend upon intellectual property rights that we may not be
able to protect.
To the extent that we use patents to protect our proprietary rights, we may
not be able to obtain needed patents or, if granted, the patents may be held
invalid or otherwise indefensible. We make extensive use of trade secrets that
we may not be able to protect.
3
<PAGE>
Other companies' intellectual property rights may prevent our current or
future product development and sales.
We have never conducted a comprehensive patent search relating to the
technology we use in our products. There may be issued or pending patents that
relate to our products. If so, we could incur substantial costs defending
against such patent infringement claims or even be blocked from selling our
products.
Other companies may succeed in obtaining valid patents covering one or more
of the key techniques we utilize in our products. If so, we may be forced to
obtain required licenses or implement alternative non-infringing approaches.
Dependence of our products on Macintosh computers exposes us to various
risks.
All of our current products and many of our future products operate on
Macintosh computers manufactured by Apple Computer. If Macintosh computers
become in short supply, sales of our products will likely decline. If there is
a decrease in the use of the Macintosh as a preferred computing platform in the
professional and corporate audio and video markets, there will likely be a
decrease in demand for our products. If there are changes in the operating
system or architecture of the Macintosh, it is likely that we will incur
significant costs to adapt our products to the changes.
Some of our competitors possess greater technological and financial
resources.
There is a substantial risk that competing companies will produce better or
more cost-effective products, or will be better equipped than we are to promote
them in the marketplace. See the discussion of competition for our SonicStudio
product line and for our DVD Creator product line at "The Business-Our Business
Lines".
We have little ability to reduce expenses to compensate for reduced sales.
We tend to close the greatest number of sales in the last month or last
weeks of a quarter and we generally do not know until quite late in a quarter
whether our sales expectations for the quarter will be met. Because most of our
quarterly operating expenses and our inventory purchasing is committed prior to
quarter end, we have little ability to reduce expenses to compensate for reduced
sales.
Approximately 10% of our revenue derives from sales to a single company.
During the last two fiscal years, 1998 and 1999, between 10% and 11%, of
our revenue was derived from sales of audio processing subsystems to Discreet
Logic. A decrease in Discreet Logic's business or its demand for our product
would cause a significant decrease in our revenue.
A significant portion of our revenue derives from sales made to foreign
customers.
Because a significant portion of our revenue is derived from non-United
States customers, we are exposed to the following risks:
. currency movements in which the U.S. dollar becomes significantly stronger
with respect to foreign currencies, thereby reducing relative demand for our
products outside the United States;
. import and export restrictions and duties;
. foreign regulatory restrictions, for example, safety or radio emissions
regulations; and
. liquidity problems in various foreign markets.
4
<PAGE>
If our suppliers and customers are not Year 2000 compliant
We do not have much information concerning Year 2000 compliance efforts of
our key suppliers and customers. If our key suppliers were to experience Year
2000 issues that caused them to delay the procurement, manufacturing or shipment
of key components to us, our ability to manufacture our products would be
affected. Similarly, if any of our key customers encounter Year 2000 issues
that cause them to delay or cancel substantial purchase orders, our revenue is
likely to be reduced.
Dilutive Effects of Stock Purchase Agreement
The sale of shares pursuant to the stock purchase agreement with
Kingsbridge will have a dilutive impact on our security holders. As a result,
our net income or loss per share could be significantly affected in future
periods causing a reduction in the market price of our common stock. In
addition, the common stock to be issued under the stock purchase agreement will
be issued at a discount of at least 10% of the then-prevailing market price of
the common stock. These discounted sales could have an immediate adverse effect
on the market price of the common stock.
Where You Can Find More Information
We file annual, quarterly, and current reports, proxy statements, and other
documents with the SEC. You may read and copy any document we file at the SEC's
public reference room at Judiciary Plaza Building, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549. You should call 1-800-SEC-0330 for more
information on the public reference room. The SEC maintains an internet site at
http://www.sec.gov where certain information regarding issuers (including Sonic
Solutions) may be found.
This prospectus is part of a registration statement that we filed with the
SEC (Registration No. __________). The registration statement contains more
information than this prospectus regarding Sonic Solutions and its common stock,
including certain exhibits and schedules. You can get a copy of the
registration statement from the SEC at the address listed above or from its
internet site.
USE OF PROCEEDS
Sonic Solutions will not receive any of the proceeds from the sale of the
shares by Kingsbridge pursuant to this prospectus. Any proceeds from the sale
of shares by us to Kingsbridge will be used for general corporate purposes.
THE STOCK PURCHASE AGREEMENT
On May 20, 1999, we entered into the stock purchase agreement with the
selling security holder, Kingsbridge pursuant to which, subject to the
satisfaction of certain conditions, we may issue and sell, from time to time, up
to an aggregate of $12,000,000, after deducting discounts, of our common stock.
Beginning on the date the registration statement, of which this prospectus
forms a part, is declared effective by the SEC, and continuing for a period of
24 months thereafter, we may from time to time, in our sole discretion, sell
("put") shares of our common stock to Kingsbridge. The price at which we may
sell shares to Kingsbridge will be equal to 88% of the then current average
market price of our common stock if the average market price is $5.00 or less,
and 90% of the average market price if the average market price is more than
$5.00. The current average market price of our common stock, for purposes of
calculating the purchase price, is the average of the lowest trading prices of
our common stock on the Nasdaq National Market for the five days beginning two
days before and ending two days after we notify Kingsbridge of our intention to
put common stock.
5
<PAGE>
Certain conditions (none of which are within the control of Kingsbridge)
must be satisfied before we can put shares of common stock, and before
Kingsbridge becomes obligated to purchase shares including, but not limited to,
the following:
. The registration statement, of which this prospectus forms a part, must
have been declared effective by the SEC;
. Our representations and warranties to Kingsbridge set forth in the
stock purchase agreement must be accurate as of the date of each put;
. No statute, rule, regulation, executive order, decree, ruling or
injunction shall be in effect which prohibits or directly and adversely affects
any of the transactions contemplated by the stock purchase agreement;
. At the time of a put, there shall have been no material adverse change
in our business, operations, properties, prospects or financial condition since
the date of filing of our most recent report with the SEC pursuant to the
Exchange Act of 1934;
. Our common stock shall not have been delisted from the Nasdaq Stock
Market nor suspended from trading;
. The number of shares already held by Kingsbridge, together with those
shares we are proposing to put, shall not exceed 9.9% of the total amount of our
common stock that would be outstanding upon completion of the put;
. At least 20 trading days must have elapsed since the date of the last
put notice (15 days if the put is for less than $650,000); and
. The average trading volume of our common stock must be at least 15,000
shares per day.
We may not be able to satisfy all conditions required under the stock
purchase agreement, therefore we may not be able to sell any shares to
Kingsbridge.
We have filed a registration statement, of which this prospectus forms a
part, in order to permit Kingsbridge to resell to the public any common stock it
buys pursuant to the stock purchase agreement.
Under the stock purchase agreement, we agreed to register the common stock
for resale by Kingsbridge to permit the resale from time to time in the market
or in privately-negotiated transactions. We will prepare and file such
amendments and supplements to the registration statement as may be necessary in
accordance with the Securities Act, and the rules and regulations promulgated
thereunder, in order to keep it effective as long as registrable securities are
held by Kingsbridge.
As explained in the "Plan of Distribution", we have agreed to bear certain
expenses (other than broker discounts and commissions, if any) in connection
with the registration statement, and we will also pay a cash commission to a
third party equal to 2% of each put amount.
SELLING SECURITY HOLDER
The following table sets forth certain information regarding beneficial
ownership of Sonic Solutions' common stock by the selling security holder as of
May 26, 1999. The number of shares beneficially owned prior to offering is
less than one percent of Sonic Solutions' common stock currently outstanding.
Because Kingsbridge may sell some or all of the shares offered hereby, and
because there are currently no agreements, arrangements or understandings with
respect to the sale of any of the shares by Kingsbridge, no
6
<PAGE>
estimate can be given as to the actual amount of shares that will be held by
Kingsbridge after completion of such distribution. See "Plan of Distribution".
Kingsbridge has not had a material relationship with Sonic Solutions within
the past three years, except as a result of entering into a Private Equity Line
of Credit Agreement with Sonic Solutions dated December 31, 1997 and a stock
purchase agreement with Sonic Solutions dated May 20, 1999.
<TABLE>
<CAPTION>
Common Stock Common Stock
Beneficially Owned Common Beneficially Owned
Prior to Offering Stock After Offering
--------------------------- to be ---------------------------
Number sold Number Percent
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Kingsbridge Capital Ltd...... 58,849 1,800,000 -- --
Dawson Building
Main Street
Road Town
Tortola, BVI
Total:.................. 58,849 1,800,000 -- --
</TABLE>
PLAN OF DISTRIBUTION
All or a portion of the shares offered hereby by Kingsbridge may be
delivered and/or sold in transactions from time to time on the over-the- counter
market, on the Nasdaq National Market, in negotiated transactions, or a
combination of such methods of sale, at market prices prevailing at the time, at
prices related to such prevailing prices or at negotiated prices. Kingsbridge
may effect such transactions by selling to or through one or more broker-
dealers, and such broker-dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from Kingsbridge. Kingsbridge
is an "underwriter" within the meaning of the Securities Act. Any broker-
dealers that participates in the distribution may under certain circumstances
also be deemed to be "underwriters" within the meaning of the Securities Act,
and any commissions received by such broker-dealers and any profits realized on
the resale of shares by them may be deemed to be underwriting discounts and
commissions under the Securities Act. Sonic Solutions has agreed to indemnify
Kingsbridge with respect to the shares offered hereby against certain
liabilities, including, without limitation, certain liabilities under the
Securities Act, or, if such indemnity is unavailable, to contribute toward
amounts required to be paid in respect of such liabilities.
Any broker-dealer participating in such transactions as agent may receive
commissions from Kingsbridge (and, if they act as agent for the purchaser of
such shares, from such purchaser). Broker-dealers may agree with Kingsbridge to
sell a specified number of shares at a stipulated price per share, and, to the
extent such a broker-dealer is unable to do so acting as agent for Kingsbridge,
to purchase as principal any unsold shares at the price required to fulfill the
broker-dealer commitment to Kingsbridge. Broker-dealers who acquire shares as
principal may thereafter resell such shares from time to time in transactions
(which may involve crosses and block transactions and which may involve sales to
and through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, in negotiated transactions or otherwise
at market prices prevailing at the time of sale or at negotiated prices, and in
connection with such resales may pay to or receive from the purchasers of such
shares commissions computed as described above. To the extent required under the
Securities Act, a supplemental prospectus will be filed, disclosing (a) the name
of any such broker-dealers; (b) the number of shares involved; (c) the price at
which such shares are to be sold; (d) the commissions paid or discounts or
concessions allowed to such broker-dealers, where applicable; (e) that such
broker-dealers did not conduct any investigation to verify the information set
out or incorporated by reference in this prospectus, as supplemented; and (f)
other facts material to the transaction.
7
<PAGE>
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale of shares may not simultaneously
engage in market making activities with respect to the common stock of Sonic
Solutions for a period of two business days prior to the commencement of such
distribution. In addition, Kingsbridge will be subject to applicable provisions
of the Exchange Act, and the rules and regulations thereunder, including,
without limitation, Regulation M, which provisions may limit the timing of
purchases and sales of shares of Sonic Solutions' common stock by the selling
security holder.
Kingsbridge will pay all commissions, transfer taxes, and certain other
expenses associated with the sale of securities by them. The shares offered
hereby are being registered pursuant to contractual obligations of Sonic
Solutions, and Sonic Solutions has paid the expenses of the preparation of this
prospectus.
Trinity Capital Advisors, Inc. is acting as placement agent in connection
with the stock purchase agreement in this offering. In exchange for such
services, Trinity will receive from the company a cash fee of 2% of each put
amount, before deducting discounts and commissions.
We have also agreed to reimburse the selling security holder for certain
costs and expenses incurred in connection with this offering including insurance
related to Kingsbridge's activities as an underwriter. These may include the
fees, expenses and disbursements of counsel for the selling security holder
incurred in the preparation of the stock purchase agreement and associated
documentation and the registration statement of which this prospectus forms a
part.
The price at which the common stock will be issued by the Company to
Kingsbridge shall be 88% of the average market price on the date the Company
issues shares if the average market price is $5.00 or less, and 90% of the
average market price if the average market price is more than $5.00. Assuming
an aggregate put amount of $1,000,000 and an average market price of $5.00 or
less, underwriting compensation to Kingsbridge would equal $120,000. The
commission to Trinity Capital Advisors, Inc. would equal $20,000.
THE BUSINESS
Overview
We develop workstations used by professionals to edit and process digital
audio and digital video. Our products are computer based, and usually include
both plug-in hardware and applications software installed on a personal
computer. Our customers use various kinds of peripheral devices -- for example,
disk drives, streaming tape drives, and audio and video tape recorders -- along
with our products. Although we do not manufacture or sell the personal
computers or peripheral devices used with our products, we typically refer to
the complete configuration of personal computer, Sonic hardware, Sonic software,
and peripherals as a Sonic workstation.
We currently market two workstation product lines: SonicStudio(TM) and DVD
Creator(TM). SonicStudio is a line of professional audio workstations that our
customers use to prepare audio for release on Digital Audio Compact Discs
(CD's), for release with video and film entertainment, and for broadcast on
radio. DVD Creator is a line of DVD-Video/Audio production workstations which
supports the preparation and assembly of video and audio assets for release on
the new DVD-Video disc format and the upcoming DVD-Audio disc format.
We recently introduced products that we intend to release later this year
designed for use by consumers or semi-professional customers. This is somewhat
of a departure for Sonic Solutions. We discuss this new initiative below under
the heading "DVDit!".
8
<PAGE>
Our Industry
Our Customers
Our customers are mainly professional facilities that process and prepare
audio, video and film programming. Most of this programming is for
entertainment, though a significant portion of it is used for educational and
business communications purposes.
Some of our facility customers are independent organizations that supply
services to audio and video content holders and publishers. Some of our
customers are in-house facilities that are owned by particular content holders
or publishers.
Our customers range in size from relatively small organizations with few
employees to larger facilities with hundreds of employees. Among our customers
are facilities that are independent, privately owned companies, as well as
facilities which are part of much larger public, private, or non-profit
organizations. While we have concluded corporate purchasing agreements with
certain customer organizations that have multiple facilities, decisions even
within such organizations to purchase and deploy our products are usually made
at the facility level.
Most of the time we market our products as Sonic Solutions products, and
not as part of another company's products. From time to time we have concluded
agreements with other companies in which they incorporate some product of ours
into their product line (this is commonly referred to as an "OEM" arrangement).
At the present time there is one such relationship which accounts for a
significant portion of our revenues. Please see further discussion about this
below under "OEM Customers; Sales Concentration." Also see "Risk Factors "
The Shift to Digital
The professional audio and video industry has shifted significantly from
analog to digital technology over the past twenty years. Digital technology
encodes sound and video as numbers and stores them as a kind of computer data.
In contrast, analog technology records sound and video by making a physical
representation analogous to the original audio or visual signal. Long-playing
records ("LP") and Digital Audio Compact Discs ("CD-A"), are good examples of
analog (LP's) and digital (CD-A's) media. In an LP the grooves cut into the
vinyl record have a physical shape analogous to the original sound pressure
wave. In a CD-A the original sound pressure wave is encoded into numbers that
are recorded as tiny pits on the surface of an optical disc.
The shift to digital encompasses the tools used to edit, process and
prepare audio and video prior to release, as well as audio and video release
formats -- the form in which the audio or video actually reaches the intended
consumer. Different applications and segments within the professional audio and
video industry have shifted to digital technology at different times. Complete
conversion to digital technology has not yet occurred. We expect that the shift
will continue for the next several years until some point in the first decade of
the 21/st/ century when analog technology will effectively cease being used in
the professional audio and video industries.
There are a number of reasons why digital technology has been attractive to
audio and video professionals:
. Higher Quality -- Digital technology permits higher quality audio
and video to be recorded and replayed under most circumstances. Of
course, this assumes that the recordings involved are made at a
high resolution.
9
<PAGE>
. Perfect Copying -- Digitally recorded audio and video can be
perfectly reproduced, over an unlimited number of generations.
Every analog recording process involves some amount of signal loss
with each successive generation of copying.
. Speed and Precision of Manipulation -- Digital technologies permit
more rapid and more accurate manipulation of audio and video
signals than is possible in analog technology.
. Special Capabilities -- Digital technology permits certain kinds
of processes that are difficult or practically impossible using
analog techniques. One of our own products, a signal processing
tool called NoNOISE(R), is a good example of this. NoNOISE permits
audio recording engineers to remove various kinds of noise from
already recorded sound with a great degree of precision and
fidelity.
. Declining Costs -- Digital technology is enjoying dramatic cost
reductions, driven by the broad scale adoption and growth of
computer technology in business, in home use, in communications
and on the Internet. In contrast, analog technology for audio and
video recording has reached a effective plateau in terms of cost.
Of course, digital technologies have presented some drawbacks to adoption
over the past 20 years. A few of these are:
. Enormous Bandwidth -- Representing audio and video in high
resolution is enormously consumptive of storage space and computer
processing power. Computers were historically first applied to
text and arithmetic processing applications which require
relatively limited digital storage and processing power. For
example, a 300 page book-length work can easily be represented in
3 megaBytes of storage. A single CD-A requires some 600 megaBytes
to store a little more than one hour of stereo music.
. Real Time Requirements -- Audio and video are real time data,
meaning that they must be presented to the observer in strict time
sequence -- neither too fast nor too slow. For historical reasons,
computer engineers developed much of their technology using
architectures, called asynchronous architectures, which make it
difficult to ensure such strict timing. This meant that it was
difficult for companies like ours to use "off the shelf" computer
technology to develop our products.
. Analog Release Formats -- In many ways release formats have been
the slowest areas to shift to digital. Even today almost all video
programs reaching consumers arrive via analog formats (VCR
cassettes, conventional broadcast television, conventional cable
television). The Digital Audio Compact Disc, of course, now
accounts for the majority of pre-recorded music sold to consumers
in industrialized countries. But most broadcast radio, as well as
the audio accompanying broadcast video, theatrical feature films,
and pre-recorded video, is still delivered mostly using analog
formats. Slow transition of release formats to digital technology
has tended to retard adoption of digital technology by
professionals for "upstream" processes such as editing.
Our company was founded to pursue the opportunities presented by this major
transition, and, to facilitate the transition by offering professionals
compelling alternatives to traditional analog production tools. The shift to
digital creates risks for us. See "Risk Factors"
10
<PAGE>
Our Business Lines
We currently offer two professional workstation product lines, oriented
toward somewhat different applications within the professional audio and video
industry. SonicStudio(TM) is a line of professional digital audio workstations.
DVD Creator(TM) is a line of DVD-Video/Audio production workstations.
Both our SonicStudio and DVD Creator workstations are designed to run on
versions of the Macintosh personal computer manufactured by Apple Computer. We
have plans to introduce versions of both product lines compatible with the
Windows and Windows/NT operating systems. But completion of such versions is by
no means assured. Current reliance on the Macintosh computer creates risks for
our Company. See "Risk Factors".
Professional Audio Workstations
SonicStudio
A SonicStudio digital audio workstation consists of:
1. one or more of our audio signal processing cards installed on a
Macintosh personal computer;
2. one or more outboard interface boxes (which contain various
styles of professional interface connections used to link the
workstation to other audio devices in the studio); and,
3. extensive applications software.
Applications for SonicStudio
Our customers use their SonicStudio systems to manipulate audio, applying a
number of processes to digital sound to prepare it for final release. Some of
these processes are quite specialized and technical. To give you a sense of the
capabilities of our workstations, here are some of the tasks typically performed
using SonicStudio workstations:
. Editing -- SonicStudio permits very precise and elegant editing
of sound. Editing is the process by which pieces of sound are
combined to create a single resulting sound in such a way that
the existence of the original individual pieces is imperceptible
to the listener. Editing is used extensively in professional
audio work. For example, movie sound tracks are heavily edited to
include sound effects and replacement dialog (virtually none of
the sound effects of dialog you hear in the theater was actually
recorded when the picture was being shot). Another example:
classical music recordings are in most cases the result of
intensive editing of multiple performances of the same program
(our classical editing customers tell us that an edit every 6
seconds on average is not uncommon).
. EQ -- SonicStudio can be used to equalize ("EQ") the sound, a
process by which certain frequencies are emphasized or de-
emphasized. EQ is similar in concept to manipulating the bass and
treble controls on a consumer audio system, but which much
greater precision and sophistication.
. Mixing -- SonicStudio can be used to mix or combine together two
sound recordings into one. Mixing is often used in professional
audio work because it is more convenient to record individual
elements at different times and under different conditions. The
individual elements or tracks are combined or mixed together to
produce the resulting sound used in release.
11
<PAGE>
. Noise Reduction -- We offer NoNOISE(R) as an option to
SonicStudio. NoNOISE is a suite of software tools which permits
users to remove unwanted noise from recordings. NoNOISE has been
used extensively by audio professionals, particularly to re-issue
older recordings on Compact Disc, and to clean up noisy location
sound tracks for film and broadcast video work. In 1997, our
company was honored with a technical Emmy(R) award for NoNOISE.
Customer Segments for SonicStudio
There are three major segments of SonicStudio customers:
. Mastering -- customers in this segment use our products to
prepare music recordings for release to consumers, primarily on
Digital Audio Compact Discs.
. Broadcast -- customers in this segment use our products to
prepare audio for broadcast on radio.
. Sound-for-Picture -- customers in this segment use our products
to prepare audio tracks used with film or video programming.
Customers
We have supplied SonicStudio workstations to many professional audio
facilities around the world. As of March 31, 1999, more than 4,000 SonicStudio
systems had been shipped to customers, since the product was first introduced in
1990.
Configurations
We offer SonicStudio in a variety of configurations, and with various
hardware and software options. A customer could purchase a SonicStudio system
configured for basic two channel CD premastering for approximately $5,000. A
customer would pay approximately $10,000 for a fully-featured SonicStudio
system configured for multi-track editing and mixing. Please remember that we
do not include the cost of the personal computer or peripheral devices in our
illustrative pricing. Remember also that revenue as we report it on our
financial statements is usually based on the net price we receive from dealers,
and is thus lower on average per system than indicated by these illustrative
prices, which are based on end user list prices.
Competition
We encounter competition from a number of companies when selling
SonicStudio. We compete with companies offering traditional analog production
tools, digital recording and processing devices, as well as digital audio
workstations. The key elements of competition include features, cost
effectiveness and product quality, customer support, and marketing and sales
efforts.
Many of our competitors have greater financial, technical and marketing
resources than we do. Traditional professional audio competitors, such as Japan
Victor Corporation (JVC), Otari Corp., Sony Corporation and Studer AG (a
division of Harmon Industries), sell analog as well as digital systems. A
number of competitors supply digital audio workstations including Digidesign (a
division of Avid Technology), Fairlight, Studio Audio and Design, Ltd. (Sadie),
WaveFrame, Dalet, Augan and others. Our products compete also with various kinds
of single function digital audio processing devices. For example noise
reduction modules from Cambridge Audio Research (CEDAR) compete with the NoNOISE
option for SonicStudio. For a further discussion of the risks associated with
the competition faced by SonicStudio, see "Risk Factors".
12
<PAGE>
New HDSP Platform
In late March, 1999, we began shipping the latest generation of our
SonicStudio workstation line -- SonicStudio HD(TM). SonicStudio HD utilizes a
new generation audio signal processing card, the "HDSP" which significantly
increases the processing power of SonicStudio. We released newly developed
application software to support this new workstation. We believe that
SonicStudio HD is important for the future of our audio business, especially in
light of the advent of new, higher resolution DVD based audio formats.
A number of our existing SonicStudio customers purchased upgrades to the
new HDSP platform when we introduced it. We anticipate that HDSP will permit
many of our customers to begin their involvement with new high resolution
formats such as DVD-Audio. We also believe that HDSP will be a very competitive
offering for customers who are shopping for a new digital audio workstation.
Strategy
Our strategy with SonicStudio is to continue to offer products that enhance
professional productivity while meeting the specific needs of each segment of
our target markets. We believe that SonicStudio and related peripheral products
currently accomplish this strategy for the following reasons:
. Focus on the Application - Each segment of the professional audio
market has specialized needs. Our SonicStudio product line spans a
wide range of performance characteristics, hardware and software
options, configurations and price points in order to address the
specific needs of professionals in each market segment.
. Professional Performance - We focus on satisfying demanding
professional performance requirements. That is why we implement an
architecture utilizing specialized hardware to ensure a fast,
professional level of system response, and to avoid processing
bottlenecks in handling bulky audio and video files.
. Efficiency Features - We designed SonicStudio to increase operator
efficiency. For example, every system allows background loading of
sound to the hard disks while the audio professional works on
other material already loaded on the hard disk. The re-design of
our applications software to support the new HDSP involved a year-
long effort and a number of customer focus groups where we
carefully analyze actual customer use patterns to improve
SonicStudio's user interface.
. Modular Software-Based Solutions; Upgrades - We offer a modular
set of software applications including digital equalization,
filtering, dynamics, processing, mixing, dithering, time
compression, pitch shifting, varispeed and reverberation. We
package various features into options which can be added by
customers as they wish and as their business needs dictate. We
have also traditionally offered customers enrolled in our
SonicCare(TM) maintenance program relatively low priced hardware
upgrades when hardware versions change. This economical upgrade
path affords customers a degree of assurance that their investment
in a SonicStudio will not be quickly outmoded.
DVD Creator
DVD-Video
Our DVD Creator(TM) workstations support preparation of DVD-Video discs.
13
<PAGE>
DVD-Video is a relatively new optical disc format, introduced in 1996,
which offers high quality video, surround audio, and interactivity on a Compact
Disc-sized disc. The DVD-Video format offers content publishers a wide range of
features and options.
Video is presented in the MPEG-1 or MPEG-2 compressed digital video format.
A number of video streams may be presented in parallel so that, responding to
user commands, the player may seamlessly jump from stream to stream.
Audio is available in both compressed digital stereo and "surround"
formats, as well as uncompressed "PCM" digital audio. Up to eight audio streams
may be presented simultaneously (and may also be selected for playback based on
real-time user decisions) -- to support different language dialog tracks, or to
allow stereo and surround versions of the same audio program.
Chapter marks may be specified for random access into the video program.
Subpictures (images overlaid on background video or still images) may be
included and can be used in a number of ways, for example, to create animated
"buttons" to facilitate user interaction, or to display language subtitles.
Still pictures may be presented with audio and with subpictures. Extensive
navigation capabilities are available to permit users to select from various
program branches, to return to previous branch points or menus, etc.
DVD-Creator Functions
DVD-Creator supports the three basic processes required to prepare audio
and video programming in the DVD-Video format. These are:
. MPEG-2 Video Encoding -- MPEG-2 and MPEG-1 video are the standards
for DVD-Video discs. MPEG is a digital video format that
compresses the original digital video stream to reduce bandwidth
and storage requirements by 90 to 95% but with little or no loss
in perceived quality.
. Audio Preparation and Encoding -- DVD-Video supports uncompressed
("PCM") digital audio as well as MPEG-2 and Dolby Digital
compressed formats.
. Format Authoring -- To support the advanced features of DVD-Video,
particularly menu-drive interactivity and multiple video and audio
streams, the audio, video, graphic and text elements included in
the disc must be organized, linked and then "woven" together.
Products
DVD Creator includes three principal separable subsystems capable together
of performing all the tasks necessary for producing a finished DVD-Video disc
image which can then be replicated on manufactured DVD discs. Those are:
. Video Encoding: DVD Studio - The DVD-Video standard specifies
MPEG-2 and MPEG-1 compressed digital video as the video formats
to be used on DVD-Video discs. While a number of choices within
the standard are possible, the typically preferred format is
variable bit rate MPEG-2 operating at an average bit rate of
approximately 4 Megabits per second. DVD Creator includes DVD
Studio, a system enabling professional users to compress input
professional video into the MPEG-2 format. DVD Studio consists of
plug in circuit cards for the Macintosh incorporating an MPEG
encoding/decoding chipset developed by IBM. Sonic has developed an
extensive suite of applications software for DVD Studio to support
user control of the encoding process,
14
<PAGE>
and facilitate the operation of DVD Studio with standard
professional video tape recorders and other typical peripherals.
. Audio Encoding: DVD Studio Audio - DVD Creator bundles a standard
SonicStudio system, running on the Macintosh, with special
software to perform Dolby Digital and MPEG-2 audio compression and
audition.
. Format Authoring: DVD Producer - DVD Creator's authoring subsystem
is DVD-Producer. The authoring step takes individual compressed
video, audio, graphics, still picture and subpicture elements and
combines and organizes them along with instructions specifying
interactivity (i.e., the response DVD players will make based on
user manipulation of front panel buttons or remote control
buttons). The output of the authoring step is an "asset list,"
containing each of the individual elements, and a "script"
describing how the assets are combined and accessed via user
commands. Because of the large number of potential elements in a
DVD title and the high level of interactivity possible, DVD-
Producer is a complicated software package.
In addition to these main subsystems, DVD Creator includes two other
subsystems:
. Emulation: PrePlay - Because of the complexity of a DVD title,
users of DVD Creator require the ability to preview the results of
their decision making before the time consuming and expensive step
of cutting a "glass master" at the replication plant. An optional
(software and hardware) emulation station permits the user to
interact with a DVD title stored as project elements on hard disk
prior to final image generation.
. Formatting and Writing: Format Server and Imager -- We provide a
separate formatting engine as a standalone application called
Format Server. Format Server takes the output of a DVD-Producer
authoring session (script and asset list) and combines navigation
instructions with audio and video assets to create a finished disc
image. The image can then be played from computer hard disk, or
converted by another standalone application, called Imager, into a
streaming tape based image (the standard way in which images are
transmitted to the replication plant) or recorded onto a
recordable DVD disc.
DVD Creator is sold in multiple versions for between $20,000 and $99,999
(again, our prices do not including host computers, disk storage or other
peripheral devices). Customers can purchase upgrade options for any version to
increase the functionality of the system. Typically customers will spend
between $35,000 and $50,000 for their DVD Creator system.
DVD-Audio
Version 1.0 of the DVD-Video specification was published in August of 1996,
and players were introduced into various regions of the world during late 1996,
1997 and 1998. At about the same time the DVD-Video specification was being
finalized, the DVD Forum (the standards-setting industry association for DVD)
formed a Working Group to develop a DVD-Audio format, intended to be a sister
format to DVD-Video, but to emphasize more audio features.
The DVD-Audio Working Group spent more than two years developing the new
DVD-Audio specification in close collaboration with the major recorded music
companies. The DVD Forum has scheduled release of Version 1.0 of the new DVD-
Audio specification to occur in early to mid 1999. We announced support for
this new specification in the fall of 1998, and began delivery of the first
software packages supporting preliminary and limited DVD-Audio authoring early
in 1999. We plan to introduce complete DVD-Audio support on a phased release
basis during the balance of 1999 working closely with player manufacturers and
early DVD-Audio content publishers.
15
<PAGE>
Market
We divide the DVD-Creator market into 3 segments:
. "Hollywood" Segment - This segment includes facilities which
prepare film and video material for mass publication on DVD-Video
discs. It includes film and television studios and production
companies and other content owners as well as top flight
independent video post production facilities which provide
services to such content holders. Customers in this segment tend
to cluster in major film and video product centers including
Hollywood/Los Angeles, New York City, Chicago, London, Paris,
Tokyo, Taipei, etc. Customers in this segment demand the very
highest quality in terms of processing output, strict adherence to
standards, and are very concerned with the overall efficiency of
production since projects are often produced on tight schedules.
Parallel production techniques are often employed by customers in
this segment to speed production. We estimate that there are a few
thousand facilities and organizations in this segment, worldwide.
. "Corporate" Segment - Customers in this segment prepare DVD-Video
discs for publishing a variety of kinds of information for sales,
training, and other communications purposes. The segment includes
"in-house" departments of corporate, industrial, non-profit or
educational organizations, or independent facilities who
specialize in assisting such organizations in preparing such
material. Customers in this segment are typically somewhat more
budget constrained than customers in the "Hollywood" segment
(though in certain instances production values and budgets equal
or even exceed those typically encountered in the Hollywood
segment). They tend to be geographically more dispersed. While
efficiency of production is a key requirement of such customers,
compatibility with other, existing recording and post-production
equipment is a major concern of customers in this segment. This
segment is only now beginning to adopt DVD, though given the
spread of DVD-ROM in the Personal Computer industry, many industry
observers predict rapid growth in the use of DVD in this segment.
We estimate that there are potentially more than 100,000
facilities and organizations in this segment on a worldwide basis.
. "Multimedia" Segment - This segment includes developers of
multimedia entertainment and educational titles intended for a
mass audience. Many of the organizations in this segment
previously were involved in the production of CD-ROM, CD-I, and
computer based titles. Customers in this segment tend to use DVD
in conjunction with specialized computer software, and accordingly
their needs are more varied than those in the other segments.
While relatively few organizations in this segment have moved to
DVD, industry observers report a high level of interest. We
estimate that there are approximately 15,000 organizations that
might ultimately become involved in DVD-based production in this
segment.
DVD Creator is sold to professional audio and video facilities, production
studios, as well as CD/DVD plants and corporate customers. As of March 31, 1999
Sonic had shipped over 500 DVD Creator systems to customers in various locations
around the world (not all customers purchased all three subsystems of DVD
Creator).
Competition
The DVD-Video format has generated significant interest among professional
system suppliers. A number of companies currently provide MPEG-2 video encoding
capabilities, audio encoding capabilities and authoring systems for the
professional user. We believe that more companies will participate in this
market in the future.
16
<PAGE>
A number of companies compete with all or part of our DVD Creator offering.
Our competitors include: Astarte, C-Cube Microsystems, Daikin Industries,
Digital Vision, Dolby Laboratories, FutureTel, Innovacom, Intec, Lucent,
Matsushita, Minerva Systems, Mitsubishi, Optibase, Philips, Pioneer, Sony,
Spruce Technologies, and Toshiba, among others. A number of these companies
have financial or organizational resources significantly greater than ours
and/or greater familiarity with certain technologies involved in DVD
premastering solutions. See "Risk Factors".
Strategy
We expect that our DVD related business will account for an increasing
portion of our overall business in the future. Our DVD strategy will continue
to be based on the following elements:
. Focus on Professional Applications -- Our DVD product and service
offerings are focused on video and audio professionals whose
primary concern is producing the highest quality DVD discs, in
complete compliance with worldwide standards, with a high level of
efficiency. We will continue to evolve DVD-related premastering
tools which are fully compatible with "industry-standard" input
formats and typical professional video and audio equipment sets.
. High Performance Tools -- Our DVD tools will offer professional
users the highest levels of performance, both in terms of power
and sophistication of processing, and in terms of maximizing
facility efficiency.
. Flexible Configurations -- Because DVD premastering is relatively
new and still evolving, the balance of capabilities in typical DVD
premastering settings, and the typical workflow involved in
generating a DVD title are still in flux. We have engineered DVD
Creator as a "workgroup" solution incorporating modular audio,
video and authoring subsystems to make it easy for facilities to
re-arrange DVD workflow quickly, and to comply easily with
changing demands in the DVD universe. We plan to continue to
implement this philosophy in future DVD product offerings.
. Range of Product Offerings -- DVD has a number of potential uses,
including applications in corporate and industrial settings, and
in "prosumer" and consumer venues, as well as in delivery of mass
entertainment such as feature films, videos, and recorded music.
We plan to evolve each element of its DVD premastering tool set --
video, audio and authoring -- to specifically address the
specialized needs of such emerging segments. Please see the
discussion regarding "DVDit!" below.
DVDit!
At the National Association of Broadcasters Convention in April, 1999 we
introduced a new DVD authoring product line, called DVDit!. DVDit! is designed
as a highly simplified interactive video authoring tool that can output a DVD
image, or can output the same program in other formats such as Video CD, HTML
web page, or a non-standard runtime image.
We announced two versions of DVDit! -- a standard version and a more
limited "LE" version.
We introduced DVDit to position Sonic to take advantage of certain
significant trends:
. Proliferation of MPEG -- Due to certain introductions by chip
makers, relatively high quality MPEG encoding systems will become
widely available during the remainder of
17
<PAGE>
1999 and in 2000 at prices ranging down to a few hundred dollars at retail.
Many of these systems will support direct transcoding from DV video to MPEG
video.
. Availability of Accessible DVD Recording -- Until recently DVD
recorders were high priced, and supported less than a full sized
disc. In the spring and summer of 1999, we anticipate that full-
image, more reasonably priced DVD recorders will become available,
and that a DVD-R/W format will be introduced to supplement DVD-R.
We believe that DVD recording devices will eventually be as cheap
as current day CD-R and R/W devices. But because of the rapid
deployment of DVD, we think that consumer level pricing will be
reached in two years rather than eight.
. Ubiquitous Digital Video -- Relatively high quality digital video
camera/recorders based on the DV format were introduced in the
past two years. In 1999 virtually every manufacturer of
professional and prosumer video editing systems is intending to
release DV compatible systems.
. Rapid Growth in DVD Playback Units -- By the end of 1998
approximately 8 million DVD-Video playback units (including both
set-top players and DVD-equipped multimedia PCs) had been
installed worldwide, according to industry sources. By the end of
1999, this installed base is forecast to have grown to more than
40 million units.
We plan to execute a bundling strategy with DVDit! We will conclude
bundling agreements with OEM partners to include copies of DVDit!-LE with their
products. We will then offer upgrades to the full DVDit! version over the web.
We may also offer DVDit! through conventional computer industry resale channels.
We have designed DVDit! to be highly compatible with our professional DVD
Creator offering. DVDit systems can output authoring scripts which can be
uploaded for professional finishing in one of our DVD Creator systems. We
anticipate bundling copies of DVDit! with our DVD Creator systems so that our
professional customers can seed their clients with DVDit! copies to leverage
their professional DVD business.
OEM Customers; Sales Concentration
We generally market our products to end users as Sonic Solutions products.
However, from time to time we have concluded various "OEM" agreements with other
companies, in which those companies included our products as part of the their
product offerings. At the present time we have one significant OEM relationship
with Discreet Logic ("Discreet"), now a division of Autodesk, in which we
provide audio subsystems for use with some of their high end video effects and
editing workstations. Sales to Discreet amounted to 10% of total revenues in
the fiscal year ended March 31, 1998, and 11% of total revenues in the fiscal
year ended March 31, 1999. Although we consider our relations with Discreet to
be good, we anticipate that at some point in the fiscal year ending March 31,
2000, or the fiscal year ending March 31, 2001, Discreet may implement changes
to its product line replacing or eliminating our subsystems. See "Risk
Factors".
Apart from sales to Discreet, no other single customer accounted for more
than 10% of our total revenue during each of the past three fiscal years.
Macintosh Dependence
All of our current professional products operate on Macintosh computers
marketed by Apple Computer. Because of this our business would be particularly
at risk if there was an interruption in the supply of Macintosh computers either
because of operational or financial or other business problems at Apple. Our
business would also be threatened if Apple made changes to the operating system
software or hardware of the Macintosh line that led to compatibility problems
with our hardware or software. See "Risk Factors".
18
<PAGE>
COMPANY OPERATIONS
Marketing, Sales and Distribution
Marketing and Product Management
Our marketing organization plans and manages development of our products.
We currently have seven employees in marketing, all based in our headquarters
office in Novato, California, including product marketing managers, public
relations and design staff.
Field Sales Force
We sell our professional workstation products through our field sales force
in combination with a network of professional audio/video dealers. We currently
employ 19 people in our field sales organization. Sales personnel are based in
our headquarters office in Novato, California as well as at our offices in
London (covering Europe) and in Tokyo (covering the Pacific Rim). We have other
sales personnel based out of home offices in Chicago, Atlanta, Los Angeles,
Shanghai, and New York City. Our field sales force includes sales managers and
sales engineers. Most of our field sales personnel operate under compensation
arrangements in which a substantial portion of their target compensation is
contingent upon performance relative to revenue targets.
Although all members of our sales organization are familiar with all of our
workstation products, some of our sales personnel focus on DVD Creator products,
and some focus on SonicStudio products.
Dealers
The vast majority of our workstation sales involve one of our dealers.
Dealers play an important role in our sales and support efforts. They stimulate
demand in their regions, they prospect for and qualify potential new customers,
they give product demonstrations, they close sales, and they assist in post-sale
installation, training and support. Dealers very often sell peripheral
equipment along with our Sonic products so that customers can obtain a complete
workstation configuration from one source.
We have dealers in most areas of the world. We generally do not grant
contractual exclusivity to our dealers, though as a matter of practice,
depending on the dealer's territory and competence, we may maintain only one
dealer in a particular region.
Recruiting and maintaining dealers can be a difficult process. Because our
products are sophisticated, our dealers need to be technically proficient and
very familiar with professional audio and video production work. Dealer
organizations sometimes have limited financial resources, and may experience
business reversals for reasons unrelated to our product lines. The attractive
dealers in a region may be carrying competing products.
Our dealers are specialized to some extent by product line. Many
SonicStudio dealers do not carry DVD Creator products, and likewise many DVD
Creator dealers do not carry SonicStudio products. There are some dealers who
carry both lines. The following table shows our current dealer count by product
line and region of the world:
19
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Sonic DVD
Region Studio Creator Total*
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Americas 22 21 34
- --------------------------------------------------------------------------
Europe 33 21 26
- --------------------------------------------------------------------------
Pacific Rim 11 15 23
- --------------------------------------------------------------------------
</TABLE>
* Note: "Total" is less than the sum of SonicStudio and DVD Creator dealers
because one dealer organization sometimes covers both product lines.
Employees
At March 31, 1999, we employed 87 full-time-equivalent employees, including
37 in marketing, sales and customer support, 30 in software and hardware
engineering, 10 in manufacturing and 10 in administration and finance. To a
very great degree our success in the future will depend on our ability to
recruit, retain and motivate engineering, technical, sales, marketing and
operations professionals. Recently the U.S. labor market has been quite tight,
and demand for high technology professionals has been very strong. To make
matters worse, our company participates in what is perceived to be a "hot" area
of the "high tech" industry. We have found that recruiting high caliber
individuals is difficult and have had to expend considerable efforts in this
area.
No labor unions represent any of our employees.
We have never experienced a work stoppage, slowdown or strike. We believe
that our employee relations are good.
Customer Support
Customer support is important to professional users. This is why we offer
our customers the SonicCare(TM) maintenance program. Customers purchase annual
SonicCare service contracts from us that provide for ongoing software upgrades,
telephone support, "swap" replacement hardware in case of hardware failure and
preferential access to new products and new versions of software. Customers
typically add a SonicCare option to their initial system purchase and a
significant portion of customers renews SonicCare yearly.
To administer SonicCare, we employ a staff of product support specialists
at our Novato headquarters and in our field offices. We provide unlimited
telephone support during scheduled support hours to all customers under
SonicCare. Customer support calls also provide us with an important means of
understanding customer requirements for future product enhancements. We also
undertake regular customer calling programs in which customers are contacted by
a customer support representative to assess their level of satisfaction and to
acquaint them with new product offerings.
Research and Development
Our research and development staff includes a total of 30 hardware and
software engineers and technicians and technical specialists. We tend to hire
research and development personnel with backgrounds in digital audio signal
processing, digital video image processing, distributed networking, and computer
systems design. Our development team exhibits a number of technology
capabilities including the following that we believe are particularly important
in light of our strategy and market position:
. Digital Signal Processing - This is the term used to describe the
sophisticated mathematical processing by which aural and visual
signals are processed in computer based settings. Our engineering
team includes individuals experienced at providing
20
<PAGE>
sophisticated digital signal processing solutions to meet the
quality and performance requirements of audio and video
professionals.
. Real Time Architectures - Our engineers are experienced in dealing
with the requirements of high bandwidth, real time data in
computer-based settings. We believe that has helped us to develop
products that provide cost effective solutions for professional
applications.
. Craft Familiarity - Our engineers are experienced in the needs and
work patterns of audio, film and video professionals. This helps
us develop products which can be adopted more quickly by creative
audio and video professionals.
Backlog
We schedule our production of products based on our projections of customer
demand, and we generally ship products within a few days of acceptance of a
customer purchase order. Thus, at any given time we have little or no order
backlog. With few exceptions, customers may cancel or delay orders with little
or no penalty. Thus, even to the extent that we have backlog we do not think
that it is a reliable indicator of future revenue levels. See "Risk Factors."
Manufacturing and Suppliers
How We Manufacture
We have typically contracted with various electronics manufacturing and
assembly houses to manufacture the hardware components of our products. Most
of these contractors are located in the San Francisco Bay Area. Our staff
performs final assembly, integration and testing at our Novato, California
headquarters.
Sole-Sourced Components
We utilize a number of components in our products that are available from
only a single source. We purchase these sole-source components from time to
time, that is, we do not carry significant inventories of these components and
we have no guaranteed supply agreements for them. We have experienced shortages
of some sole-sourced components in the past. We are likely to experience
similar shortages at some point in the future. Such shortages can have a
significant negative impact on our business.
Outsourcing
Over the past two years, we have shifted our hardware manufacturing to an
"outsourcing" approach. Under outsourcing we contract with a single partner
organization which takes responsibility for procuring parts, and for
manufacturing them into completed, tested assemblies which are then released to
us according to our instructions. Our current outsourcing arrangement is with
Time/Avnet. We believe that outsourcing provides us with increased flexibility
to increase or decrease production, and allows us to operate our business with
substantially reduced inventories thereby reducing financing requirements.
During the 1999 fiscal year, we produced approximately 85% of our hardware via
outsourcing. We plan to continue this outsourcing approach indefinitely.
While we believe that outsourcing is advantageous for Sonic, this makes us
very dependent on a single production source. Financial, operational, or supply
problems encountered by our outsourcing partner or its sub-contractors could
seriously hamper or interrupt our ability to manufacture and sell our products.
21
<PAGE>
Proprietary Rights
General Approach
We rely on a combination of trade secret, copyright law, trademark law,
contracts and technical measures to establish and protect our proprietary rights
in our products. We generally sell our products subject to standard purchase
and license agreements that restrict unauthorized disclosure of our proprietary
software and designs, or copying for purposes other than the use intended when
the product is sold.
Patents
We have applied in the United States for patents covering certain of our
technologies and will probably apply for more in the future. We will probably
also apply for foreign patents. We have been granted U.S. Patent No. 5812790:
"Variable encoding rate plan generation" covering certain aspects of MPEG-2
Video encoding technology, and may be granted additional patents in the future.
Of course, we can't be sure that our current or future patent applications will
be granted. Not can we be certain that we can successfully prosecute claims
against others based on our patents, or defend our patents against the claims of
others. We believe that becoming involved in patent litigation can be quite
expensive, and is highly uncertain in terms of outcome.
The status of patent protection in our industry is not well defined
particularly as it relates to software and signal processing algorithms. In the
past several years there seems to have been a trend on the part of patent
authorities to grant patents in audio and video processing techniques with
increasing liberality. We believe that it is quite possible that some of our
present or future products may infringe issued or yet to be issued patents. It
is almost certain that we will be asked to respond by patent holders to respond
to infringement claims. If such patents were held to be valid, and if they
covered a portion of our technology for which there was no ready substitute, we
might suffer significant market and financial losses.
Our products involve the use of certain technologies in which the overall
patent situation is acknowledged by most industry observers to be very unclear.
For example, patent coverage and license availability for MPEG-2 video encoding
and decoding is currently quite uncertain. While one group of companies has
attempted to create a single licensing entity for this technology (called
"MPEG/LA"), not all relevant patent holding companies have joined this entity.
We plan to continue to monitor this area and to act prudently to avoid needless
litigation and entanglements while continuing to offer our products.
Trade Secrets
We rely to a great extent on the protection the law gives to trade secrets
to protect our proprietary technology. Our policy is to request confidentiality
agreements from all of our employees and key consultants, and we regularly enter
into confidentiality agreements with other companies with whom we discuss any
Sonic proprietary technology.
Despite trade secret protection, we cannot be sure that third parties will
not independently develop the same or similar technologies. Despite contract
and procedural measures, we believe that it is practically impossible to guard
against unauthorized disclosure or misuse of technology to which we have granted
third parties access. We have significant international operations. Many
foreign countries, in law or in practice, do not extend the same level of
protection to trade secrets as does U.S. law.
Current Infringement Issues
In the past we have been advised of various infringements of patents and
trademarks. We do not believe that in any such situation currently known to us
we are at risk of material loss or serious interruption of our business. We may
be incorrect in this assessment, of course.
22
<PAGE>
Geographic Exposure
We have for many years realized a significant proportion of our revenues
from sales outside the United States. In some fiscal quarters non-U.S. revenue
has constituted as much as 52% of our revenues. In the fiscal year ended March
31, 1999, 47% of our revenues came from sales outside the United States. We
believe that it is quite likely that at some points in the future an even higher
percentage of our sales will be generated outside the United States.
Because of our foreign sales, Sonic is exposed to a number of factors we
would not be relevant if our sales were largely made within the United States.
Currency movements which make the U.S. dollar stronger relative to foreign
currencies can effectively raise the price of our products to foreign customers,
reducing demand for our products. Import restrictions, tariffs, and foreign
product regulations (particularly those dealing with product safety and RF
emissions) may also impede our ability to do business in foreign countries.
Engagement of Advisor
From time to time we have considered various strategic partnerships with
other companies. In some cases we have considered whether it would be advisable
for our Company to combine with other companies, either through merger, or
through a combination transaction in which Sonic acquires or is acquired by
another company. From time to time we have retained the services of
professional organizations to assist us in our analysis. At the present time we
have engaged Volpe, Brown, Whelan & Company to assist us in evaluating such
transactions. During the term of this engagement, should we decide to pursue
such a combination transaction, Volpe Brown Whelan & Company would act as our
exclusive representatives under a specified fee arrangement.
PROPERTIES
Sonic's principal administrative, sales and marketing, research and
development and support facility is located at 101 Rowland Way in Novato,
California and consists of approximately 30,000 square feet under a lease which
expires in 2001.
Sonic also has sales offices located in London and Tokyo.
MARKET FOR SONIC SOLUTIONS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Sonic Solutions' common stock is listed on the Nasdaq National Market. As
of March 31, 1999 there were approximately 175 registered holders of Sonic
Solutions' common stock. Sonic Solutions believes, however, that many
beneficial holders of its common stock have registered their shares in nominee
or street name, and that there are substantially more than 175 beneficial
owners. The low price and high price of Sonic Solutions' common stock during
the last eight quarters, are as follows:
23
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Low Price High Price
-------------- --------------
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Quarter ended June 30, 1997...................................... $5.000 $ 6.750
Quarter ended September 30, 1997................................. $5.000 $10.625
Quarter ended December 31, 1997.................................. $4.375 $10.250
Quarter ended March 31, 1998..................................... $2.250 $ 3.750
Quarter ended June 30, 1998...................................... $2.125 $ 5.250
Quarter ended September 30, 1998................................. $1.250 $ 3.250
Quarter ended December 31, 1998.................................. $1.500 $ 7.375
Quarter ended March 31, 1999..................................... $3.563 $ 8.438
- -------------------------------------------------------------------------------------------------
</TABLE>
Sonic Solutions has not paid any dividends on its Common Stock during the
periods set forth above. It is presently the policy of the Board of Directors
to retain earnings for use in expanding and developing Sonic Solutions'
business. Accordingly, Sonic Solutions does not anticipate paying dividends on
the Common Stock in the foreseeable future.
24
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Sonic Solutions
for each of the years in the five year period ended March 31, 1999. The
selected financial data should be read in conjunction with the Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
document. The financial statements for the periods ended March 31, 1995, 1996,
1997, 1998 and 1999 have been audited by KPMG LLP, independent certified public
accountants.
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
(in thousands except share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue.................................... 20,154 13,944 15,911 19,881 21,899
Cost of revenue................................ 7,676 7,344 7,432 10,209 9,547
------ ------ ------ ------ ------
Gross profit................................... 12,478 6,600 8,479 9,672 12,352
Operating expenses:
Marketing and sales........................... 5,198 5,873 6,000 7,257 7,216
Research and development...................... 2,417 2,961 5,737 6,037 5,137
General and administrative.................... 1,627 2,668 1,837 1,603 1,556
------ ------ ------ ------ ------
Total operating expenses....................... 9,242 11,502 13,574 14,897 13,909
------ ------ ------ ------ ------
Operating income (loss)........................ 3,236 (4,902) (5,095) (5,225) (1,557)
Other income (expense)......................... 298 176 (96) (651) (302)
Provision (benefit) for income taxes........... 1,000 (1,169) - - -
------ ------ ------ ------ ------
Net income (loss).............................. 2,534 (3,557) (5,191) (5,876) (1,859)
====== ====== ====== ====== ======
Basic income (loss) per share.................. 0.35 (0.48) (0.69) (0.76) (0.21)
Weighted average shares used in computing per
share amounts................................. 7,351 7,447 7,542 7,761 8,896
Diluted income (loss) per share................ 0.33 (0.48) (0.69) (0.76) (0.21)
Weighted average shares used in computing per
share amounts................................. 7,726 7,447 7,542 7,761 8,896
BALANCE SHEET DATA:
Working capital................................ 13,529 8,384 6,263 1,164 1,167
Total assets................................... 21,712 16,107 15,889 12,630 13,765
Shareholders' equity........................... 16,332 12,912 8,430 5,418 5,932
</TABLE>
25
<PAGE>
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 a portion of 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. See Note 4 of Notes to Financial
Statements.
26
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items from Sonic Solutions'
statements of operations as a percentage of net revenue for fiscal years 1997
through 1999:
<TABLE>
<CAPTION>
Years ended March 31,
---------------------------------------------------
1997 1998 1999
------------- -------------- ------------
<S> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0%
Cost of revenue 46.7 51.4 43.6
------ ------ -----
Gross profit 53.3 48.6 56.4
Operating expenses:
Marketing and sales 37.7 36.5 33.0
Research and development 36.1 30.4 23.5
General and administrative 11.5 8.0 7.0
------ ------ -----
Total operating expenses 85.3 74.9 63.5
------ ------ -----
Operating loss (32.0) (26.3) (7.1)
Other expense (0.6) (3.3) (1.4)
------ ------ -----
Net loss (32.6)% (29.6)% (8.5)%
====== ====== =====
</TABLE>
COMPARISON OF FISCAL YEARS ENDED MARCH 31
Net Revenue. Our net revenue increased from $15,911,000 in fiscal 1997 to
$19,881,000 in fiscal 1998 and to $21,899,000 in fiscal 1999, representing an
increase of 24.5% from fiscal 1997 to fiscal 1998 and 10.2% from fiscal 1998 to
fiscal 1999. The increase in fiscal 1998 was due mostly to the increased sales
of DVD Creator systems, offset partially by the decline in Sonic MediaNet (a
discontinued network product)and SonicStudio sales. The increase in fiscal 1999
was primarily due to increased sales of DVD Creator systems.
International sales accounted for 45%, 52% and 47% of our net revenue for
the 1997, 1998, and 1999 fiscal years, respectively. See Note 10 of Notes to
Financial Statements. Our international sales increased proportionally in
fiscal 1998 primarily due to increased sales of DVD Creator outside the United
States, depending on the rollout of the DVD-Video format in certain non-U.S.
markets. Our international sales decreased proportionally in fiscal 1999
primarily due to the increased sales of DVD Creator systems in the U.S.
markets. International sales have historically represented around 50% of our
total sales, and we expect that they will continue to represent a significant
percentage of future revenue.
Cost of Revenue. Our cost of revenue increased from 46.7% of net revenue
in fiscal 1997 to 51.4% in fiscal 1998 and decreased to 43.6% in fiscal 1999.
The increase for fiscal year 1998 was primarily due to approximately $981,000 of
additional charges, based upon our decisions to write-down inventory and
capitalized software related to discontinued and slower selling product lines.
The decrease in cost of revenue in fiscal year 1999 is due to an absence of
charges like those recorded in fiscal 1998, plus a shift in sales product mix
towards DVD Creator system sales as well as the efficiencies inherent in a
higher overall level of sales.
Marketing and Sales. Our marketing and sales expenses increased from
$6,000,000 in fiscal 1997 to $7,257,000 in fiscal 1998 and decreased to
$7,216,000 in fiscal 1999. Marketing and sales represented 37.7%, 36.5% and
33.0% of net revenue for fiscal 1997, 1998 and 1999, respectively. Our
marketing and sales headcount decreased from thirty-four at March 31, 1997 to
twenty-eight at March 31, 1998 and increased to thirty-seven at March 31, 1999.
Our marketing and sales expenses increased primarily due to increases in
advertising and marketing costs related to our DVD Creator product line as well
as increased sales commission expense. In fiscal 1999 marketing and sales
expense decreased because our commission expenses decreased. This was due
primarily due to a shift in sales into dealer channels (we generally do not pay
commissions to dealers for sales of our products; instead the dealers'
compensation is derived from the markup they apply to our products).
Research and Development. Our research and development expenses increased
from $5,737,000 in fiscal 1997 to $6,037,000 in fiscal 1998 and decreased to
$5,137,000 in fiscal 1999. Our research and development expense as a percentage
of net revenue was 36.1% in fiscal 1997, 30.4% in fiscal 1998, and 23.5% in
fiscal 1999. We capitalize a portion of our software development costs in
accordance with statement of Financial Accounting Standard 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 increased in
fiscal 1998 due to increases in consulting and prototype expenses associated
with introductions of new products in our DVD Creator product line. Research
and development expenses decreased in fiscal 1999 due to decreases in consulting
and prototype expenses associated with new product introductions. Prototype and
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 expenses
decreased from $1,837,000 in fiscal 1997 to $1,603,000 in fiscal 1998 and to
$1,556,000 in fiscal 1999. These expenses represented 11.5% of net revenue in
fiscal 1997, 8.0% of net revenue in fiscal 1998 and 7.0% of net revenue in
fiscal 1999. Our general and administrative expenses decreased in fiscal 1998
and fiscal 1999 due to reductions in bad debt and other general expenses. Our
general and administrative expenses decreased as a percentage of net revenue in
fiscal 1998 and fiscal 1999 because of the absolute level of such expenses was
lower, and they were being compared to an increasing level of net revenue. We
anticipate that general and administrative expenses will increase in the future
as costs increase and if 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 our 1997, 1998 and 1999 fiscal
years, 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.
27
<PAGE>
Provision for Income Taxes. In accordance with Statement of Financial
Accounting Standards No. 109, we made no provision for income taxes for our
1997, 1998, and 1999 fiscal years. Under applicable taxation and accounting
rules companies which incur losses are entitled under many conditions to receive
tax refunds, and therefore can record a tax benefit. We did record such a tax
benefit during the 1996 fiscal year. However, during the 1996 fiscal year we
exhausted our ability to carryback tax losses. Thus we recorded no tax benefit
during the 1997, 1998 and 1999 fiscal years.
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 provides for up
to $1,500,000 in available borrowings based upon our eligible accounts
receivable balances. The current bank credit line will expire on May 29, 1999,
however, we are currently in the process of extending this bank credit line and
we expect it to be extended prior to expiration. 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 monthly at a rate between three-quarters percent and two
and one half percent in excess of the prime rate. On March 31, 1999 $500,000
was outstanding.
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 is 7.25% and lower interest of
approximately 1% debt 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
Sonic Solutions' 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.
In December, 1997, we secured a $7,000,000 equity-based line of credit.
Under this arrangement, we had the right to draw up to a total of $7,000,000 in
cash in exchange for Sonic Solutions' 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
28
<PAGE>
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 quarter and 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. Because of certain
limitations on the total number of shares which can be issued under this line of
credit, this facility is currently unavailable to us.
Our operating activities have used cash of $34,000 in fiscal year 1997,
$1,412,000 in fiscal year 1998 and $124,000 in fiscal 1999. During those fiscal
years cash required by operating activities was not as great as our operating
losses due to various factors, including improvements in receivables collection
and inventory turnover in certain fiscal years, and the receipt of income tax
refunds in certain fiscal years. In addition to our operating losses, we
utilized cash during the 1997, 1998, and 1999 fiscal years to purchase new fixed
assets, and to develop and purchase software that was added to capitalized
software.
During fiscal year 1997 we augmented cash on hand with the proceeds of the
subordinated debt facility with entities associated with Hambrecht & Quist noted
above. During fiscal 1998 we augmented cash on hand via borrowings from our
bank credit line described above, as well as draws on the equity credit line
described above. During the 1999 fiscal year we augmented cash on hand
primarily by drawing on the equity credit line described above.
On May 20, 1999, Sonic Solutions entered into a new stock purchase
agreement with Kingsbridge. Under the stock purchase agreement, we may sell up
to $12,000,000 of common stock to Kingsbridge. The stock purchase agreement,
and a summary of the condition to our rights to sell stock to Kingsbridge are
set forth under "The Stock Purchase Agreement."
We believe that existing cash, cash equivalents and short term investments,
available credit and cash generated from operations, plus cash available through
the new stock purchase agreement mentioned in the paragraph immediately above,
will be sufficient to meet Sonic's cash requirements through at least fiscal
2000.
As of March 31, 1999, Sonic Solutions had cash and cash equivalents of
$2,414,000 and working capital of $1,167,000.
Impact of Year 2000 Issue: The year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of our computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
This could potentially result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in other similar normal
business activities.
We are heavily dependent upon the proper functioning of our own computer or
data-dependent systems. These include our systems in information, business,
finance, operations, manufacturing and customer service. Any failure or
malfunctioning on the part of these or other systems could adversely affect our
business in ways that are not currently known, discernable, quantifiable or
otherwise anticipated by us.
We have ensured that our internal software and embedded technology is
already Year 2000 compliant. Thus, we do not expect this issue to have a
material effect on our operations. We also believe that all current versions of
our products are Year 2000 compliant.
We currently have only limited information on Year 2000 compliance of our
key suppliers and customers. We have received confirmation from a primary
supplier that it is Year 2000 compliant. We are currently surveying our key
suppliers and customers for Year 2000 compliance and will be developing our own
contingency plan in case of suppliers failures. We anticipate that these
surveys and the development of our contingency plan should be completed by
September, 1999. The operations of our key suppliers and
29
<PAGE>
customers could be adversely affected by the Year 2000 problem, which could
cause significant problems in our business.
A survey of our leased properties and facilities, including vendors
providing power, local and long distance telecommunications, water, heating and
cooling, and various services to determine the status of embedded technology
equipment that could affect our operations, will be conducted within the next
few months. Temporary disruption of our manufacturing, customer service, sales
and marketing, research and development and administrative functions may occur
as a result of vendors' non-compliance affecting the delivery of power,
telecommunications, water and heating and cooling services.
We believe we are taking the steps necessary to understand the Year 2000
issues; however, failure to adequately address all known and unknown Year 2000
compliance issues could have a material adverse effect on our business,
financing condition and results of operations. The remaining Year 2000
compliance activities are not expected to result in significant incremental
operating expenses. To date, we have not incurred significant incremental costs
to become Year 2000 compliant.
Forward Looking Statements. Certain statements in this Prospectus,
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.
DIRECTORS
<TABLE>
<CAPTION>
DIRECTORS AGE POSITION WITH SONIC SOLUTIONS SINCE
- ----------------------- ------- ------------------------------------------------------------ ---------
<S> <C> <C> <C>
Robert J. Doris 46 President (Chief Executive Officer) and Director 1986
Mary C. Sauer 46 Senior Vice President of Business Development, Secretary and 1986
Director
Michael C. Child 44 Director 1993
Robert M. Greber 60 Director 1993
Peter J. Marguglio 51 Director 1986
</TABLE>
30
<PAGE>
EXECUTIVE OFFICERS
The executive officers of Sonic Solutions and their ages as of March 31,
1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- --------- ---------------------------------------------------------------
<S> <C> <C>
Robert J. Doris 46 President (Chief Executive Officer) and Director
Mary C. Sauer 46 Senior Vice President of Business Development and Director
A. Clay Leighton 42 Senior Vice President Worldwide Operations, Finance and Chief
Financial Officer
Christopher A. Kryzan 40 Senior Vice President of Engineering and Marketing
</TABLE>
Mr. Doris is married to Ms. Sauer. There are no other family relationships
between any director or executive officer of Sonic Solutions.
ROBERT J. DORIS. Mr. Doris founded Sonic Solutions in 1986 and has served
as President and Director of Sonic Solutions since that time. Prior to 1986 he
was President of The Droid Works, a subsidiary of Lucasfilm Ltd., which produced
computer-based video and digital audio systems for the film and television post-
production and music recording industries. Prior to founding The Droid Works,
Mr. Doris was a Vice President of Lucasfilm and General Manager of the Lucasfilm
Computer Division. Mr. Doris received B.A., J.D. and M.B.A. degrees from
Harvard University. Mr. Doris is married to Ms. Sauer.
MARY C. SAUER. Ms. Sauer founded Sonic Solutions in 1986 and has served as
a Vice President and Director of Sonic Solutions since that time. Ms. Sauer
became Senior Vice President of Marketing and Sales in February 1993. Prior to
1986, Ms. Sauer was Vice President of Marketing for The Droid Works and prior to
joining The Droid Works, Ms. Sauer was Director of Marketing for the Lucasfilm
Computer Division. Ms. Sauer received an M.B.A. in Finance and Marketing from
the Wharton School of the University of Pennsylvania and a B.F.A. from
Washington University in St. Louis. Ms. Sauer is married to Mr. Doris.
A. CLAY LEIGHTON. Mr. Leighton joined Sonic Solutions in February 1993 as
Vice President of Finance. In January, 1999, Mr. Leighton was named Senior Vice
President of Worldwide Operations and Finance and Chief Financial Officer.
Prior to joining Sonic, from January 1990 to July 1992 he was Vice President,
Finance and CFO for RESNA Industries Inc., an environmental services firm, and
from August 1988 to December 1989 he was Vice President, Finance and CFO for
Command Data Systems, a software company specializing in software for the public
safety market. Mr. Leighton has also worked as strategy consultant for the
Boston Consulting Group. Mr. Leighton received a B.A. from Wesleyan University
and an M.B.A. from the Amos Tuck School of Business Administration at Dartmouth
College.
CHRISTOPHER A. KRYZAN. Mr. Kryzan joined Sonic Solutions in March 1996 as
Vice President of Marketing. In January, 1999, Mr. Kryzan was named Senior Vice
President of Marketing and Engineering. Prior to joining Sonic, from July 1990
to April 1994, he was Director of Marketing at SuperMac Technology, a graphics
and digital video technology firm, and General Manager of E-Machines, a
subsidiary of SuperMac. From January 1986 to July 1990, he was Director of
Product Marketing at Wyse Technology, a manufacturer of terminals and personal
computers, and Nation Sales Manager of Amdek, a subsidiary of Wyse. Mr. Kryzan
also worked as a strategy and marketing consultant. Mr. Kryzan received a B.S.
in Electrical Engineering from Northwestern University and an M.B.A. from Santa
Clara University.
31
<PAGE>
MICHAEL C. CHILD. Mr. Child has served as a Director of Sonic Solutions
since August 1993. Mr. Child has been employed by TA Associates, a venture
capital firm, or its predecessor, since 1982, has been a partner of affiliated
venture funds since January 1986 and is currently a Managing Director of TA
Associates, Inc.
ROBERT M. GREBER. Mr. Greber has served as a director of Sonic Solutions
since August 1993. Mr. Greber served as president and Chief Operating Officer of
The Pacific Stock Exchange since July 1990 and in January 1996 he was elected
Chairman and Chief Executive Officer. Prior to joining The Pacific Stock
Exchange, he was from 1985 to 1987 President and Chief Executive Officer of
Diagnostic Networks, Inc., a network of Magnetic Resonance Imaging Centers which
was merged into NMR America in 1987. Prior to DNI, Mr. Greber was President and
Chief Executive Officer of Lucasfilm Ltd. from 1981 to 1985 where, among other
duties, he oversaw development of digital technologies for video, film, audio,
and special effects and video games applications. Before joining Lucasfilm, Mr.
Greber was associated with the firm of Merrill Lynch where he was Vice President
and Manager of the Los Angeles Institutional Office. Mr. Greber holds a B.S. in
Finance from Temple University. Mr. Greber also serves on the Board of Bay View
Capital Corp.
PETER J. MARGUGLIO. Mr. Marguglio has served as a Director of Sonic
Solutions since August 1986. Since January 1990, Mr. Marguglio has worked at
Eatec Corporation, a software company located in Berkeley, California where he
is now President. Prior to joining Eatec, Mr. Marguglio was President of
Resource Marketing, Inc., an equipment leasing firm he founded in 1981. Mr.
Marguglio holds a Mechanical Engineering degree from the University of
Washington and an M.B.A. degree from Stanford University.
32
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation for the fiscal years
ended March 31, 1999, 1998 and 1997 for the Chief Executive Officer and each of
the three other most highly compensated executive officers of Sonic Solutions
who served as executive officers at fiscal year end and who received salary and
bonuses of $100,000 or more. None of the named executive officers earned any
bonuses or compensation for these fiscal years other than as set forth in the
table or received any restricted stock awards, stock appreciation rights or
long-term incentive plan payouts.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
FISCAL YEAR ----------------------- COMPENSATION
NAME AND PRINCIPAL POSITION ENDED MARCH 31, SALARY ($) BONUS ($) OPTIONS (#)
- ------------------------------------------- --------------- ---------- --------- --------------------
<S> <C> <C> <C> <C>
Robert J. Doris 1999 $138,750 $0 85,000
President (Chief Executive Officer) 1998 $180,000 $0 175,000 (1)
and Director 1997 $165,000 $0 --
Mary C. Sauer 1999 $111,000 $0 40,000
Senior Vice President, 1998 $146,250 $0 112,000 (2)
Business Development, 1997 $135,000 $0 --
Secretary and Director
Christopher A. Kryzan(3) 1999 $175,000 $32,300 40,000
Senior Vice President, 1998 $161,550 $29,584 100,000 (5)
Engineering and Marketing 1997 $150,580 $75,000 --
A. Clay Leighton(4) 1999 $112,920 $15,000 25,000
Senior Vice President Worldwide Operations 1998 $130,625 $20,000 155,000 (6)
Finance and Chief Financial Officer 1997 $137,737 $15,000 20,000
</TABLE>
_______________________
(1) Of these options, 85,000 represent new options granted to replace the same
number of canceled options previously granted in fiscal year 1998 with
higher exercise prices. See (7) below regarding the repricing of options.
(2) Of these options, 40,000 represent new options granted to replace the same
number of canceled options previously granted in fiscal year 1998 with
higher exercise prices. See (7) below regarding the repricing of options.
(3) Mr. Kryzan was named Senior Vice President of Engineering and Marketing in
January 1999.
(4) Mr. Leighton was named Senior Vice President of Worldwide Operations and
Finance and Chief Financial Officer in January 1999.
(5) Of these options, 20,000 represent new options granted to replace the same
number of canceled options previously granted in fiscal year 1998 with
higher exercise prices and 80,000 options represent new options granted to
replace canceled options shown as granted in fiscal year 1996 with higher
exercise prices. See (7) below regarding the repricing of options.
(6) Of these options, 30,000 represent new options granted to replace the same
number of canceled options previously granted in fiscal year 1998 with
higher exercise prices, 20,000 represent new options granted to replace
canceled options shown as granted in fiscal year 1997 with higher exercise
prices and 25,000
33
<PAGE>
represent new options granted to replace canceled options shown as granted
in fiscal year 1996 with higher exercise prices. See (7) below regarding the
repricing of options.
(7) In March, 1998, following a significant decline in the market price of Sonic
Solutions' Common Stock during the preceding months, the Board authorized
the repricing of certain options by the Chief Executive Officer. The options
were repriced as of March 3, 1998, with the effect of canceling the old
options and granting new options with an exercise price equal to the fair
market value of the Common Stock on such date. Other than the change in
exercise price, the terms of each repriced option, including the vesting
schedule and expiration date, are the same as that of the initial option.
The Board authorized the repricing of the options for the same reason it
authorized the initial grants, including promoting the retention of
employees crucial to the success of Sonic Solutions and motivating them to
perform their duties in ways that will contribute to the appreciation of
stockholder value. In the opinion of the Board, the regrant was a prudent
way to reduce the risk of attrition of key employees and thereby reduce the
risks to Sonic Solutions' product development.
The following table sets forth certain information regarding grants of
stock options made during the fiscal year ended March 31, 1999 to the executive
officers named in the Summary Compensation Table. Since inception, Sonic
Solutions has not granted any stock appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE AT
NUMBER OF TOTAL OPTIONS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OR OPTION TERM (3)
OPTIONS FISCAL BASE PRICE EXPIRATION -------------- ----------------
NAME GRANTED (#) YEAR ($/SH)(1) DATE(2) 5% 10%
- ---------------------- ------------- ------------- ------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Doris 85,000(4) 13% 1.688 9/2/08 $91,921 $228,670
Mary C. Sauer 40,000(4) 6% 1.688 9/2/08 42,463 107,609
Christopher A. Kryzan 40,000(5) 6% 1.688 9/2/08 42,463 107,609
A. Clay Leighton 25,000(4) 4% 1.688 9/2/08 26,539 67,256
</TABLE>
______________________
(1) The exercise price is equal to the fair market value of Sonic Solutions'
Common Stock on the date of grant, as determined by reference to the closing
price of Sonic Solutions' Common Stock on the Nasdaq National Market.
(2) These options are subject to earlier expiration in the event of the
officer's termination of employment with Sonic Solutions.
(3) Potential realizable value is based on an assumption that the fair market
value of the stock on the date of grant appreciates at the stated rate,
compounded annually, from the date of grant until the end of the option
term. These values are calculated based on requirements promulgated by the
Securities and Exchange Commission and do not reflect Sonic Solutions'
estimate of future stock price appreciation.
(4) These options, granted under Sonic Solutions' Stock Option Plan, vest over
a period of one year at a rate of 8.3333 percent per month.
(5) These options, granted under Sonic Solutions' Stock Option Plan, vest over a
period of four years at a rate of 25% one year from the date of grant of the
original options and 2.0833 percent per month thereafter.
34
<PAGE>
The following table sets forth information regarding the number and value
of options exercised during the fiscal year ended March 31, 1999 and of
unexercised options held by the named executive officers on March 31, 1999.
Value is considered to be the difference between exercise price and the closing
price of $4.125 per share of the Common Stock as quoted on the Nasdaq National
Market on March 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTION AT VALUE OF IN-THE-MONEY
SHARES ACQUIRED ON AGGREGATE FISCAL YEAR END AT FISCAL YEAR END
EXERCISE VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE(1)
<S> <C> <C> <C> <C>
Robert J. Doris 0 0 213,900/46,100 $371,385/109,198
Mary C. Sauer 0 0 129,120/22,880 $ 219,240/53,240
Christopher A. Kryzan 0 0 79,166/60,834 $132,442/121,288
A. Clay Leighton 0 0 132,900/70,100 $256,006/120,463
</TABLE>
__________________
(1) These values have not been, and may not be, realized, and are based on the
positive spread between the respective exercise prices of the outstanding
stock options and the closing price of Sonic Solutions' Common Stock at
March 31, 1999 ($4.125).
Sonic Solutions did not make any awards during the fiscal year ended March
31, 1999 to any of the executive officers named in the Summary Compensation
Table under any long-term incentive plan providing compensation intended to
serve as incentive for performance to occur over a period longer than one fiscal
year, excluding the stock options set forth above.
Stock Options
Under our September 1989 Stock Option Plan, options to purchase up to an
aggregate of 2,090,000 shares of common stock may be granted to key employees,
directors and consultants. Grants of options to the directors of Sonic
Solutions may not exceed 140,000 shares. The plan provides for issuing both
incentive stock options, which must be granted at fair market value at the date
of grant, and nonqualified stock options, which must be granted at not less than
85% of fair market value of the stock. All options to date have been granted as
incentive stock options. Options under the plan generally vest over four years
from the date of grant. The options generally expire ten years from the date of
grant and are canceled three months after termination of employment. The Board
of Directors and/or the President administer the plan.
During 1995, we adopted the 1994 NonEmployee Directors Stock Option Plan
which provides for the grant of stock options to Sonic Solutions' nonemployee
directors. Under this plan, stock options are granted annually at the fair
market value of Sonic Solutions' common stock on the date of grant. The number
of options so granted annually is fixed by the plan. Such options generally
vest over four years from the grant date. The total number of shares to be
issued under this plan may not exceed 100,000 shares.
In March 1998, the Board of Directors approved the repricing of options at
an exercise price of $2.5625. There were no changes made to the vesting
schedules in relation to the repricing.
In July, 1998, the Board of Directors adopted the Sonic Solutions 1998
Stock Option Plan and the shareholder's approved the 1998 Stock Option Plan in
September, 1998. The 1998 Stock Option Plan covers 1,000,000 shares of Common
Stock, with an annual increase in the number of shares available for issuance
35
<PAGE>
under the Stock Option Plan on the last day of each fiscal year; provided that
the total number of shares issuable under the plan shall not exceed 2,000,000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of March 31, 1999 (i) by each person who is
known by Sonic Solutions to own beneficially more than five percent of the
Common Stock, (ii) by each of Sonic Solutions' directors, (iii) by each of Sonic
Solutions' executive officers named in the Summary Compensation Table under the
caption "Executive Compensation" below, and (iv) by all directors and executive
officers as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
OF SHARES OF SHARES
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OWNED(1) OWNED(1)
- ------------------------------------------------------- --------------------- -------------------
<S> <C> <C>
Hambrecht & Quist Guaranty Finance, LLC(2) 607 *
One Bush Street
San Francisco, CA 94104
Entities Affiliated with TA Associates(3) 570,627 6.0%
435 Tasso Street
Palo Alto, California 94301
Robert J. Doris(4) 1,525,890 16.1%
Mary C. Sauer(5) 767,995 8.1%
Peter J. Marguglio(6) 122,356 1.3%
Michael C. Child(7) 1,618 *
Robert M. Greber(8) 27,021 *
Christopher A. Kryzan(9) 84,166 *
A. Clay Leighton(10) 166,500 1.8%
All directors and executive officers as a group (9 persons) 3,311,509 35.0%
</TABLE>
- --------
* Less than one percent.
(1) This table is based upon information supplied by directors, officers and
principal shareholders. Applicable percentage ownership for each shareholder
is based on 9,468,123 shares of Common Stock outstanding as of March 31,
1999, together with applicable options for such shareholders. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities, subject to the community property laws where
applicable. Shares of Common Stock subject to options are deemed outstanding
for the purpose of computing the percentage ownership of the person holding
such options, but are not treated as outstanding for computing the
percentage ownership of any other person.
(2) According to Schedule 13G filed by Hambrecht & Quist Guaranty Finance, LLC.
(3) Includes 1,618 shares held by Mr. Child as described in footnote 7 below and
569,009 shares held by the following entities affiliated with TA Associates:
Advent VI L.P. (284,508); Advent Atlantic and Pacific II L.P. (130,293);
Chestnut III Limited Partnership (50,967); Chestnut Capital International
III Limited Partnership (16,440); Advent New York L.P. (35,564); Advent
Industrial II L.P. (46,972); and TA Venture Investors Limited Partnership
(4,265).
36
<PAGE>
(4) Includes 1,294,223 shares owned by Mr. Doris, and 231,667 shares issuable
upon exercise of options which will be exercisable within 60 days of March
31, 1999.
(5) Includes 629,328 shares owned by Ms. Sauer, 138,667 shares issuable upon
exercise of options which will be exercisable within 60 days of March 31,
1999.
(6) Includes 117,043 shares owned by Mr. Marguglio, and 5,313 shares issuable
upon exercise of options which will be exercisable within 60 days of March
31, 1999.
(7) Excludes all but 1,618 shares described in footnote 3 above. Mr. Child, a
director of Sonic Solutions, is a general partner of TA Venture Investors
Limited Partnership and a Managing Director of TA Associates, but disclaims
beneficial ownership of all other shares beneficially owned by entities
affiliated with TA Associates.
(8) All shares issuable upon exercise of options which will be exercisable
within 60 days of March 31, 1999, and 27,021 of which were granted pursuant
to Sonic Solutions Nonemployee Director Stock Option Plan.
(9) All shares issuable upon exercise of options which will be exercisable
within 60 days of March 31, 1999.
(10) Includes 5,500 shares owned by Mr. Leighton and 155,500 shares issuable
upon exercise of options which will be exercisable within 60 days of March
31, 1999.
DESCRIPTION OF CAPITAL STOCK
As of the date of this Prospectus, the authorized capital stock of the
Company consists of 30,000,000 shares of Common Stock, no par value ("Common
Stock"), and 10,000,000 shares of Preferred Stock, no par value ("Preferred
Stock").
Common Stock
As of March 31, 1999, there were 9,468,123 shares of Common Stock
outstanding held of record by approximately 175 registered stockholders. The
Company believes however, that many beneficial holders of its common stock have
registered their shares in nominee or street name, and that there are
substantially more than 175 beneficial owners. The holders of shares of Common
Stock are entitled to one vote per share on all matters to be voted on by
stockholders, except that holders may cumulate their votes in the election of
directors. Subject to preferences that may be applicable to any outstanding
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors in its discretion from
funds legally available therefor. In the event of a liquidation, dissolution,
or winding up of the Company, holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any outstanding Preferred Stock. Holders of Common Stock have no
preemptive rights and have no rights to convert their Common Stock into any
other securities. The outstanding shares of Common Stock are fully paid and
nonassessable.
Preferred Stock
The Board of Directors has the authority to issue up to 10,000,000 shares
of Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without any further vote or action by the shareholders. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company or making removal of management more difficult
without further action by the shareholders and could adversely affect the rights
and powers, including voting rights, of the holders of Common Stock. This could
have the effect of decreasing the market price of the Common Stock. The Company
has issued 461,538
37
<PAGE>
shares of Series C Preferred Stock, 167,500 of which were converted into Common
Stock during fiscal year end March 31, 1999. The Company has no present plans to
issue any additional shares of Preferred Stock.
Warrants
In connection with the receipt by the Company of a financing facility in
December 1996, the Company issued warrants to purchase 130,100 shares of Common
Stock at an exercise price of $7.00 per share (the "$7 Warrants") and warrants
to purchase 130,100 shares of Common Stock at an exercise price of $10.00 per
share (the "$10 Warrants"). The warrants may be exercised at any time on or
before December 24, 2003. In December 1997, all of the $7 Warrants were
exercised. In March 1998, in connection with renegotiation of the terms of the
financing facility, the exercise price of 90,000 of the $10 Warrants was reduced
to $3.25.
LEGAL MATTERS
The legality of the issuance of the securities being offered hereby is
being passed upon for Sonic Solutions by Heller Ehrman White & McAuliffe, Palo
Alto, California.
EXPERTS
The audited financial statements and schedule of Sonic Solutions as of
March 31, 1998 and 1999 and for each of the years in the three year period ended
March 31, 1999 have been incorporated in the registration statement in reliance
upon the reports of KPMG LLP, independent public accountants, appearing
elsewhere herein and upon the authority of said firm as experts in accounting
and auditing.
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent auditors' report.......................................................... F-2
Balance Sheets as of March 31, 1998 and 1999.......................................... F-3
Statements of Operations for the years ended March 31, 1997, 1998 and 1999............ F-4
Statements of Shareholders' Equity for the years ended March 31, 1997, 1998 and 1999.. F-5
Statements of Cash Flows for the years ended March 31, 1997, 1998 and 1999............ F-6
Notes to Financial Statements for the years ended March 31, 1997, 1998 and 1999....... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Sonic Solutions:
We have audited the accompanying balance sheets of Sonic Solutions as of
March 31, 1998 and 1999, and the related statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended March
31, 1999. These financial statements are the responsibility of Sonic Solutions'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sonic Solutions as of March
31, 1998 and 1999 and the results of its operations and its cash flows for the
each of the years in the three-year period ended March 31, 1999, in conformity
with generally accepted accounting principles.
KPMG LLP
San Francisco, California
April 26, 1999
F-2
<PAGE>
FINANCIAL STATEMENTS
SONIC SOLUTIONS
BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31
1998 1999
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................................... $ 2,479 2,414
Accounts receivable, net of allowance for returns and doubtful accounts of
$617 and $599 at March 31, 1998 and 1999, respectively..................... 3,198 5,403
Inventory.................................................................. 634 807
Refundable income taxes.................................................... 148 -
Prepaid expenses and other current assets.................................. 317 287
-------- -------
Total current assets....................................................... 6,776 8,911
Fixed assets, net............................................................ 2,766 2,313
Purchased and internally developed software costs, net....................... 2,944 2,385
Other assets................................................................. 144 156
-------- -------
Total assets............................................................... $ 12,630 13,765
======== =======
Liabilities And Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities................................... $ 3,315 4,359
Bank note payable.......................................................... 500 500
Deferred revenue and deposits.............................................. 1,036 1,318
Subordinated debt, current portion......................................... 623 1,419
Current portion of obligations under capital leases........................ 138 148
-------- -------
Total current liabilities.................................................. 5,612 7,744
Subordinated debt, net of current portion.................................... 1,364 -
Obligations under capital leases, net of current portion..................... 236 89
-------- -------
Total liabilities.......................................................... 7,212 7,833
Commitments and contingencies
Shareholders' Equity
Convertible preferred stock, no par value, 10,000,000 shares authorized:
461,538 and 294,038 shares issued and outstanding at March 31, 1998, and
1999, respectively......................................................... 1,500 956
Common stock, no par value, 30,000,000 shares authorized; 8,302,230 and
9,468,123 shares issued and outstanding at March 31, 1998 and 1999,
respectively 15,204 18,121
Accumulated deficit......................................................... (11,286) (13,145)
-------- -------
Total shareholders' equity................................................ 5,418 5,932
Total liabilities and shareholders' equity................................ $ 12,630 13,765
======== =======
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
SONIC SOLUTIONS
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------------
1997 1998 1999
---------- ----------- ----------
<S> <C> <C> <C>
Net revenue............................................................. $ 15,911 19,881 21,899
Cost of revenue......................................................... 7,432 10,209 9,547
---------- ----------- ----------
Gross profit............................................................ 8,479 9,672 12,352
---------- ----------- ----------
Operating expenses:
Marketing and sales.................................................... 6,000 7,257 7,216
Research and development............................................... 5,737 6,037 5,137
General and administrative............................................. 1,837 1,603 1,556
---------- ----------- ----------
Total operating expenses............................................... 13,574 14,897 13,909
---------- ----------- ----------
Operating loss......................................................... (5,095) (5,225) (1,557)
Other expense, net...................................................... (96) (651) (302)
---------- ----------- ----------
Net loss............................................................... ($5,191) (5,876) (1,859)
========== =========== ==========
Basic and diluted loss per share applicable to common shareholders..... ($0.69) (0.76) (0.21)
========== =========== ==========
Weighted average shares used in computing per share amounts............ 7,542 7,761 8,896
========== =========== ==========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
SONIC SOLUTIONS
STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Unrealized
Preferred stock Common stock Gain (Loss) Total
---------------- ------------ Accumulated on Shareholders'
Shares Amount Shares Amount deficit Investments Equity
------ ------ ------ ------ ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1996................... --- $ --- 7,494 $13,133 (219) (2) 12,912
Exercise of common stock options........... --- --- 102 158 --- --- 158
Unrealized gain on investments............. --- --- --- --- --- 2 2
Issuance of warrants....................... --- --- --- 549 --- --- 549
Net loss................................... --- --- --- --- (5,191) --- (5,191)
----- ----- ----- ------ ----- ----- ------
Balances at March 31, 1997................... --- --- 7,596 13,840 (5,410) --- 8,430
Exercise of common stock options........... --- --- 50 84 --- --- 84
Issuance of preferred stock................ 462 1,500 --- --- --- --- 1,500
Equity line of credit issuances, net of
issuance costs............................ --- --- 618 1,253 -- --- 1,253
Exercise of warrants....................... --- --- 38 --- --- --- ---
Issuance of warrants....................... --- --- --- 27 --- --- 27
Net loss................................... --- --- --- --- (5,876) --- (5,876)
----- ----- ----- ------ ----- ----- ------
Balances at March 31, 1998................... 462 1,500 8,302 15,204 (11,286) --- 5,418
Exercise of common stock options........... --- --- 64 143 --- --- 143
Equity line of credit issuances, net of
issuance costs............................ --- --- 904 2,283 --- --- 2,283
Conversion of preferred stock.............. (168) (544) 168 544 --- --- ---
Preferred stock dividends.................. --- --- --- (53) --- --- (53)
Exercise of warrants....................... --- --- 30 --- --- --- ---
Net loss................................... --- --- --- --- (1,859) --- (1,859)
----- ----- ----- ------- ------ ----- ------
Balances at March 31, 1999................... 294 $ 956 9,468 $18,121 (13,145) --- 5,932
===== ===== ===== ======= ====== ===== =======
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
SONIC SOLUTIONS
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------
1997 1998 1999
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,191) (5,876) (1,859)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,693 2,255 2,621
Provision for returns and doubtful accounts, net of write-offs (1,102) 29 (18)
Interest expense amortization --- 482 60
Changes in operating assets and liabilities:
Accounts receivable 2,098 (122) (2,187)
Inventory 606 641 (173)
Refundable income taxes 1,150 450 148
Prepaid expenses and other current assets (243) 254 30
Other assets 181 (200) (72)
Accounts payable and accrued liabilities 218 344 1,044
Deferred revenue and deposits 263 331 282
Deferred income taxes 293 --- ---
------- ------ ------
Net cash used in operating activities (34) (1,412) (124)
------- ------ ------
Cash flows from investing activities:
Purchase of fixed assets (1,462) (787) (913)
Additions to purchased and internally developed software (1,112) (1,849) (696)
Redemption/maturities of short-term investments 2,108 --- ---
------- ------ ------
Net cash used in investing activities (466) (2,636) (1,609)
------- ------ ------
Cash flows from financing activities:
Proceeds from exercise of common stock options 158 84 143
Proceeds from issuances of subordinated debt 3,542 --- ---
Repayments of subordinated debt --- (55) (568)
Proceeds from equity line financing --- 1,253 2,283
Borrowings on line of credit --- 500 420
Repayments of line of credit --- --- (420)
Principal payments on capital leases (29) (88) (137)
Payment of dividends --- --- (53)
Issuance of warrants 549 27 ---
------- ------ ------
Net cash provided by financing activities 4,220 1,721 1,668
------- ------ ------
Net increase (decrease) in cash and cash equivalents 3,720 (2,327) (65)
Cash and cash equivalents, beginning of year 1,086 4,806 2,479
------- ------ ------
Cash and cash equivalents, end of year $ 4,806 2,479 2,414
======= ====== ======
Supplemental disclosure of cash flow information:
Interest paid during year $ 106 265 71
======= ====== ======
Income taxes paid during year $ --- 13 9
======== ====== ======
Noncash financing and investing activities:
Assets acquired through capital lease $ 270 221 ---
======= ====== ======
Conversion of preferred stock to common stock $ --- --- 544
======= ====== ======
Conversion of subordinated debt to preferred stock $ --- 1,500 ---
======= ====== ======
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
SONIC SOLUTIONS
NOTES TO FINANCIAL STATEMENTS
March 31, 1997, 1998 and 1999
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(a) Operations
We develop workstations used by professionals to edit and process audio and
video media. Our products are computer based, and usually include both plug-in
hardware and applications software installed on a personal computer. Our
customers use various kinds of peripheral devices -- for example, disk drives,
streaming tape drives, and audio and video tape recorders -- along with our
products. Although we do not manufacture or sell the personal computer or
peripheral devices used with our products, we typically talk about the complete
configuration of personal computer, Sonic hardware, Sonic software, and
peripherals as a Sonic workstation.
We currently market two workstation product lines: SonicStudio(TM) and DVD
Creator(TM). SonicStudio is a line of professional audio workstations that our
customers use to prepare audio for release on digital audio compact discs, for
release with video and film entertainment, and for broadcast on radio. DVD
Creator is a line of DVD-Video/Audio production workstations which supports the
preparation and assembly of video and audio assets for release on the new DVD-
Video disc format and the upcoming DVD-Audio disc format.
Our products generally include application software and specialized
hardware installed on a personal computer. Our products are designed to improve
the productivity and effectiveness of media professionals, enabling them to
process and manipulate more material in a given amount of time and to achieve
results which would have been impossible using traditional linear analog or
digital technology.
(b) Use of Estimates and Certain Concentrations
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
We are dependent on sole-source suppliers for certain key components used
in our products. Sonic Solutions purchases these sole-source components
pursuant to purchase orders placed from time to time. We do not carry
significant inventories of these components, and we have no guaranteed supply
agreements. Any extended future interruption or limitation in the supply of
any of the components obtained from a single source could have a material
adverse effect on our results of operations.
Our products are primarily compatible with Macintosh personal computers.
Although we plan to introduce new products compatible with other computer
platforms in the future, the financial results of our company could be
materially adversely affected should the industry no longer support the
Macintosh platform prior to the new products release.
(c) Revenue Recognition
Revenue is derived from product sales and maintenance contracts. Revenue
from product sales is recognized upon shipment of the products. Revenue from
software maintenance, including maintenance sold with the product, is recognized
on a straight-line basis over the term of the agreement, generally one year.
F-7
<PAGE>
We recognize revenue in accordance with Statement of Position (SOP) 97-2,
"Software Revenue Recognition." The statement provides specific industry
guidance and stipulates that revenue recognized from software arrangements is to
be allocated to each element of the arrangement based on the relative fair
values of the elements, based on objective evidence which is specific to the
vendor. Our adoption of SOP 97-2 on April 1, 1998 did not have a material impact
on revenue recognition.
Revenue from sales to distributors and dealers may be subject to agreements
allowing limited rights of return and exchange. Accordingly, we provide
reserves for estimated future returns and exchanges at the time of the sale as a
reduction of revenue.
In the year ended March 31, 1997 no single customer accounted for more
than 10% of revenue. In the years ended March 31, 1998 and 1999, one customer
accounted for 10% and 11%, respectively, of revenue.
Cost of revenue includes hardware product costs, third party hardware
costs, amortization of capitalized software and third party software royalties.
(d) Cash Equivalents
Cash equivalents consist of short-term, highly-liquid investments with
original maturities of ninety days or less. Cash equivalents are generally
invested in money market funds.
(e) Inventory
Inventory is valued at the lower of cost, determined on a first-in, first-
out basis, or market. Inventory consists of raw materials, work in process and
original equipment manufacturer's goods.
(f) Fixed Assets
Fixed assets consist of furniture and equipment and are recorded at cost.
Equipment under capital leases is stated at the present value of minimum lease
payments at the inception of the lease. Depreciation of furniture and equipment
is provided using the straight-line method over the estimated useful lives of
the respective assets which are generally three to five years. Equipment held
under capital leases is amortized over the shorter of the lease term or the
estimated useful life of the asset.
(g) Purchased and Internally Developed Software Costs
In accordance with Statement of Financial Accounting Standards (SFAS) No.
86 "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," purchased software and software product development costs
are capitalized when a product's technological feasibility has been established
and then is amortized over a future period. Amortization begins when a product
is available for general release to customers. Amortization of capitalized
software costs, for both internally developed and purchased software products,
is computed on a straight-line basis over the estimated economic life of the
product, which is generally three years, or on a basis using the ratio of
current revenue to the total of current and anticipated future revenue,
whichever is greater. All other research and development expenditures are
charged to research and development expense in the period incurred.
(h) 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
F-8
<PAGE>
attributable to differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases.
(i) 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 years ended March 31, 1997, 1998 and 1999 (in
thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------------------
1997 1998 1999
---------- --------- ---------
<S> <C> <C> <C>
Net loss......................................................... ($5,191) (5,876) (1,859)
Dividends paid to preferred shareholders......................... -- -- 53
------- ------ ------
Net loss applicable to common shareholders....................... ($5,191) (5,876) (1,912)
======= ====== ======
Weighted average number of common shares outstanding............ 7,542 7,761 8,896
======= ====== ======
Basic and diluted net loss per share applicable to common
shareholders.................................................... ($0.69) (0.76) (0.21)
======= ====== ======
</TABLE>
As of March 31, 1997, 1998 and 1999 potentially dilutive shares totaling
827,699, 2,060,166 and 1,834,502, 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.
(j) Concentrations of Credit Risk
Financial instruments which potentially subject our company to
concentrations of credit risk are trade receivables. We manufacture and sell
our products to customers who are primarily audio and video and graphic arts
professionals who prepare sound, video and graphics for use in the music
recording, video, film and broadcast and printing industries or for corporate
in-house use and to dealers who support such customers. Management believes
that any risk of credit loss is significantly reduced due to the diversity of
its end users and their dispersion across many geographic sales areas. We
maintain an allowance for doubtful accounts to provide against potential credit
losses.
(k) Stock-Based Compensation
Our company has various stock-based compensation plans, as discussed in
Note 7. We have accounted for the effect of our stock based compensation plans
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees." We have elected to adopt only the disclosure based requirements
of SFAS No. 123 "Accounting for Stock-Based Compensation" and as such have
disclosed the pro forma effects on net income (loss) and net income (loss) per
F-9
<PAGE>
share data as if we had elected to use the fair value approach to account for
all our employee stock-based compensation plans.
(l) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
We account for long-lived assets, including intangibles, at amortized cost.
As part of our ongoing review of the valuation and amortization of long-lived
assets, we assess the carrying value of such assets if the facts and
circumstances suggest that they may be impaired. As a result, we have
determined that our long-lived assets are not impaired as of March 31, 1999 and
1998.
(m) Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative instruments and hedging activities. Sonic Solutions
is required to adopt SFAS No. 133 in the first quarter of fiscal year 2001.
Sonic Solutions does not anticipate that SFAS No. 133 will have a material
impact on its 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. SOP 98-9 is effective for all
transactions entered into by the Company in fiscal year 2000. The adoption of
this statement is not expected to have a material impact on the Company's
operating results, financing position, or cash flows.
(n) Comprehensive Income
SFAS No. 130 establishes standards for the reporting and disclosure of
comprehensive income and its components which will be presented in association
with our financial statements. Comprehensive income is defined as the
change in a business enterprise's equity during a period arising from
transactions, events or circumstances relating to nonowner sources, such as
foreign currency translation adjustments and unrealized gains or losses on
available-for-sale securities. It includes all changes in equity during a
period except those resulting from investments by or distributions to owners.
For the fiscal years ended March 31, 1997, 1998 and 1999, net income and
comprehensive income were equivalent. Accordingly, the adoption of SFAS No. 130
had no impact on our financial reporting.
(o) Reclassification
Certain amounts in the fiscal 1997 and fiscal 1998 financial statements
have been reclassified to conform to the 1999 presentation.
(2) INVENTORY
The components of inventory consist of (in thousands):
March 31,
------------------------
1998 1999
---------- ----------
Raw materials $ 468 603
Work-in-process 130 187
Original equipment manufacturer's goods 36 17
----- ----
$ 634 807
===== ====
F-10
<PAGE>
(3) FIXED ASSETS
Fixed assets consist of (in thousands):
March 31,
-----------------
1998 1999
------- ------
Equipment, furniture and fixtures $ 4,206 4,781
Demonstration equipment 1,505 1,733
Parts used in service, not held for sale 1,292 1,401
------- ------
7,003 7,915
Less accumulated depreciation (4,237) (5,602)
------- ------
$ 2,766 2,313
======= ======
Depreciation expense was $1,262,000, $1,397,000 and $1,365,000 for the
years ended March 31, 1997, 1998, and 1999, respectively. As of March 31, 1999,
fixed assets held under capital lease totaled $315,000 and accumulated
depreciation on those assets totaled $161,000.
(4) PURCHASED AND INTERNALLY DEVELOPED SOFTWARE COSTS
Capitalized software costs consist of (in thousands):
March 31,
--------------------
1998 1999
------- ------
Purchased software $ 332 365
Internally developed software 4,615 5,278
------- ------
4,947 5,643
Accumulated amortization (2,003) (3,258)
------- ------
$ 2,944 2,385
======= ======
Amortization of capitalized software costs was $431,000, $859,000 and
$1,255,000 for the years ended March 31, 1997, 1998 and 1999, respectively.
(5) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of (in thousands):
March 31,
--------------------
1998 1999
------- ------
Accounts payable $1,458 1,988
Commissions payable 321 428
Accrued compensation and benefits 605 555
Accrued expenses 931 1,388
------ -----
$3,315 4,359
====== =====
F-11
<PAGE>
(6) LONG-TERM DEBT AND CREDIT FACILITIES
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 provides for up to $1,500,000 in available
borrowings based upon our eligible accounts receivable balances. The current
bank credit line will expire on May 29, 1999, however, we are currently in the
process of extending this bank credit line and we expect it to be extended prior
to the expiration date. 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 monthly at a rate between three-quarters percent and two and one
half percent in excess of the prime rate (prime rate at March 31, 1999 was
7.75%). On March 31, 1999, $500,000 was outstanding under this agreement. The
Company was in compliance with its debt covenants under this agreement at
March 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
purchases 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 (see note 7)
and $1,500,000 of debt. The interest rate on such restructured debt is 7.25%
and is due in October 1999. We filed a Form S-3 Registration Statement under
the Securities Act of 1933 to register the resale of the 461,538 shares of the
Company's Common Stock which underlie the Series C 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 with the
original arrangement reached in December 1996 was lowered to the fair value of
common stock of $3.25. We accounted for this transaction by revaluing the new
warrants, using comparable assumptions as the original warrant grant, and the
resultant value of $90,000 is being amortized over the new loan period. In
June, 1998, 90,000 of the $3.25 warrants were exercised on a "net exercise"
basis, and the warrant holder received 29,691 shares of common stock. During
the fiscal year ended March 31, 1999, 167,500 shares of the Preferred Stock
were converted into common stock.
In December, 1997, we secured a $7,000,000 equity-based line of credit.
Under this arrangement, we had the right to draw up to a total of $7,000,000 in
cash in exchange for Sonic Solutions' common stock. Pricing of the common stock
issued was based on the market price of our 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
618,130 shares of common stock. During the fiscal year ended March 31,
F-12
<PAGE>
1999, we drew an additional $2,358,000 from this credit line for which we issued
903,870 shares of common stock. Because of certain limitations on the total
number of shares which can be issued under this line of credit, this facility is
currently unavailable to us.
(7) SHAREHOLDERS' EQUITY
Convertible Preferred Stock
In March 1998 we issued 461,538 shares of Series C Convertible Preferred
Stock to Hambrecht & Quist Guaranty Finance. The Series C Preferred Stock is
convertible to shares of common stock on a share-to-share basis, subject to
adjustment for stock splits, stock dividends or other similar transactions.
Subject to certain limitations, the share-to-share conversion rate may be
reduced if we sell or issue dilutive equity securities at an effective purchase
price of less than $3.00.
Stock Options
Under our September 1989 Stock Option Plan (the Plan), options to purchase
up to an aggregate of 2,090,000 shares of common stock may be granted to key
employees, directors and consultants. Grants of options to the directors of
Sonic Solutions may not exceed 140,000 shares. The Plan provides for issuing
both incentive stock options, which must be granted at fair market value at the
date of grant, and nonqualified stock options, which must be granted at not less
than 85% of fair market value of the stock. All options to date have been
granted as incentive stock options. Options under the Plan generally vest over
four years from the date of grant. The options generally expire ten years from
the date of grant and are canceled three months after termination of employment.
Our Board of Directors and Chief Executive Officers administer the Plan.
During 1995, we adopted the 1994 NonEmployee Directors Stock Option Plan
which provides for the grant of stock options to Sonic Solutions' nonemployee
directors. Under this plan, stock options are granted annually at the fair
market value of Sonic Solutions' common stock on the date of grant. The number
of options so granted is fixed by the plan. Such options generally
vest over four years from the grant date. The total number of shares to be
issued under this plan may not exceed 100,000 shares. There were 44,500 options
outstanding at March 31, 1999, at prices of $2.5625 and $1.6880 per share, of
which 29,748 were exercisable.
In March 1998, the Board of Directors approved the repricing of options
at an exercise price equal to fair market value on March 3, 1998 of $2.5625
per share. There were no changes made to the vesting schedules in relation to
the repricing.
In July, 1998, the Board of Directors adopted the Sonic Solutions 1998
Stock Option Plan and the shareholder's approved the 1998 Stock Option Plan in
September, 1998. The 1998 Stock Option Plan covers 1,000,000 shares of Common
Stock, with an annual increase in the number of shares available for issuance
under the Stock Option Plan on the last day of each fiscal year; provided that
the total number of shares issuable under the plan shall not exceed 2,000,000.
A summary of Sonic Solutions' option plans is presented below:
F-13
<PAGE>
<TABLE>
<CAPTION>
1997 1998 1999
-------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- -------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 820,398 $4.92 829,699 $5.53 1,660,178 $2.89
Granted 310,400 6.31 1,925,150 3.76 670,250 3.08
Exercised (102,269) 1.66 (50,062) 1.70 (64,225) 2.22
Forfeited (198,830) 6.19 (1,044,609) 6.66 (239,870) 4.32
-------- ----- ---------- ----- --------- -----
Outstanding at end of year. 829,699 $5.53 1,660,178 $2.89 2,026,333 $2.80
======== ========== =========
Options exercisable at
year end 308,723 $4.45 640,809 $2.82 1,179,191 $2.65
Fair value of options granted
during the year $3.73 $2.22 $2.06
</TABLE>
Had compensation cost for our plans been determined consistent with the
fair value approach enumerated in SFAS No. 123, our net loss and net loss per
share for the years ended March 31, 1997, 1998 and 1999 would have been
increased as indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended
March 31,
1997 1998 1999
------- --------- ----------
<S> <C> <C> <C> <C>
Net loss As Reported $5,191 5,876 1,859
Pro Forma $5,603 6,572 3,640
Net loss per share As Reported $ 0.69 0.76 0.21
Pro Forma $ 0.74 0.85 0.41
</TABLE>
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1998 and 1999; risk-free interest rate of
6.31%, 5.97% and 4.65%; expected life of 4 years; 73%, 91% and 91% expected
volatility; and no dividends.
The effect of applying SFAS No. 123 for disclosing compensation costs may
not be representative of the effects on reported net income (loss) for future
years because pro forma net income (loss) reflects compensation costs only for
stock options granted in fiscal 1996 through 1999 and does not consider
compensation costs for stock options granted prior to April 1, 1995.
The following table summarizes information about stock options outstanding
at March 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- --------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Outstanding at Average
Exercise Price March 31, 1999 Contractual Life Exercise Price March 31, 1999 Exercise Price
- --------------------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
From 0.86 to $1.75 269,980 8.24 $1.65 168,648 $1.48
From $2.00 to $2.63 1,271,103 8.07 2.55 962,281 2.55
From $3.44 to $3.88 372,500 9.72 3.65 10,813 3.47
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- --------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Outstanding at Average
Exercise Price March 31, 1999 Contractual Life Exercise Price March 31, 1999 Exercise Price
- --------------------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
From $4.18 to $4.75 30,750 9.29 4.60 3,500 4.29
From $5.25 to $5.75 28,000 8.34 5.66 10,783 5.66
From $6.00 to $6.88 54,000 7.53 6.25 23,166 6.18
------- ---- ---- ------ ----
From $0.86 to $6.88 2,026,333 8.40 $2.80 1,179,191 $2.65
========= ==== ===== ========= =====
</TABLE>
(8) INCOME TAXES
In March, 1997, we had current income tax benefits of $293,000 which was
offset by deferred tax expense in the same amount.
The differences between income taxes computed using the statutory federal
income tax rate of 34% and that shown in the statements of operations are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended March 31
--------------------------------------------------
1997 1998 1999
------------- ----------- ----------
<S> <C> <C> <C>
Computed tax at statutory rate $(1,765) (1,998) (630)
Tax credits utilized (201) 131 105
State taxes, net of federal benefit -- 3 5
Tax exempt interest income (25) (36) (19)
Current year net operating losses, temporary differences
and credits for which no benefit was recognized 1,681 1,880 520
Change in beginning of year valuation allowance 293 -- --
Other 17 20 19
---- ----- -----
$ -- -- --
======== ====== =====
</TABLE>
The components of deferred taxes are as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
------------------------------------------------
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable $ 252 254 179
Inventories 459 542 123
Tax credit carryforwards 1,013 1,550 2,086
Net operating losses 1,843 4,103 4,732
Accrued vacation pay 50 62 55
Commissions 29 40 1
State income taxes -- 1 52
Warranty and other 22 42 51
------- ------ ------
Gross deferred tax assets 3,668 6,594 7,279
------- ------ ------
</TABLE>
F-15
<PAGE>
<TABLE>
March 31,
------------------------------------------------
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
Valuation allowance (2,784) (5,343) (6,309)
------- ------ ------
Total deferred tax assets, net of valuation allowance 884 1,251 970
Deferred tax liabilities:
Fixed assets (172) (174) (130)
Internally developed software 712 (1,077) (840)
------- ------ ------
Total deferred tax liability 884 (1,251) (970)
------- ------ ------
Net deferred taxes $ -- - -
======= ====== ======
</TABLE>
The net change in the valuation allowance for the year ended March 31, 1998
and 1999 was an increase of approximately $2,559,000 and $996,000, respectively.
Management believes that sufficient uncertainty exists regarding the future
realization of certain deferred tax assets and, that a valuation allowance is
required.
As of March 31, 1999, we have cumulative federal and California net
operating losses of approximately $12,686,000 and $6,269,000, respectively,
which can be used to offset future taxable income subject to taxes. The federal
tax loss carryforwards will expire beginning in the year 2012 through 2019. The
California tax loss carryforwards will expire beginning in the year 2001 through
2004.
As of March 31, 1999, we have cumulative unused research and development
tax credits of approximately $1,325,000 and $626,000 which can be used to reduce
future federal and California income taxes, respectively. Federal credit
carryforwards expire from 2009 through 2019; California credits will
carryforward indefinitely.
As of March 31, 1999, we have federal minimum tax credit carryforwards of
approximately $135,000 which will carry forward indefinitely until utilized.
(9) COMMITMENTS AND CONTINGENCIES
(a) Leases
In December, 1996, we entered into a leasing agreement to finance the
purchase of up to $1,000,000 in equipment, as discussed in Note 6. Lease terms
under the agreement are for 42 months and are secured by the leased equipment.
We also lease certain facilities and equipment under noncancelable operating
leases. Future payments under capital and operating leases that have initial
remaining noncancelable lease terms in excess of one year are as follows (in
thousands):
Years Ended March 31,
---------------------------------
Capital Operating
Leases Leases
--------------- --------------
2000 $ 126 705
2001 121 705
2002 20 705
2003 - 117
2004 - -
Thereafter - -
----- -----
Total minimum lease payments 267 2,232
Less amount representing interest (30)
F-16
<PAGE>
Years Ending March 31,
---------------------------------
Capital Operating
Leases Leases
--------------- --------------
Less current portion of obligations
under capital lease (148)
----
Long-term obligations under capital
lease $ 89
====
Rent expense under operating leases for the years ended March 31, 1997,
1998 and 1999 was approximately $610,000, $847,000 and $954,000, respectively.
(b) Benefit Plan
We sponsor a 401(k) savings plan covering most salaried employees. To
date, no contributions have been made to this plan by the Company.
(c) Other
We from time to time are subject to routine claims and litigation
incidental to our business. We believe that the results of these matters will
not have a material adverse effect on our financial condition.
(10) 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 the Company 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 departments within the
organization. Accordingly, we have a single reportable segment. As such, we
are required to disclose the following geographic information:
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
North America (substantially all United States) 8,780 9,612 11,702
Export:
Europe 2,763 4,949 5,707
Pacific Rim 3,491 4,009 4,218
Other international 877 1,311 272
------ ------ ------
Total net revenue 15,911 19,881 21,899
====== ====== ======
</TABLE>
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.
F-17
<PAGE>
Our accounting system does not capture meaningful revenue information by
product line. Accordingly, such information has not been disclosed.
F-18
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth various expenses in connection with the sale
and distribution of the securities being registered. All of the amounts shown
are estimates except for the Securities and Exchange Commission Registration
Fee.
Securities and Exchange Commission Registration Fee
Accounting Fees
Legal Fees and Disbursements
Miscellaneous
Total:
Item 14. Indemnification of Officers and Directors.
Section 317 of the California Corporations Code permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law. Article III of Sonic
Solutions' Amended and Restated Articles of Incorporation provides for the
indemnification of officers, directors and third parties acting on behalf of
Sonic Solutions to the fullest extent permissible under California law. Sonic
Solutions has entered into indemnification agreements with its directors and
executive officers to the maximum extent permitted under California law.
Item 16. Exhibits and Financial Statement Schedules.
A. Exhibits
<TABLE>
<CAPTION>
Exhibit Description
- --------- -------------------------------------------------------------------------------------------------
<C> <S>
4.1 Stock purchase agreement between Sonic Solutions and Kingsbridge Capital Limited dated as of May
20, 1999
4.2 Registration Rights Agreement between Sonic Solutions and Kingsbridge Capital Limited dated as of
May 20, 1999
5 Opinion of Heller Ehrman White & McAuliffe
23.1 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5)
23.2 Consent of KPMG LLP
24 Power of Attorney (See Page II-4)
27 Financial Data Schedule
</TABLE>
B. Financial Statement Schedules
Valuation and Qualifying Accounts
i
<PAGE>
Item 17. Undertakings.
A. The undersigned Sonic Solutions hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
Provided, however, that paragraphs (i) and (ii) shall not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by Sonic Solutions pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
B. That, for purposes of determining any liability under the Securities Act of
1933, each filing of Sonic Solutions' annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities
ii
<PAGE>
offering therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
C. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Sonic Solutions pursuant to the provisions described under Item 15 above,
or otherwise, Sonic Solutions has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by Sonic Solutions of expenses incurred or paid by a director,
officer or controlling person of Sonic Solutions in the successful defense
of any action, suit or proceeding) is asserted against Sonic Solutions by
such Director, officer or controlling person in connection with the
securities being registered, Sonic Solutions will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sonic Solutions
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in Novato, State of California, on the 21st day of May, 1999.
Sonic Solutions
By: /s/ Robert J. Doris
--------------------------
Robert J. Doris, President
iii
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert J. Doris or A. Clay Leighton, or
either of them, with the power of substitution, her or his attorney in fact, to
sign any amendments to this Registration Statement (including post-effective
amendments), and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorney-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
May 21, 1999 /s/ Robert J. Doris
-------------------------------------------------
President and Director
Robert J. Doris
May 21, 1999 /s/ Mary C. Sauer
-------------------------------------------------
Senior Vice President of Business Development and
Director Mary C. Sauer
May 21, 1999 /s/ Michael C. Child
-------------------------------------------------
Director
Michael C. Child
May 21, 1999 /s/ Robert M. Greber
-------------------------------------------------
Director
Robert M. Greber
May 21, 1999 /s/ Peter J. Marguglio
-------------------------------------------------
Director
Peter J. Marguglio
May 21, 1999 /s/ A. Clay Leighton
-------------------------------------------------
Senior Vice President of Worldwide Operations and
Finance and Chief Financial Officer (Principal
Financial Accounting Officer)
A. Clay Leighton
iv
<PAGE>
FINANCIAL STATEMENT SCHEDULES
SONIC SOLUTIONS
VALUATION AND QUALIFYING ACCOUNTS
Years Ended March 31, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance
beginning costs and to other at end of
of period expenses accounts Deductions period
----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1997
Allowance for doubtful accounts............. $1,105 90 --- (974) 221
Allowance for returns....................... 585 --- 100 (318) 367
------ --- --- ------ ---
$1,690 90 100 (1,292) 588
====== === === ====== ===
Year ended March 31, 1998
Allowance for doubtful accounts............. $ 221 44 --- (42) 223
Allowance for returns....................... 367 --- 190 (163) 394
------ --- --- ------ ---
$ 588 44 190 (205) 617
====== === === ====== ===
Year ended March 31, 1999
Allowance for doubtful accounts............. $ 223 50 --- (133) 140
Allowance for returns....................... 394 --- 85 (20) 459
------ --- --- ------ ---
$ 617 50 85 (153) 599
====== === === ====== ===
</TABLE>
<PAGE>
SONIC SOLUTIONS
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit Description Pages
- -------------- -------------------------------------------------------------------------------- ----------
<C> <S> <C>
4.1 Stock purchase agreement between Sonic Solutions and Kingsbridge Capital Limited
dated as of May 20, 1999
4.2 Registration Rights Agreement between Sonic Solutions and Kingsbridge Capital
Limited dated as of May 20, 1999
5 Opinion of Heller Ehrman White & McAuliffe
23.1 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5)
23.2 Consent of KPMG LLP
24 Power of Attorney (See Page II-4)
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 4.1
STOCK PURCHASE AGREEMENT
by and between
KINGSBRIDGE CAPITAL LIMITED
and
SONIC SOLUTIONS
________________________________________________________________
Dated as of May 20, 1999
________________________________________________________________
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE I Certain Definitions............................................................... 1
Section 1.1 "Adjustment Period......................................................... 1
Section 1.2 "Bid Price"................................................................ 1
Section 1.3 "Capital Shares"........................................................... 1
Section 1.4 "Closing".................................................................. 1
Section 1.5 "Closing Date"............................................................. 1
Section 1.6 "Commitment Period"........................................................ 1
Section 1.7 "Common Stock"............................................................. 2
Section 1.8 "Common Stock Equivalents"................................................. 2
Section 1.9 "Condition Satisfaction Date".............................................. 2
Section 1.10 "Damages"................................................................. 2
Section 1.11 "Effective Date".......................................................... 2
Section 1.12 "Exchange Act"............................................................ 2
Section 1.13 "Floor Price"............................................................. 2
Section 1.14 "Investment Amount"....................................................... 2
Section 1.15 "Legend".................................................................. 2
Section 1.16 "Market Price"............................................................ 2
Section 1.17 "Material Adverse Effect"................................................. 2
Section 1.18 "Maximum Commitment Amount"............................................... 2
Section 1.19 "Maximum Purchase Amount"................................................. 2
Section 1.20 "NASD".................................................................... 2
Section 1.21 "Outstanding"............................................................. 2
Section 1.22 "Person".................................................................. 3
Section 1.23 "Principal Market"........................................................ 3
Section 1.24 "Purchase"................................................................ 3
Section 1.25 "Purchase Date"........................................................... 3
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 1.26 "Purchase Notice"......................................................... 3
Section 1.27 "Purchase Price".......................................................... 3
Section 1.28 "Purchased Shares"........................................................ 3
Section 1.29 "Registrable Securities".................................................. 3
Section 1.30 "Registration Rights Agreement"........................................... 3
Section 1.31 "Registration Statement".................................................. 3
Section 1.32 "Regulation D"............................................................ 4
Section 1.33 "SEC"..................................................................... 4
Section 1.34 "Section 4(2)"............................................................ 4
Section 1.35 "Securities Act".......................................................... 4
Section 1.36 "SEC Documents"........................................................... 4
Section 1.37 "Subscription Date........................................................ 4
Section 1.38 "Trading Cushion"......................................................... 4
Section 1.39 "Trading Day"............................................................. 4
Section 1.40 "Trinity"................................................................. 4
Section 1.41 "Valuation Event"......................................................... 4
Section 1.42 "Valuation Period"........................................................ 5
ARTICLE II Purchase and Sale of Common Stock................................................ 5
Section 2.1 Investments................................................................ 5
Section 2.2 Mechanics.................................................................. 5
Section 2.3 Closings................................................................... 6
Section 2.4 Special Circumstances; Adjustment Period................................... 6
Section 2.5 Termination of Investment Obligation....................................... 7
Section 2.6 Blackout Shares............................................................ 7
Section 2.7 Liquidated Damages......................................................... 8
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE III Representations and Warranties of Investor...................................... 8
Section 3.1 Intent..................................................................... 8
Section 3.2 Sophisticated Investor..................................................... 8
Section 3.3 Authority.................................................................. 8
Section 3.4 Not an Affiliate........................................................... 8
Section 3.5 Organization and Standing.................................................. 8
Section 3.6 Absence of Conflicts....................................................... 8
Section 3.7 Disclosure; Access to Information.......................................... 9
Section 3.8 Manner of Sale............................................................. 9
ARTICLE IV Representations and Warranties of the Company.................................... 9
Section 4.1 Organization of the Company................................................ 9
Section 4.2 Authority.................................................................. 9
Section 4.3 Capitalization............................................................. 9
Section 4.4 Common Stock............................................................... 9
Section 4.5 SEC Documents.............................................................. 10
Section 4.6 Valid Issuances............................................................ 10
Section 4.7 No General Solicitation or Advertising in Regard to this Transaction....... 10
Section 4.8 Corporate Documents........................................................ 10
Section 4.9 No Conflicts............................................................... 10
Section 4.10 No Material Adverse Change................................................ 11
Section 4.11 No Undisclosed Liabilities................................................ 11
Section 4.12 No Undisclosed Events or Circumstances.................................... 11
Section 4.13 No Integrated Offering.................................................... 11
Section 4.14 Litigation and Other Proceedings.......................................... 11
Section 4.15 No Misleading or Untrue Communication..................................... 12
Section 4.16 Material Non-Public Information........................................... 12
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Section 4.17 Broker-Dealer Status...................................................... 12
ARTICLE V Covenants of the Investor......................................................... 12
Section 5.1 Compliance with Law........................................................ 12
Section 5.2 Limitation on Short Sales.................................................. 12
ARTICLE VI Covenants of the Company......................................................... 12
Section 6.1 Registration Rights........................................................ 12
Section 6.2 Reservation of Common Stock................................................ 12
Section 6.3 Listing of Common Stock.................................................... 13
Section 6.4 Exchange Act Registration.................................................. 13
Section 6.5 Legends.................................................................... 13
Section 6.6 Corporate Existence........................................................ 13
Section 6.7 Additional SEC Documents................................................... 13
Section 6.8 Blackout Period............................................................ 13
Section 6.9 Expectations Regarding Purchase Notices.................................... 14
Section 6.10 Consolidation; Merger..................................................... 14
Section 6.11 Issuance of Purchased Shares and Blackout Shares.......................... 14
Section 6.12 Legal Opinion on Subscription Date........................................ 14
Section 6.13 Limitation on Other Financing............................................. 14
ARTICLE VII Conditions to Delivery of Optional Purchase Notices and Conditions to Closing.. 14
Section 7.1 Conditions Precedent to the Obligation of the Company to Issue and Sell
Common Stock............................................................................ 14
Section 7.2 Conditions Precedent to the Right of the Company to Deliver a Purchase
Notice and the Obligation of the Investor to Purchase the Purchased Shares.............. 15
ARTICLE VIII Due Diligence Review; Non-Disclosure of Non-Public Information................. 17
Section 8.1 Due Diligence Review....................................................... 17
Section 8.2 Non-Disclosure of Non-Public Information................................... 17
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
ARTICLE IX Legends.......................................................................... 18
Section 9.1 Legends.................................................................... 18
Section 9.2 No Other Legend or Stock Transfer Restrictions............................. 20
Section 9.3 Investor's Compliance...................................................... 20
ARTICLE X Choice of Law..................................................................... 20
Section 10.1 Choice of Law............................................................. 20
ARTICLE XI Assignment; Entire Agreement, Amendment; Termination............................. 20
Section 11.1 Assignment................................................................ 20
Section 11.2 Termination............................................................... 20
Section 11.3 Entire Agreement, Amendment; Waiver....................................... 20
ARTICLE XII Notices; Indemnification........................................................ 20
Section 12.1 Notices................................................................... 20
Section 12.2 Indemnification........................................................... 22
Section 12.3 Method of Asserting Indemnification Claims................................ 22
ARTICLE XIII Miscellaneous.................................................................. 25
Section 13.1 Fees and Expenses......................................................... 25
Section 13.2 Brokerage................................................................. 25
Section 13.3 Counterparts.............................................................. 25
Section 13.4 Entire Agreement.......................................................... 25
Section 13.5 Survival; Severability.................................................... 26
Section 13.6 Title and Subtitles....................................................... 26
Section 13.7 Reporting Entity for the Common Stock..................................... 26
</TABLE>
v
<PAGE>
STOCK PURCHASE AGREEMENT
by and between
KINGSBRIDGE CAPITAL LIMITED
and
SONIC SOLUTIONS
dated as of May 20, 1999
This STOCK PURCHASE AGREEMENT is entered into as of the 20th day of May,
1999 (this "Agreement"), by and between Kingsbridge Capital Limited (the
"Investor"), an entity organized and existing under the laws of the British
Virgin Islands, and Sonic Solutions, a corporation organized and existing under
the laws of the State of California (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investor,
from time to time as provided herein, and the Investor shall purchase, up to
$12,000,000 of the Common Stock (as defined below); and
WHEREAS, such investments will be made in reliance upon the provisions of
Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of the United
States Securities Act of 1933, as amended and the regulations promulgated
thereunder (the "Securities Act"), and/or upon such other exemption from the
registration requirements of the Securities Act as may be available with respect
to any or all of the investments in Common Stock to be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1 "Adjustment Period" See Section 2.4(b).
-----------------
Section 1.2 "Bid Price" shall mean the closing bid price (as reported by
---------
Bloomberg L.P.) of the Common Stock on the Principal Market.
Section 1.3 "Capital Shares" shall mean the Common Stock and any shares of
--------------
any other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.
Section 1.4 "Closing" shall mean one of the closings of a purchase and
-------
sale of the Common Stock pursuant to Section 2.1.
Section 1.5 "Closing Date" shall mean, with respect to a Closing, the
------------
third Trading Day following the Purchase Date related to such Closing, provided
all conditions to such Closing have been satisfied on or before such Trading
Day.
Section 1.6 "Commitment Period" shall mean the period commencing on the
-----------------
earlier to occur of (i) the Effective Date or (ii) such earlier date as the
Company and the Investor may mutually agree in writing, and expiring on the
earliest to occur of (x) the date on which the Investor shall have purchased
Purchased Shares pursuant to this Agreement for an aggregate Investment Amount
of $12,000,000, (y) the date this Agreement is terminated pursuant to Section
2.5(b), or (z) the date occurring twenty-four (24) months from the date of
commencement of the Commitment Period.
Section 1.7 "Common Stock" shall mean the Company's common stock, no par
------------
value per share.
<PAGE>
Section 1.8 "Common Stock Equivalents" shall mean any securities that are
------------------------
convertible into or exchangeable for Common Stock or any warrants, options or
other rights to subscribe for or purchase Common Stock or any such convertible
or exchangeable securities.
Section 1.9 "Condition Satisfaction Date" See Section 7.2.
---------------------------
Section 1.10 "Damages" shall mean any loss, claim, damage, liability,
-------
costs and expenses (including, without limitation, reasonable attorneys' fees
and disbursements and costs and expenses of expert witnesses and investigation).
Section 1.11 "Effective Date" shall mean the date on which the SEC first
--------------
declares effective a Registration Statement registering resale of the
Registrable Securities as set forth in Section 7.2(a).
Section 1.12 "Exchange Act" shall mean the Securities Exchange Act of
-------------
1934, as amended and the regulations promulgated thereunder.
Section 1.13 "Investment Amount" shall mean the dollar amount specified in
------------------
a Purchase Notice to be paid by the Investor to purchase Purchased Shares in
accordance with Section 2.2 hereof.
Section 1.14 "Legend" See Section 8.1.
-------
Section 1.15 "Market Price" on any given date shall mean the average of
-------------
the lowest intra-day prices of the Common Stock over the Valuation Period.
"Lowest intra-day price" shall mean the lowest trade price of the Common Stock
(as reported by Bloomberg L.P.) during any Trading Day.
Section 1.16 "Material Adverse Effect" shall mean any effect on the
------------------------
business, operations, properties, prospects, or financial condition of the
Company that is material and adverse to the Company or to the Company and such
other entities controlling or controlled by the Company, taken as a whole,
and/or any condition, circumstance, or situation that would prohibit or
otherwise interfere with the ability of the Company to enter into and perform
its obligations under any of (a) this Agreement and (b) the Registration Rights
Agreement.
Section 1.17 "Maximum Commitment Amount" shall mean $12,000,000.
-------------------------
Section 1.18 "Maximum Purchase Amount" shall mean with respect to each
------------------------
Purchase, subject to the provisions of Section 2.4 hereof, (i) $500,000 if the
average daily volume of shares of Common Stock traded during the preceding ten
(10) Trading Days (the "Average Trading Volume") is 40,000 shares or less; (ii)
$750,000 if the Average Trading Volume greater than 40,000 shares and less than
60,000 shares; and (iii) $1,000,000 if the Average Trading Volume equal to or
greater than 60,000 shares. Notwithstanding the foregoing, (i) in the event
that the Market Price is less than three dollars ($3.00) in connection with any
Purchase, the Maximum Purchase Amount shall be $150,000 and (ii) in the event
that the Market Price is less than one dollar ($1.00) in connection with any
Purchase, the Maximum Purchase Amount shall be $50,000.
Section 1.19 "NASD" shall mean the National Association of Securities
-----
Dealers, Inc.
Section 1.20 "Outstanding" when used with reference to Common Shares or
------------
Capital Shares (collectively the "Shares"), shall mean, at any date as of which
the number of such Shares is to be determined, all issued and outstanding
Shares, and shall include all such Shares issuable in respect of outstanding
scrip or any certificates representing fractional interests in such Shares;
provided, however, that "Outstanding" shall not mean any such Shares then
- -------- -------
directly or indirectly owned or held by or for the account of the Company.
Section 1.21 "Person" shall mean an individual, a corporation, a
-------
partnership, an association, a trust or other entity or organization, including
a government or political subdivision or an agency or instrumentality thereof.
Section 1.22 "Principal Market" shall mean the Nasdaq National Market, the
-----------------
Nasdaq Small-Cap
<PAGE>
Market, the American Stock Exchange or the New York Stock Exchange, whichever is
at the time the principal trading exchange or market for the Common Stock.
Section 1.23 "Purchase" shall mean each occasion the Company elects to
--------
tender Purchase Notice requiring the Investor to purchase a discretionary amount
of the Company's Common Stock, subject to the terms of this Agreement.
Section 1.24 "Purchase Date" shall mean the Trading Day during the
--------------
Commitment Period that a Purchase Notice is deemed delivered to the Investor
pursuant to Section 2.2(b) hereof.
Section 1.25 "Purchase Notice" shall mean a written notice to the Investor
----------------
setting forth the Investment Amount.
Section 1.26 "Purchase Price" shall mean (i) in the event that the Market
---------------
Price is equal to or less than five dollars ($5.00), eighty-eight percent (88%)
of the Market Price of the Common Stock in respect of any Purchase Notice or
(ii) in the event that the Market Price is greater than five dollars ($5.00),
ninety percent (90%) of the Market Price of the Common Stock in respect of any
Purchase Notice.
Section 1.27 "Purchased Shares" shall mean all shares of Common Stock
-----------------
issued or issuable pursuant to a Purchase that has occurred or may occur in
accordance with the terms and conditions of this Agreement.
Section 1.28 "Registrable Securities" shall mean the Purchased Shares
-----------------------
until (i) the Registration Statement has been declared effective by the SEC and
all Purchased Shares have been disposed of pursuant to the Registration
Statement, (ii) all Purchased Shares have been sold under circumstances under
which all of the applicable conditions of Rule 144 (or any similar provision
then in force) under the Securities Act ("Rule 144") are met, (iii) all
Purchased Shares have been otherwise transferred to holders who may trade such
shares without restriction under the Securities Act, and the Company has
delivered a new certificate or other evidence of ownership for such securities
not bearing a restrictive legend or (iv) such time as, in the opinion of counsel
to the Company, which counsel shall be reasonably acceptable to the Investor,
all Purchased Shares may be sold without any time, volume or manner limitations
pursuant to Rule 144(k) (or any similar provision then in effect) under the
Securities Act.
Section 1.29 "Registration Rights Agreement" shall mean the agreement
------------------------------
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, entered into between the Company and the Investor as of
the Subscription Date.
Section 1.30 "Registration Statement" shall mean a registration statement
-----------------------
on Form S-1 (if use of such form is then available to the Company pursuant to
the rules of the SEC and, if not, on such other form promulgated by the SEC for
which the Company then qualifies and which counsel for the Company shall deem
appropriate and which form shall be available for the resale of the Registrable
Securities to be registered thereunder in accordance with the provisions of this
Agreement and the Registration Rights Agreement, and in accordance with the
intended method of distribution of such securities), for the registration of the
resale by the Investor of the Registrable Securities under the Securities Act.
Section 1.31 "Regulation D" shall have the meaning set forth in the
-------------
recitals of this Agreement.
Section 1.32 "SEC" shall mean the Securities and Exchange Commission.
----
Section 1.33 "Section 4(2)" shall have the meaning set forth in the
-------------
recitals of this Agreement.
Section 1.34 "Securities Act" shall have the definition ascribed to it in
---------------
the recitals of this Agreement.
Section 1.35 "SEC Documents" shall mean the Company's latest Form 10-K as
--------------
of the time in question, all Forms 10-Q and 8-K filed thereafter, and the Proxy
Statement for its latest fiscal year as of the
<PAGE>
time in question until such time the Company no longer has an obligation to
maintain the effectiveness of a Registration Statement as set forth in the
Registration Rights Agreement.
Section 1.36 "Subscription Date" shall mean the date on which this
------------------
Agreement is executed and delivered by the parties hereto.
Section 1.37 "Trading Cushion" shall mean, at any time (subject to the
----------------
provisions of Section 2.4 hereof), (i) the mandatory fifteen (15) Trading Days
between Purchase Dates if at such time the immediately preceding Purchase was
consummated for an Investment Amount of $650,000 or less and (ii) the mandatory
twenty (20) Trading Days between Purchase Dates if at such time the immediately
preceding Purchase was consummated for an Investment Amount of more than
$650,000.
Section 1.38 "Trading Day" shall mean any day during which the New York
------------
Stock Exchange shall be open for business.
Section 1.39 "Trinity" See Section 4.17.
--------
Section 1.40 "Valuation Event" shall mean an event in which the Company at
----------------
any time during a Valuation Period takes any of the following actions:
(a) subdivides or combines its Common Stock;
(b) pays a dividend in its Capital Stock or makes any other
distribution of its Capital Shares;
(c) issues any additional Capital Shares ("Additional Capital
Shares"), otherwise than as provided in the foregoing Subsections
(a) and (b) above, at a price per share less, or for other
consideration lower, than the Bid Price in effect immediately prior
to such issuance, or without consideration;
(d) issues any warrants, options or other rights to subscribe for
or purchase any Additional Capital Shares and the price per share
for which Additional Capital Shares may at any time thereafter be
issuable pursuant to such warrants, options or other rights shall
be less than the Bid Price in effect immediately prior to such
issuance;
(e) issues any securities convertible into or exchangeable for
Capital Shares and the consideration per share for which Additional
Capital Shares may at any time thereafter be issuable pursuant to
the terms of such convertible or exchangeable securities shall be
less than the Bid Price in effect immediately prior to such
issuance;
(f) makes a distribution of its assets or evidences of
indebtedness to the holders of its Capital Shares as a dividend in
liquidation or by way of return of capital or other than as a
dividend payable out of earnings or surplus legally available for
dividends under applicable law or any distribution to such holders
made in respect of the sale of all or substantially all of the
Company's assets (other than under the circumstances provided for
in the foregoing subsections (a) through (e); or
(g) takes any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the foregoing
Subsections (a) through (f) hereof, inclusive, which in the opinion
of the Company's Board of Directors, determined in good faith,
would have a materially adverse effect upon the rights of the
Investor at the time of a Put.
Section 1.41 "Valuation Period" shall mean the period of five Trading Days
-----------------
during which the Purchase Price of the Common Stock is valued, which period
shall be with respect to the Purchase Price on any Purchase Date, the two
Trading Days preceding and the two Trading Days following the Trading Day on
which a Purchase Notice is deemed to be delivered, as well as the Trading Day on
which such notice is
<PAGE>
deemed to be delivered; provided, however, that if a Valuation Event occurs
-------- -------
during any Valuation Period, a new Valuation Period shall begin on the Trading
Day immediately after the occurrence of such Valuation Event and end on the
fifth Trading Day thereafter.
ARTICLE II
PURCHASE AND SALE OF COMMON STOCK
Section 2.1 Investments.
-----------
(a) Purchases. Upon the terms and conditions set forth herein
(including, without limitation, the provisions of Article VII
hereof), on any Purchase Date the Company may deliver a Purchase
Notice. The number of Purchased Shares that the Investor shall
receive pursuant to such Purchase shall be determined by dividing
the Investment Amount specified in the Purchase Notice by the
Purchase Price on such Purchase Date.
(b) Minimum Amount of Purchases. The Company shall, in accordance
with Section 2.2(a), issue and sell Purchased Shares to the
Investor totaling (in aggregate Investment Amounts) at least
$1,000,000, but not more than the Maximum Commitment Amount. If the
Company for any reason fails to issue and deliver Purchased Shares
in respect of Investment Amounts of at least $1,000,000 during the
Commitment Period, on the first Trading Day after the expiration of
the Commitment Period, the Company shall deliver to Investor cash
equal to the product of: ($1,000,000 minus the aggregate Investment
Amounts of the Purchased Shares delivered hereunder) multiplied by
(0.11).
(c) Maximum Amount of Purchased Shares. Unless the Company
obtains the requisite approval of its shareholders in accordance
with the corporate laws of California and the applicable rules of
the Principal Market, no more than 1,800,000 shares of Common Stock
may be issued and sold pursuant to Puts.
Section 2.2 Mechanics.
---------
(a) Purchase Notice. At any time during the Commitment Period,
the Company may deliver a Purchase Notice to the Investor, subject
to the conditions set forth in Section 7.2; provided, however, the
-------- -------
Investment Amount for each Put as designated by the Company in the
applicable Purchase Notice shall not be greater than the Maximum
Purchase Amount.
(b) Date of Delivery of Purchase Notice. A Purchase Notice shall
be deemed delivered on (i) the Trading Day it is received by
facsimile or otherwise by the Investor if such notice is received
prior to 12:00 noon New York time, or (ii) the immediately
succeeding Trading Day if it is received by facsimile or otherwise
after 12:00 noon New York time on a Trading Day or at any time on a
day which is not a Trading Day. No Purchase Notice may be deemed
delivered, on a day that is not a Trading Day.
Section 2.3 Closings. On each Closing Date for a Purchase, the Company
--------
shall deliver into escrow one or more certificates, at the Investor's option,
representing the Purchased Shares to be purchased by the Investor pursuant to
Section 2.1 herein, registered in the name of the Investor or, at the Investor's
option, deposit such certificate(s) into such account or accounts previously
designated by the Investor and (ii) the Investor shall deliver to escrow the
Investment Amount specified in the Purchase Notice by wire transfer of
immediately available funds to an account designated by the Company on or before
the Closing Date. In addition, on or prior to the Closing Date, each of the
Company and the Investor shall deliver all documents, instruments and writings
required to be delivered or reasonably requested by either of them pursuant to
this Agreement in order to implement and effect the transactions contemplated
herein. Payment of funds to the Company and delivery of the certificates to the
Investor shall occur out of escrow in accordance with the escrow agreement
referred to in Section 7.2(p) following (x) the Company's deposit into escrow of
the certificates representing the Purchased Shares and (y) the Investor's
deposit into escrow of the Investment
<PAGE>
Amount; provided, however, that to the extent the Company has not paid the fees,
-------- -------
expenses and disbursements of the Investor's counsel in accordance with Section
13.1, the amount of such fees, expenses and disbursements shall be paid in
immediately available funds, at the direction of the Investor, to Investor's
counsel with no reduction in the number of Purchased Shares issuable to the
Investor on such Closing Date; provided, further, that so long as the Investor
shall maintain professional liability, errors and omissions liability and/or
directors' and officers' liability insurance for its activities related to the
Purchased Shares or the Blackout Shares, three percent (3%) of such Investment
Amount shall be either (i) retained by the Investor in respect of premium
payments for such insurance or (ii) paid in immediately available funds, at the
direction of the Investor in respect of such premium payments, in either case,
with no reduction in the number of Purchased Shares issuable to the Investor on
such Closing Date (such percentage of the Investment Amount, the "Premium
Reimbursement Percentage"); provided further, that, in the event that premium in
respect of such insurance shall be reduced at any time during the Commitment
Period, the Premium Reimbursement Percentage for subsequent Purchases shall be
reduced by the same proportion as such reduction in premium.
Section 2.4 Special Circumstances; Adjustment Period.
----------------------------------------
(a) Adjustment Period Notice. In the event that the Company shall
in good faith anticipate executing an agreement of acquisition,
merger or consolidation within ninety (90) days after giving the
Investor Adjustment Period Notice (as defined below), the Company
may, at its sole discretion, give the Investor at least twenty-one
(21) days' irrevocable advance notice, in the form of Exhibit A
hereto ("Adjustment Period Notice"), that the Company shall
initiate an Adjustment Period (as defined below). The giving of
such Adjustment Period Notice shall not constitute the disclosure
of non-public information to the Investor under this Agreement.
(b) During the Adjustment Period:
1. The Maximum Purchase Amount shall be $1,000,000;
2. the Purchase Price shall be eighty-five percent (85%) of
the Market Price upon a Purchase Date;
3. the duration of the Trading Cushion shall be shortened to
ten (10) Trading Days until the expiration of five
consecutive weeks (the "Adjustment Period");
4. the Company may not deliver a Purchase Notice such that
the number of Purchased Shares to be purchased by the
Investor upon the applicable Closing, when aggregated with
all other shares of Common Stock then owned by the Investor
beneficially or deemed beneficially owned by the Investor,
would result in the Investor owning more than 4.9% of all of
such Common Stock as would be outstanding on such Closing
Date, as determined in accordance with Section 13(d) of the
Exchange Act and the regulations promulgated thereunder. For
purposes of this Section 2.4(b), in the event that the amount
of Common Stock outstanding as determined in accordance with
Section 13(d) of the Exchange Act and the regulations
promulgated thereunder is greater on a Closing Date than on
the date upon which the Purchase Notice associated with such
Closing Date is given, the amount of Common Stock outstanding
on such Closing Date shall govern for purposes of determining
whether the Investor, when aggregating all purchases of
Common Stock made pursuant to this Agreement, would own more
than 4.9% of the Common Stock following such Closing Date.
Section 2.5 Termination of Investment Obligation. The obligation of the
------------------------------------
Investor to purchase shares of Common Stock shall terminate permanently
(including with respect to any Purchase, when a Purchase Notice has been given,
but the applicable Closing Date has not yet occurred) in the event that (i) the
<PAGE>
Registration Statement is not effective within ninety (90) days following the
date required therefor in the Registration Rights Agreement, (ii) there shall
occur any stop order or suspension of the effectiveness of the Registration
Statement for an aggregate of thirty (30) Trading Days during the Commitment
Period, for any reason other than deferrals or suspension in accordance with
Section 1.1(f) of the Registration Rights Agreement, as a result of corporate
developments subsequent to the Subscription Date that would require such
Registration Statement to be amended to reflect such event in order to maintain
its compliance with the disclosure requirements of the Securities Act or (iii)
the Company shall at any time fail to comply with the requirements of Section
6.3, 6.4, 6.5 or 6.6; provided, however, that, in the event that the
-------- -------
Registration Statement is not declared effective on or before the date required
therefor in the Registration Rights Agreement solely due to the SEC's
determination that the transactions contemplated hereby do not qualify for
effective registration, then either party may, by written notice to the other
party, terminate this Agreement and all of the rights and obligations of the
parties hereunder.
Section 2.6 Blackout Shares. In the event that, (a) within five Trading
---------------
Days of any Closing Date, the Company gives notice ("Blackout Notice") to the
Investor of an impending blackout period ("Blackout Period") in accordance with
Section 1.1(f) of the Registration Rights Agreement, and (b) the Bid Price on
the Trading Day immediately preceding such Blackout Period ("Old Bid Price") is
greater than the Bid Price on the first Trading Day following such Blackout
Period" that the Investor may sell its Registrable Securities pursuant to an
effective Registration Statement ("New Bid Price"), then the Company shall issue
to the Investor a number of additional shares of Registrable Securities (the
Blackout Shares") equal to the difference between (X) the product of the number
of Registrable Securities held by Investor immediately prior to the Blackout
Period" multiplied by the Old Bid Price, divided by the New Bid Price and (Y)
the number of Registrable Securities held by Investor immediately prior to the
Blackout Period."
Section 2.7 Liquidated Damages. The parties hereto acknowledge and agree
------------------
that the sum payable under Section 2.1(b) and the obligation to issue Blackout
Securities under Section 2.6 above shall constitute liquidated damages and not
penalties. The parties further acknowledge that (a) the amount of loss or
damages likely to be incurred is incapable or is difficult to precisely
estimate, (b) the amounts specified in such Sections bear a reasonable
proportion and are not plainly or grossly disproportionate to the probable loss
likely to be incurred by the Investor in connection with the failure by the
Company to deliver Purchase Notices with aggregate Investment Amounts totaling
at least $1,000,000 or in connection with a Blackout Period under Section 1.1(f)
of the Registration Rights Agreement, and (c) the parties are sophisticated
business parties and have been represented by sophisticated and able legal and
financial counsel and negotiated this Agreement at arm's length.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
The Investor represents and warrants to the Company that:
Section 3.1 Intent. The Investor is entering into this Agreement for its
------
own account and the Investor has no present arrangement (whether or not legally
binding) at any time to sell the Common Stock to or through any person or
entity; provided, however, that by making the representations herein, the
Investor does not agree to hold the Common Stock for any minimum or other
specific term and reserves the right to dispose of the Common Stock at any time
in accordance with federal and state securities laws applicable to such
disposition.
Section 3.2 Sophisticated Investor. The Investor is a sophisticated
----------------------
investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited
investor (as defined in Rule 501 of Regulation D), and Investor has such
experience in business and financial matters that it is capable of evaluating
the merits and risks of an investment in Common Stock. The Investor
acknowledges that an investment in the Common Stock is speculative and involves
a high degree of risk.
Section 3.3 Authority. This Agreement has been duly authorized and
---------
<PAGE>
validly executed and delivered by the Investor and is a valid and binding
agreement of the Investor enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.
Section 3.4 Not an Affiliate. The Investor is not an officer, director or
----------------
"affiliate" (as that term is defined in Rule 405 promulgated under the
Securities Act) of the Company.
Section 3.5 Organization and Standing. Investor is duly organized,
-------------------------
validly existing, and in good standing under the laws of the British Virgin
Islands.
Section 3.6 Absence of Conflicts. The execution and delivery of this
--------------------
Agreement and any other document or instrument executed in connection herewith,
and the consummation of the transactions contemplated thereby, and compliance
with the requirements thereof, will not violate any law, rule, regulation,
order, writ, judgment, injunction, decree or award binding on Investor, or, to
the Investor's knowledge, (a) violate any provision of any indenture, instrument
or agreement to which Investor is a party or is subject, or by which Investor or
any of its assets is bound, (b) conflict with or constitute a material default
thereunder, (c) result in the creation or imposition of any lien pursuant to the
terms of any such indenture, instrument or agreement, or constitute a breach of
any fiduciary duty owed by Investor to any third party, or (d) require the
approval of any third-party (which has not been obtained) pursuant to any
material contract, agreement, instrument, relationship or legal obligation to
which Investor is subject or to which any of its assets, operations or
management may be subject.
Section 3.7 Disclosure; Access to Information. Investor has received all
---------------------------------
documents, records, books and other information pertaining to Investor's
investment in the Company that have been requested by Investor. The Company is
subject to the periodic reporting requirements of the Exchange Act, and Investor
has reviewed or received copies of any such reports that have been requested by
it.
Section 3.8 Manner of Sale. At no time was Investor presented with or
--------------
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investor that:
Section 4.1 Organization of the Company. The Company is a corporation duly
---------------------------
organized and existing in good standing under the laws of the State of
California and has all requisite corporate authority to own, lease and operate
its properties and to carry on its business as now being conducted. Except as
set forth in the SEC Documents, the Company does not have any subsidiaries.
Except as set forth in the SEC Documents, the Company does not own more than
fifty percent (50%) of or control any other business entity. The Company is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, other than those in which the
failure so to qualify would not have a Material Adverse Effect.
Section 4.2 Authority. (i) The Company has the requisite corporate power
---------
and authority to enter into and perform its obligations under this Agreement and
the Registration Rights Agreement and to issue the Purchased Shares and any
Blackout Shares; (ii) the execution, issuance and delivery of this Agreement and
the Registration Rights Agreement and the consummation by it of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
and no further consent or authorization of the Company or its Board of Directors
or stockholders is required; and (iii) this Agreement and the Registration
Rights Agreement have been duly executed and delivered by the Company and
constitute valid and binding obligations of the Company enforceable against the
Company in accordance with their terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the
<PAGE>
enforcement of, creditors' rights and remedies or by other equitable principles
of general application.
Section 4.3 Capitalization. The authorized capital stock of the Company
--------------
consists of 30,000,000 shares of Common Stock, of which 9,468,123 shares were
issued and outstanding as of March 31, 1999, and 10,000,000 shares of Preferred
Stock, 294,038 of which were issued and outstanding on March 31, 1999. Except
as disclosed in the audited financial statements of the Company included in the
annual report on Form 10-K for the fiscal year ended March 31, 1998; options to
purchase not more than 3,090,000 shares of Common Stock granted in the ordinary
course of business and with purchase prices equal to the fair market value of
such Common Stock on the date of grant; and warrants to purchase 40,100 shares
of Common Stock in exchange for 40,100 shares of Common Stock, there are no
options, warrants, or rights to subscribe to, securities, rights or obligations
convertible into or exchangeable for or giving any right to subscribe for any
shares of capital stock of the Company. All of the outstanding shares of Common
Stock of the Company have been duly and validly authorized and issued and are
fully paid and nonassessable.
Section 4.4 Common Stock. The Company has registered its Common Stock
------------
pursuant to Section 12(b) or 12(g) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act, and the Company has
maintained all requirements for the continued listing or quotation of its Common
Stock, and such Common Stock is currently listed or quoted on the Principal
Market. As of the date hereof, the Principal Market is the Nasdaq National
Market.
Section 4.5 SEC Documents. The Company has delivered or made available to
-------------
the Investor true and complete copies of the SEC Documents (including, without
limitation, proxy information and solicitation materials). The Company has not
provided to the Investor any information that, according to applicable law, rule
or regulation, should have been disclosed publicly prior to the date hereof by
the Company, but which has not been so disclosed. As of their respective dates,
the SEC Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and rules and
regulations of the SEC promulgated thereunder and other federal, state and local
laws, rules and regulations applicable to such SEC Documents, and none of the
SEC Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of the Company included in the
SEC Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements) and fairly present
in all material respects the financial position of the Company as of the dates
thereof and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
Section 4.6 Valid Issuances. The Purchase Shares and any Blackout Shares
---------------
may and will be properly issued pursuant to Rule 4(2), Regulation D and/or any
applicable state law. When issued, the Purchased Shares and the Blackout Shares
shall be duly and validly issued, fully paid, and nonassessable. Neither the
sales of the Purchased Shares and the Blackout Shares pursuant to, nor the
Company's performance of its obligations under, this Agreement or the
Registration Rights Agreement will (i) result in the creation or imposition of
any liens, charges, claims or other encumbrances upon the Purchased Shares or
any of the assets of the Company, or (ii) entitle the holders of Outstanding
Capital Shares to preemptive or other rights to subscribe to or acquire the
Capital Shares or other securities of the Company. The Purchased Shares and
the Blackout Shares shall not subject the Investor to personal liability by
reason of the ownership thereof.
Section 4.7 No General Solicitation or Advertising in Regard to this
--------------------------------------------------------
Transaction. Neither the Company nor any of its affiliates nor any distributor
- -----------
or any person acting on its or their behalf (i) has conducted or will conduct
any general solicitation (as that term is used in Rule 502(c) of Regulation D)
or
<PAGE>
general advertising with respect to any of the Purchased Shares and the Blackout
Shares, or (ii) made any offers or sales of any security or solicited any offers
to buy any security under any circumstances that would require registration of
the Common Stock under the Securities Act.
Section 4.8 Corporate Documents. The Company has furnished or made
-------------------
available to the Investor true and correct copies of the Company's Articles of
Incorporation, as amended and in effect on the date hereof, and the Company's
By-Laws, as amended and in effect on the date hereof (the "By-Laws").
Section 4.9 No Conflicts. The execution, delivery and performance of this
------------
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including, without limitation, the issuance of the Purchase
Shares and any Blackout Shares do not and will not (i) result in a violation of
the Company's Articles of Incorporation or By-Laws or (ii) conflict with, or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, indenture,
instrument or any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company is a party, or (iii) result in a violation of any
federal, state, local or foreign law, rule, regulation, order, judgment or
decree (including federal and state securities laws and regulations) applicable
to the Company or by which any property or asset of the Company is bound or
affected (except for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect) nor is the Company otherwise in
violation of, conflict with or in default under any of the foregoing; provided
that, for purposes of the Company's representations and warranties as to
violations of foreign law, rule or regulation referenced in clause (iii), such
representations and warranties are made only to the best of the Company's
knowledge insofar as the execution, delivery and performance of this Agreement
by the Company and the consummation by the Company of the transactions
contemplated hereby are or may be affected by the status of the Investor under
or pursuant to any such foreign law, rule or regulation. The business of the
Company is not being conducted in violation of any law, ordinance or regulation
of any governmental entity, except for possible violations that either singly or
in the aggregate do not and will not have a Material Adverse Effect. The
Company is not required under federal, state or local law, rule or regulation to
obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute,
deliver or perform any of its obligations under this Agreement or issue and sell
the Common Stock in accordance with the terms hereof (other than any SEC, NASD
or state securities filings that may be required to be made by the Company
subsequent to any Closing, any registration statement that may be filed pursuant
hereto, and any shareholder approval required by the rules applicable to
companies whose common stock trades on the Nasdaq National Market referenced in
Section 5.1); provided that, for purposes of the representation made in this
sentence, the Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Investor herein.
Section 4.10 No Material Adverse Change. Since March 31, 1998, no
--------------------------
Material Adverse Effect has occurred or exists with respect to the Company,
except as disclosed in the SEC Documents.
Section 4.11 No Undisclosed Liabilities. The Company has no liabilities
--------------------------
or obligations which are material, individually or in the aggregate, and are not
disclosed in the SEC Documents or otherwise publicly announced, other than those
incurred in the ordinary course of the Company's businesses since March 31, 1998
and which, individually or in the aggregate, do not or would not have a Material
Adverse Effect on the Company.
Section 4.12 No Undisclosed Events or Circumstances. Since March 31,
--------------------------------------
1998, no event or circumstance has occurred or exists with respect to the or its
businesses, properties, prospects, operations or financial condition, that,
under applicable law, rule or regulation, requires public disclosure or
announcement prior to the date hereof by the Company but which has not been so
publicly announced or disclosed in the SEC Documents.
Section 4.13 No Integrated Offering. Neither the Company, nor any of its
----------------------
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security
<PAGE>
or solicited any offers to buy any security, other than pursuant to this
Agreement, under circumstances that would require registration of the Common
Stock under the Securities Act.
Section 4.14 Litigation and Other Proceedings. Except as may be set forth
--------------------------------
in the SEC Documents, there are no lawsuits or proceedings pending or to the
best knowledge of the Company threatened, against the Company, nor has the
Company received any written or oral notice of any such action, suit, proceeding
or investigation, which might have a Material Adverse Effect. Except as set
forth in the SEC Documents, no judgment, order, writ, injunction or decree or
award has been issued by or, so far as is known by the Company, requested of any
court, arbitrator or governmental agency which might result in a Material
Adverse Effect.
Section 4.15 No Misleading or Untrue Communication. The Company, any
-------------------------------------
Person representing the Company, and, to the knowledge of the Company, any other
Person selling or offering to sell the Purchased Shares in connection with the
transactions contemplated by this Agreement, have not made, at any time, any
oral communication in connection with the offer or sale of the same which
contained any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading.
Section 4.16 Material Non-Public Information. The Company is not in
-------------------------------
possession of, nor has the Company or its agents disclosed to the Investor, any
material non-public information that (i) if disclosed, would, or could
reasonably be expected to have, an effect on the price of the Common Stock or
(ii) according to applicable law, rule or regulation, should have been disclosed
publicly by the Company prior to the date hereof but which has not been so
disclosed.
Section 4.17 Broker-Dealer Status. The Company has reviewed certain NASD
--------------------
applications and has contacted the NASD Regulation Membership Department
regarding its placement agent, Trinity Capital Advisors, Inc. ("Trinity"), and
represents and warrants to the Investor that a principal of Trinity is a duly
registered representative of a broker or dealer that is duly registered under
the Exchange Act in accordance with the rules and regulation of the SEC.
ARTICLE V
COVENANTS OF THE INVESTOR
Section 5.1 Compliance with Law. The Investor's trading activities with
-------------------
respect to shares of the Company's Common Stock will be in compliance with all
applicable state and federal securities laws, rules and regulations and the
rules and regulations of the Principal Market on which the Company's Common
Stock is listed.
Section 5.2 Limitation on Short Sales. The Investor and its affiliates
-------------------------
shall not engage in short sales of the Company's Common Stock; provided,
--------
however, that the Investor may enter into any short sale or other hedging or
- -------
similar arrangement it deems appropriate with respect to Purchased Shares after
it receives a Purchase Notice with respect to such Purchased Shares so long as
such sales or arrangements do not involve more than the number of such Purchased
Shares (determined as of the date of such Purchase Notice).
ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.1 Registration Rights. The Company shall cause the Registration
-------------------
Rights Agreement to remain in full force and effect and the Company shall comply
in all respects with the terms thereof.
Section 6.2 Reservation of Common Stock. As of the date hereof, the
---------------------------
Company has reserved and the Company shall continue to reserve and keep
available at all times, free of preemptive rights, shares of Common Stock for
the purpose of enabling the Company to satisfy any obligation to issue the
Purchased Shares; such amount of shares of Common Stock to be reserved shall be
calculated based upon the minimum Purchase Price therefor under the terms of
this Agreement. The number of shares so reserved from time to time, as
theretofore increased or reduced as hereinafter provided, may be reduced by the
numbers of shares
<PAGE>
actually delivered hereunder.
Section 6.3 Listing of Common Stock. The Company shall maintain the
-----------------------
listing of the Common Stock on a Principal Market, and as soon as practicable
(but in any event prior to the commencement of the Commitment Period) to list
the Purchased Shares and any Blackout Shares. The Company further shall, if the
Company applies to have the Common Stock traded on any other Principal Market,
include in such application the Purchased Shares, and shall take such other
action as is necessary or desirable in the opinion of the Investor to cause the
Common Stock to be listed on such other Principal Market as promptly as
possible. The Company shall take all action necessary to continue the listing
and trading of its Common Stock on the Principal Market (including, without
limitation, maintaining sufficient net tangible assets) and will comply in all
respects with the Company's reporting, filing and other obligations under the
bylaws or rules of the NASD and the Principal Market.
Section 6.4 Exchange Act Registration. The Company shall (i) cause its
-------------------------
Common Stock to continue to be registered under Section 12(g) or 12(b) of the
Exchange Act, will comply in all respects with its reporting and filing
obligations under said Act, and will not take any action or file any document
(whether or not permitted by said Act or the rules thereunder) to terminate or
suspend such registration or to terminate or suspend its reporting and filing
obligations under said Act. The Company will take all action to continue the
listing and trading of its Common Stock on the Principal Market and will comply
in all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the NASD and the Principal Market.
Section 6.5 Legends. The certificates evidencing the Common Stock to be
-------
sold by the Investor pursuant to Section 9.1 shall be free of legends, except as
set forth in Article IX.
Section 6.6 Corporate Existence. The Company will take all steps
-------------------
necessary to preserve and continue the corporate existence of the Company.
Section 6.7 Additional SEC Documents. The Company will deliver to the
------------------------
Investor, as and when the originals thereof are submitted to the SEC for filing,
copies of all SEC Documents so furnished or submitted to the SEC.
Section 6.8 Blackout Period. (a) The Company will immediately notify the
---------------
Investor upon the occurrence of any of the following events in respect of a
Registration Statement or related prospectus in respect of an offering of
Registrable Securities; (i) receipt of any request for additional information by
the SEC or any other federal or state governmental authority during the period
of effectiveness of the Registration Statement, or for amendments or supplements
to the Registration Statement or related prospectus; (ii) the issuance by the
SEC or any other federal or state governmental authority of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose; (iii) receipt of any notification with respect
to the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
that makes any statement made in such Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the Registration Statement, related prospectus or documents so that,
in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (v) the Company's
reasonable determination that a post-effective amendment to the registration
statement would be appropriate; and the Company will promptly make available to
the Investor any such supplement or amendment to the related prospectus. The
Company shall not deliver to the Investor any Purchase Notice during the
continuation of any of the foregoing events.
<PAGE>
Section 6.9 Expectations Regarding Purchase Notices. Within ten (10)
---------------------------------------
days after the commencement of each calendar quarter occurring subsequent to the
commencement of the Commitment Period, the Company undertakes to notify the
Investor as to its reasonable expectations as to the dollar amount it intends to
raise during such calendar quarter, if any, through the issuance of Purchase
Notices. Such notification shall constitute only the Company's good faith
estimate and shall in no way obligate the Company to raise such amount, or any
amount, or otherwise limit its ability to deliver Purchase Notices. The failure
by the Company to comply with this provision can be cured by the Company's
notifying the Investor at any time as to its reasonable expectations with
respect to the current calendar quarter.
Section 6.10 Consolidation; Merger. The Company shall not, at any time
---------------------
after the date hereof, effect any merger or consolidation of the Company with or
into, or a transfer of all or substantially all of the assets of the Company to,
another entity (a "Consolidation Event") unless the resulting successor or
acquiring entity (if not the Company) assumes by written instrument the
obligation to deliver to the Investor such shares of stock and/or securities as
the Investor is entitled to receive pursuant to this Agreement.
Section 6.11 Issuance of Purchased Shares and Blackout Shares. The sale
------------------------------------------------
and issuance of the Purchased Shares shall be made in accordance with the
provisions and requirements of Regulation D and any applicable state law.
Section 6.12 Legal Opinion on Subscription Date. The Company's
----------------------------------
independent counsel shall deliver to the Investor on the Subscription Date an
opinion substantially in the form of Exhibit B, except for paragraph 6 thereof.
ARTICLE VII
CONDITIONS TO DELIVERY OF OPTIONAL
PURCHASE NOTICES AND CONDITIONS TO CLOSING
Section 7.1 Conditions Precedent to the Obligation of the Company to
--------------------------------------------------------
Issue and Sell Common Stock. The obligation hereunder of the Company to issue
- ---------------------------
and sell the Purchased Shares to the Investor incident to each Closing is
subject to the satisfaction, at or before each such Closing, of each of the
conditions set forth below.
(a) Accuracy of the Investor's Representation and Warranties. The
representations and warranties of the Investor shall be true and
correct in all material respects as of the date of this Agreement
and as of the date of each such Closing as though made at each such
time.
(b) Performance by the Investor. The Investor shall have
performed, satisfied and complied in all respects with all
covenants, agreements and conditions required by this Agreement to
be performed, satisfied or complied with by the Investor at or
prior to such Closing.
Section 7.2 Conditions Precedent to the Right of the Company to Deliver a
-------------------------------------------------------------
Purchase Notice and the Obligation of the Investor to Purchase the Purchased
- ----------------------------------------------------------------------------
Shares. The right of the Company to deliver a Purchase Notice and the
- ------
obligation of the Investor hereunder to acquire and pay for the Purchased Shares
incident to a Closing is subject to the satisfaction, on (i) the date of
delivery of such Purchase Notice and (ii) the applicable Closing Date (each a
"Condition Satisfaction Date"), of each of the following conditions:
(a) Registration of the Registrable Securities with the SEC. As
set forth in the Registration Rights Agreement, the Company shall
have filed with the SEC a Registration Statement with respect to
the resale of the Registrable Securities that shall have been
declared effective by the SEC prior to the first Purchase Date, but
in no event later than one hundred twenty (120) days after
Subscription Date.
(b) Effective Registration Statement. As set forth in the
Registration Rights Agreement, the Registration Statement shall
have previously become effective and shall remain effective
<PAGE>
on each Condition Satisfaction Date and (i) neither the Company nor
the Investor shall have received notice that the SEC has issued or
intends to issue a stop order with respect to the Registration
Statement or that the SEC otherwise has suspended or withdrawn the
effectiveness of the Registration Statement, either temporarily or
permanently, or intends or has threatened to do so (unless the
SEC's concerns have been addressed and the Investor is reasonably
satisfied that the SEC no longer is considering or intends to take
such action), and (ii) no other suspension of the use or withdrawal
of the effectiveness of the Registration Statement or related
prospectus shall exist.
(c) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company shall be true and
correct in all material respects as of each Condition Satisfaction
Date as though made at each such time (except for representations
and warranties specifically made as of a particular date) with
respect to all periods, and as to all events and circumstances
occurring or existing to and including each Condition Satisfaction
Date, except for any conditions which have temporarily caused any
representations or warranties herein to be incorrect and which have
been corrected with no continuing impairment to the Company or the
Investor.
(d) Performance by the Company. The Company shall have
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement and
the Registration Rights Agreement to be performed, satisfied or
complied with by the Company at or prior to each Condition
Satisfaction Date.
(e) No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted,
entered, promulgated or adopted by any court or governmental
authority of competent jurisdiction that prohibits or directly and
adversely affects any of the transactions contemplated by this
Agreement, and no proceeding shall have been commenced that may
have the effect of prohibiting or adversely affecting any of the
transactions contemplated by this Agreement.
(f) Adverse Changes. Since the date of filing of the Company's
most recent SEC Document, no event that had or is reasonably likely
to have a Material Adverse Effect has occurred.
(g) No Suspension of Trading In or delisting of Common Stock.
The trading of the Common Stock (including without limitation the
Purchased Shares) shall not have been suspended by the SEC, the
Principal Market or the NASD and the Common Stock (including
without limitation the Purchased Shares) shall have been approved
for listing or quotation on and shall not have been delisted from
the Principal Market. The issuance of shares of Common Stock with
respect to the applicable Closing, if any, shall not violate the
shareholder approval requirements of the Principal Market.
(h) Legal Opinions. The Company shall have caused to be
delivered to the Investor, within five (5) Trading Days of the
Effective Date of the Registration Statement, an opinion of the
Company's independent counsel in the form of Exhibit B hereto,
addressed to the Investor; provided, however, that in the event
-------- -------
that such an opinion cannot be delivered by the Company's
independent counsel to the Investor, the Company shall promptly
revise the Registration Statement and shall not deliver a Purchase
Notice. If a Purchase Notice shall have been delivered in good
faith without knowledge by the Company that an opinion of
independent counsel cannot be delivered as required, at the option
of the Investor, either the applicable Closing Date shall
automatically be postponed for a period of up to five (5) Trading
Days until such an opinion is delivered to the Investor, or such
Closing shall otherwise be canceled. In the event of such a
postponement, the Purchase Price of the Common Stock to be issued
at such Closing as determined pursuant of Section 2.2 shall
<PAGE>
be the lower of the Purchase Price as calculated as of the
originally scheduled Closing Date and as of the actual Closing
Date. The Company's independent counsel shall also deliver to the
Investor upon execution of this Agreement an opinion in form and
substance reasonably satisfactory to the Investor addressing, among
other things, corporate matters and the exemption from registration
under the Securities Act of the issuance of the Registrable
Securities by the Company to the Investor under this Agreement and
the Registration Rights Agreement.
(i) Due Diligence. No dispute between the Company and the
Investor shall exist pursuant to Section 8.2(c) as to the adequacy
of the disclosure contained in the Registration Statement.
(j) Ten Percent Limitation. On each Closing Date, the number of
Purchased Shares then to be purchased by the Investor shall not
exceed the number of such shares that, when aggregated with all
other shares of Registrable Securities then owned by the Investor
beneficially or deemed beneficially owned by the Investor, would
result in the Investor owning no more than 9.9% of all of such
Common Stock as would be outstanding on such Closing Date, as
determined in accordance with Section 16 of the Exchange Act and
the regulations promulgated thereunder. For purposes of this
Section 3.2(k), in the event that the amount of Common Stock
outstanding as determined in accordance with Section 16 of the
Exchange Act and the regulations promulgated thereunder is greater
on a Closing Date than on the date upon which the Purchase Notice
associated with such Closing Date is given, the amount of Common
Stock outstanding on such Closing Date shall govern for purposes of
determining whether the Investor, when aggregating all purchases of
Common Stock made pursuant to this Agreement and, if any, Blackout
Shares, would own more than 9.9% of the Common Stock following such
Closing Date.
(k) Intentionally omitted.
(l) Minimum Average Trading Volume. The average trading volume
for the Common Stock over the previous fifteen (15) Trading Days
equals or exceeds 10,000 shares per Trading Day.
(m) No Knowledge. The Company shall have no knowledge of any
event more likely than not to have the effect of causing such
Registration Statement to be suspended or otherwise ineffective
(which event is more likely than not to occur within the fifteen
Trading Days following the Trading Day on which such Notice is
deemed delivered).
(n) Trading Cushion. The Trading Cushion shall have elapsed
since the immediately preceding Purchase Date.
(o) Shareholder Vote. The issuance of shares of Common Stock
with respect to the applicable Closing, if any, shall not violate
the shareholder approval requirements of the Principal Market.
(p) Escrow Agreement. The parties hereto shall have entered into
a mutually acceptable escrow agreement for the Purchase Prices due
hereunder, providing for reasonable interest on any funds deposited
into the escrow account established under such agreement.
(q) Other. On each Condition Satisfaction Date, the Investor
shall have received and been reasonably satisfied with such other
certificates and documents as shall have been reasonably requested
by the Investor in order for the Investor to confirm the Company's
satisfaction of the conditions set forth in this Section 7.2.,
including, without limitation, a certificate in substantially the
form and substance of Exhibit C hereto, executed in either case by
an executive officer of the Company and to the effect that all the
conditions to
<PAGE>
such Closing shall have been satisfied as at the date of each such
certificate.
ARTICLE VIII
DUE DILIGENCE REVIEW; NON-DISCLOSURE OF NON-PUBLIC INFORMATION
Section 8.1 Due Diligence Review. The Company shall make available for
--------------------
inspection and review by the Investor, advisors to and representatives of the
Investor (who may or may not be affiliated with the Investor and who are
reasonably acceptable to the Company), any underwriter participating in any
disposition of the Registrable Securities on behalf of the Investor pursuant to
the Registration Statement, any such registration statement or amendment or
supplement thereto or any blue sky, NASD or other filing, all financial and
other records, all SEC Documents and other filings with the SEC, and all other
corporate documents and properties of the Company as may be reasonably necessary
for the purpose of such review, and cause the Company's officers, directors and
employees to supply all such information reasonably requested by the Investor or
any such representative, advisor or underwriter in connection with such
Registration Statement (including, without limitation, in response to all
questions and other inquiries reasonably made or submitted by any of them),
prior to and from time to time after the filing and effectiveness of the
Registration Statement for the sole purpose of enabling the Investor and such
representatives, advisors and underwriters and their respective accountants and
attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.
Section 8.2 Non-Disclosure of Non-Public Information.
----------------------------------------
(a) The Company represents and warrants that the Company and its
officers, directors, employees and agents have not disclosed any
non-public information to the Investor or advisors to or
representatives of the Investor. The Company covenants and agrees
that it shall refrain from disclosing, and shall cause its
officers, directors, employees and agents to refrain from
disclosing, (including, without limitation, in connection with the
giving of the Adjustment Period Notice pursuant to Section 2.4),
unless prior to disclosure of such information the Company
identifies such information as being non-public information and
provides the Investor, such advisors and representatives with the
opportunity to accept or refuse to accept such non-public
information for review. The Company may, as a condition to
disclosing any non-public information hereunder, require the
Investor's advisors and representatives to enter into a
confidentiality agreement in form reasonably satisfactory to the
Company and the Investor.
(b) Nothing herein shall require the Company to disclose non-
public information to the Investor or its advisors or
representatives, and the Company represents that it does not
disseminate non-public information to any investors who purchase
stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding
anything herein to the contrary, the Company will, as herein above
provided, immediately notify the advisors and representatives of
the Investor and, if any, underwriters, of any event or the
existence of any circumstance (without any obligation to disclose
the specific event or circumstance) of which it becomes aware,
constituting non-public information (whether or not requested of
the Company specifically or generally during the course of due
diligence by such persons or entities), which, if not disclosed in
the prospectus included in the Registration Statement would cause
such prospectus to include a material misstatement or to omit a
material fact required to be stated therein in order to make the
statements, therein, in light of the circumstances in which they
were made, not misleading. Nothing contained in this Section 8.2
shall be construed to mean that such persons or entities other than
the Investor (without the written consent of the Investor prior to
disclosure of such information) may not obtain non-public
information in the course of conducting due diligence in accordance
with the terms of this Agreement and nothing herein shall prevent
any such persons or entities from notifying the Company of their
opinion that based on such due
<PAGE>
diligence by such persons or entities, that the Registration
Statement contains an untrue statement of a material fact or omits
a material fact required to be stated in the Registration Statement
or necessary to make the statements contained therein, in light of
the circumstances in which they were made, not misleading.
ARTICLE IX
LEGENDS
Section 9.1 Legends. Unless otherwise provided below, each certificate
-------
representing Registrable Securities will bear the following legend (the
"Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE
BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS.
NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY
BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED,
HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO,
SUCH REGISTRATION. THE HOLDER OF THIS CERTIFICATE IS THE
BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY SET FORTH IN A
STOCK PURCHASE AGREEMENT BETWEEN SONIC SOLUTIONS AND KINGSBRIDGE
CAPITAL LIMITED DATED MAY 20, 1999. A COPY OF THE PORTION OF THE
AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE OBTAINED
FROM THE COMPANY'S EXECUTIVE OFFICES.
Upon the execution and delivery hereof, the Company is issuing to the
transfer agent for its Common Stock (and to any substitute or replacement
transfer agent for its Common Stock upon the Company's appointment of any such
substitute or replacement transfer agent) instructions in substantially the form
of Exhibit D hereto with a copy to the Investor. Such instructions shall be
irrevocable by the Company from and after the date hereof or from and after the
issuance thereof to any such substitute or replacement transfer agent, as the
case may be, except as otherwise expressly provided in the Registration Rights
Agreement. It is the intent and purpose of such instructions, as provided
therein, to require the transfer agent for the Common Stock from time to time
upon transfer of Registrable Securities by the Investor to issue certificates
evidencing such Registrable Securities free of the Legend during the following
periods and under the following circumstances and without consultation by the
transfer agent with the Company or its counsel and without the need for any
further advice or instruction or documentation to the transfer agent by or from
the Company or its counsel or the Investor:
(a) at any time after the Effective Date, upon surrender of one
or more certificates evidencing Common Stock that bear the Legend,
to the extent accompanied by a notice requesting the issuance of
new certificates free of the Legend to replace those surrendered;
provided that (i) the Registration Statement shall then be
effective; (ii) the Investor confirms to the transfer agent that it
has sold, pledged or otherwise transferred or agreed to sell,
pledge or otherwise transfer such Common Stock in a bona fide
transaction to a third party that is not an affiliate of the
Company; and (iii) the Investor confirms to the transfer agent that
the
<PAGE>
Investor has complied with the prospectus delivery requirement; and
(b) at any time upon any surrender of one or more certificates
evidencing Registrable Securities that bear the Legend, to the
extent accompanied by a notice requesting the issuance of new
certificates free of the Legend to replace those surrendered and
containing representations that (i) the Investor is permitted to
dispose of such Registrable Securities without limitation as to
amount or manner of sale pursuant to Rule 144(k) under the
Securities Act or (ii) the Investor has sold, pledged or otherwise
transferred or agreed to sell, pledge or otherwise transfer such
Registrable Securities in a manner other than pursuant to an
effective registration statement, to a transferee who will upon
such transfer be entitled to freely tradable securities.
Any of the notices referred to above in this Section 9.1 may be sent by
facsimile to the Company's transfer agent.
Section 9.2 No Other Legend or Stock Transfer Restrictions. No legend
----------------------------------------------
other than the one specified in Section 8.1 has been or shall be placed on the
share certificates representing the Common Stock and no instructions or "stop
transfers orders," so called, "stock transfer restrictions," or other
restrictions have been or shall be given to the Company's transfer agent with
respect thereto other than as expressly set forth in this Article IX.
Section 9.3 Investor's Compliance. Nothing in this Article VIII shall
---------------------
affect in any way the Investor's obligations under any agreement to comply with
all applicable securities laws upon resale of the Common Stock.
ARTICLE X
CHOICE OF LAW
Section 10.1 Choice of Law. This Agreement shall be construed under the
-------------
laws of the State of California, without giving effect to provisions regarding
conflicts of law or choice of law.
ARTICLE XI
ASSIGNMENT; ENTIRE AGREEMENT, AMENDMENT; TERMINATION
Section 11.1 Assignment. Neither this Agreement nor any rights of the
----------
Investor or the Company hereunder may be assigned by either party to any other
person. Notwithstanding the foregoing, (a) the provisions of this Agreement
shall inure to the benefit of, and be enforceable by, any transferee of any of
the Common Stock purchased or acquired by the Investor hereunder with respect to
the Common Stock held by such person, and (b) the Investor's interest in this
Agreement may be assigned at any time, in whole or in part, to any other person
or entity (including any affiliate of the Investor) upon the prior written
consent of the Company, which consent shall not to be unreasonably withheld.
Section 11.2 Termination. This Agreement shall terminate twenty-four (24)
-----------
months after the commencement of the Commitment Period; provided, however, that
-------- -------
the provisions of Articles VI, VII, VIII, X, XI, and XII shall survive the
termination of this Agreement.
Section 11.3 Entire Agreement, Amendment; Waiver. This Agreement and the
-----------------------------------
Registration Rights Agreement constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof,
and no party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants except as specifically set forth in
this Agreement or therein. Except as expressly provided in this Agreement,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by both parties hereto. Any
term or condition of this Agreement may be waived at any time by the party that
is entitled to the benefit thereof, but no such waiver shall be effective unless
set forth in a written instrument duly executed by or on behalf of the party
waiving such term or condition. No waiver by any party of any term or condition
of this
<PAGE>
Agreement, in any one or more instances, shall be deemed to be or construed as a
waiver of the same or any other term or condition of this Agreement on any
future occasion.
ARTICLE XII
NOTICES; INDEMNIFICATION
Section 12.1 Notices. All notices, demands, requests, consents, approvals,
-------
and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to Sonic Solutions:
Robert J. Doris
President and Chief Executive Officer
Sonic Solutions
101 Rowland Way, Suite 110
Novato, California 94945
Telephone: (415) 893-8000
Facsimile: (415) 893-8008
with a copy to (which communication shall not constitute notice):
August J. Moretti, Esq.
Heller Ehrman White & McAuliffe
2500 Sand Hill Road, Suite 100
Menlo Park, California 94025-7063
Telephone: (650) 234-4229
Facsimile: (650) 234-4299
If to the Investor:
Adam Gurney
Kingsbridge Capital Limited
c/o Kingsbridge Corporate Services Limited
Main Street
Kilcullen, County Kildare
Republic of Ireland
Telephone: 011-353-45-481-811
Facsimile: 011-353-45-482-003
with a copy to (which communication shall not constitute notice):
Keith M. Andruschak, Esq.
Rogers & Wells
<PAGE>
200 Park Avenue
New York, NY 10166
Telephone: (212) 878-8000
Facsimile: (212) 878-8375
Either party hereto may from time to time change its address or facsimile
number for notices under this Section 12.1 by giving at least ten (10) days'
prior written notice of such changed address or facsimile number to the other
party hereto.
Section 12.2 Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless the
Investor, its partners, affiliates, officers, directors, employees,
and duly authorized agents, and each Person or entity, if any, who
controls the Investor within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, together with the
Controlling Persons (as defined in the Registration Rights
Agreement) from and against any Damages, joint or several, and any
action in respect thereof to which the Investor, its partners,
affiliates, officers, directors, employees, and duly authorized
agents, and any such Controlling Person becomes subject to,
resulting from, arising out of or relating to (i) any
misrepresentation, breach of warranty or nonfulfillment of or
failure to perform any covenant or agreement on the part of Company
contained in this Agreement or (ii) the disclosure by Trinity of
the information set forth on Schedule 8.2(a) hereof, in any event
as such Damages are incurred.
(b) The Investor agrees to indemnify and hold harmless the
Company, its partners, affiliates, officers, directors, employees,
and duly authorized agents, and each Person or entity, if any, who
controls the Investor within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, together with the
Controlling Persons (as defined in the Registration Rights
Agreement) from and against any Damages, joint or several, and any
action in respect thereof to which the Company, its partners,
affiliates, officers, directors, employees, and duly authorized
agents, and any such Controlling Person becomes subject to,
resulting from, arising out of or relating to any
misrepresentation, breach of warranty or nonfulfillment of or
failure to perform any covenant or agreement on the part of
Investor contained in this Agreement in an aggregate amount not to
exceed $140,000.
Section 12.3 Method of Asserting Indemnification Claims. All claims for
------------------------------------------
indemnification by any Indemnified Party (as defined below) under Section 12.2
will be asserted and resolved as follows:
(a) In the event any claim or demand in respect of which any
person claiming indemnification under any provision of Section 12.2
(an "Indemnified Party") might seek indemnity under Section 12.2 is
asserted against or sought to be collected from such Indemnified
Party by a person other than the Company, the Investor or any
affiliate of the Company or (a "Third Party Claim"), the
Indemnified Party shall deliver a written notification, enclosing a
copy of all papers served, if any, and specifying the nature of and
basis for such Third Party Claim and for the Indemnified Party's
claim for indemnification that is being asserted under any
provision of Section 12.2 against any person (the "Indemnifying
Party"), together with the amount or, if not then reasonably
ascertainable, the estimated amount, determined in good faith, of
such Third Party Claim (a "Claim Notice") with reasonable
promptness to the Indemnifying Party. If the Indemnified Party
fails to provide the Claim Notice with reasonable promptness after
the Indemnified Party receives notice of such Third Party Claim,
the Indemnifying Party will not be obligated to indemnify the
Indemnified Party with respect to such Third Party Claim to the
extent that the Indemnifying Party's ability to defend has been
irreparably prejudiced by such failure of the Indemnified Party.
The Indemnifying Party will notify the Indemnified Party as soon as
<PAGE>
practicable within the period ending thirty (30) calendar days
following receipt by the Indemnifying Party of either a Claim
Notice or an Indemnity Notice (as defined below) (the "Dispute
Period") whether the Indemnifying Party disputes its liability or
the amount of its liability to the Indemnified Party under Section
12.2 and whether the Indemnifying Party desires, at its sole cost
and expense, to defend the Indemnified Party against such Third
Party Claim.
(i) If the Indemnifying Party notifies the Indemnified
Party within the Dispute Period that the Indemnifying Party
desires to defend the Indemnified Party with respect to the
Third Party Claim pursuant to this Section 12.3(a), then the
Indemnifying Party will have the right to defend, with
counsel reasonably satisfactory to the Indemnified Party, at
the sole cost and expense of the Indemnifying Party, such
Third Party Claim by all appropriate proceedings, which
proceedings will be vigorously and diligently prosecuted by
the Indemnifying Party to a final conclusion or will be
settled at the discretion of the Indemnifying Party (but only
with the consent of the Indemnified Party in the case of any
settlement that provides for any relief other than the
payment of monetary damages or that provides for the payment
of monetary damages as to which the Indemnified Party will
not be indemnified in full pursuant to Section 12.2). The
Indemnifying Party will have full control of such defense and
proceedings, including any compromise or settlement thereof;
provided, however, that the Indemnified Party may, at the
-------- -------
sole cost and expense of the Indemnified Party, at any time
prior to the Indemnifying Party's delivery of the notice
referred to in the first sentence of this clause (i), file
any motion, answer or other pleadings or take any other
action that the Indemnified Party reasonably believes to be
necessary or appropriate to protect its interests; and
provided further, that if requested by the Indemnifying
Party, the Indemnified Party will, at the sole cost and
expense of the Indemnifying Party, provide reasonable
cooperation to the Indemnifying Party in contesting any Third
Party Claim that the Indemnifying Party elects to contest.
The Indemnified Party may participate in, but not control,
any defense or settlement of any Third Party Claim controlled
by the Indemnifying Party pursuant to this clause (i), and
except as provided in the preceding sentence, the Indemnified
Party will bear its own costs and expenses with respect to
such participation. Notwithstanding the foregoing, the
Indemnified Party may take over the control of the defense or
settlement of a Third Party Claim at any time if it
irrevocably waives its right to indemnity under Section 12.2
with respect to such Third Party Claim.
(ii) If the Indemnifying Party fails to notify the
Indemnified Party within the Dispute Period that the
Indemnifying Party desires to defend the Third Party Claim
pursuant to Section 12.3(a), or if the Indemnifying Party
gives such notice but fails to prosecute vigorously and
diligently or settle the Third Party Claim, or if the
Indemnifying Party fails to give any notice whatsoever within
the Dispute Period, then the Indemnified Party will have the
right to defend, at the sole cost and expense of the
Indemnifying Party, the Third Party Claim by all appropriate
proceedings, which proceedings will be prosecuted by the
Indemnified Party in a reasonable manner and in good faith or
will be settled at the discretion of the Indemnified Party
(with the consent of the Indemnifying Party, which consent
will not be unreasonably withheld). The Indemnified Party
will have full control of such defense and proceedings,
including any compromise or settlement thereof; provided,
however, that if requested by the Indemnified Party, the
Indemnifying Party will, at the sole cost and expense of the
Indemnifying Party, provide reasonable cooperation to the
Indemnified Party and its counsel in contesting any Third
Party Claim which the
<PAGE>
Indemnified Party is contesting. Notwithstanding the
foregoing provisions of this clause (ii), if the Indemnifying
Party has notified the Indemnified Party within the Dispute
Period that the Indemnifying Party disputes its liability or
the amount of its liability hereunder to the Indemnified
Party with respect to such Third Party Claim and if such
dispute is resolved in favor of the Indemnifying Party in the
manner provided in clause (iii) below, the Indemnifying Party
will not be required to bear the costs and expenses of the
Indemnified Party's defense pursuant to this clause (ii) or
of the Indemnifying Party's participation therein at the
Indemnified Party's request, and the Indemnified Party will
reimburse the Indemnifying Party in full for all reasonable
costs and expenses incurred by the Indemnifying Party in
connection with such litigation. The Indemnifying Party may
participate in, but not control, any defense or settlement
controlled by the Indemnified Party pursuant to this clause
(ii), and the Indemnifying Party will bear its own costs and
expenses with respect to such participation.
(iii) If the Indemnifying Party notifies the Indemnified
Party that it does not dispute its liability or the amount of
its liability to the Indemnified Party with respect to the
Third Party Claim under Section 12.2 or fails to notify the
Indemnified Party within the Dispute Period whether the
Indemnifying Party disputes its liability or the amount of
its liability to the Indemnified Party with respect to such
Third Party Claim, the Loss in the amount specified in the
Claim Notice will be conclusively deemed a liability of the
Indemnifying Party under Section 12.2 and the Indemnifying
Party shall pay the amount of such Loss to the Indemnified
Party on demand. If the Indemnifying Party has timely
disputed its liability or the amount of its liability with
respect to such claim, the Indemnifying Party and the
Indemnified Party will proceed in good faith to negotiate a
resolution of such dispute, and if not resolved through
negotiations within the Resolution Period, such dispute shall
be resolved by arbitration in accordance with paragraph (c)
of this Section 12.3.
(b) In the event any Indemnified Party should have a claim under
Section 12.2 against the Indemnifying Party that does not involve a
Third Party Claim, the Indemnified Party shall deliver a written
notification of a claim for indemnity under Section 12.2 specifying
the nature of and basis for such claim, together with the amount
or, if not then reasonably ascertainable, the estimated amount,
determined in good faith, of such claim (an "Indemnity Notice")
with reasonable promptness to the Indemnifying Party. The failure
by any Indemnified Party to give the Indemnity Notice shall not
impair such party's rights hereunder except to the extent that the
Indemnifying Party demonstrates that it has been irreparably
prejudiced thereby. If the Indemnifying Party notifies the
Indemnified Party that it does not dispute the claim or the amount
of the claim described in such Indemnity Notice or fails to notify
the Indemnified Party within the Dispute Period whether the
Indemnifying Party disputes the claim or the amount of the claim
described in such Indemnity Notice, the Loss in the amount
specified in the Indemnity Notice will be conclusively deemed a
liability of the Indemnifying Party under Section 12.2 and the
Indemnifying Party shall pay the amount of such Loss to the
Indemnified Party on demand. If the Indemnifying Party has timely
disputed its liability or the amount of its liability with respect
to such claim, the Indemnifying Party and the Indemnified Party
will proceed in good faith to negotiate a resolution of such
dispute, and if not resolved through negotiations within the
Resolution Period, such dispute shall be resolved by arbitration in
accordance with paragraph (c) of this Section 12.3.
(c) Any dispute under this Agreement (including, without
limitation, in connection with this Section 12.3) or the
Registration Rights Agreement shall be submitted to arbitration and
shall be finally and conclusively determined by the decision of a
single arbitrator who shall
<PAGE>
be a retired San Francisco Superior Court Judge with experience in
civil litigation involving interpretation of stock purchase
agreements (the "Arbitrator"). The arbitration shall be governed by
the United States Arbitration Act, 9 U.S.C. (S)(S) 1-16, 201-208
and judgment upon the award rendered by the Arbitrator may be
entered by any United States federal or state court in and of the
State of California, to the non-exclusive jurisdiction of which
each of the parties hereto irrevocably submits. The parties agree
to cooperate and use their reasonable best efforts to cause the
Arbitrator render a decision in any dispute within thirty (30) days
following the commencement of proceedings with respect thereto and,
to the extent practicable, the decision of the Arbitrator shall be
rendered no more than thirty (30) calendar days following such
commencement. The Arbitrator shall cause its written decision to be
delivered to the Indemnified Party and the Indemnifying Party
within three (3) business days following such decision. Any
decision made by the Arbitrator (either prior to or after the
expiration of such thirty (30) calendar-day period) shall be final,
binding and conclusive on the Indemnified Party and the
Indemnifying Party and shall be entitled to be enforced to the
fullest extent permitted by law and entered in any court of
competent jurisdiction. Each party to any arbitration shall bear
its own expense in relation thereto, including but not limited to
such party's attorneys' fees, if any, and the expenses and fees of
the Arbitrator shall be divided between the Indemnifying Party and
the Indemnified Party in the same proportion as the portion of the
related claim determined by the Arbitrator to be payable to the
Indemnified Party bears to the portion of such claim determined not
to be so payable.
ARTICLE XIII
MISCELLANEOUS
Section 13.1 Fees and Expenses. Each of the Company and the Investor
-----------------
agrees to pay its own expenses incident to the performance of its obligations
hereunder, except that the Company shall pay the fees, expenses and
disbursements of the Investor's counsel in connection with the preparation,
negotiation, execution and delivery of this Agreement and the Registration
Rights Agreement in an amount not to exceed $5,000.
Section 13.2 Brokerage. Each of the parties hereto represents that it has
---------
had no dealings in connection with this transaction with any finder or broker
who will demand payment of any fee or commission from the other party. The
Company on the one hand, and the Investor, on the other hand, agree to indemnify
the other against and hold the other harmless from any and all liabilities to
any persons claiming brokerage commissions or finder's fees on account of
services purported to have been rendered on behalf of the indemnifying party in
connection with this Agreement or the transactions contemplated hereby.
Section 13.3 Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which may be executed by less than all of the parties and
shall be deemed to be an original instrument which shall be enforceable against
the parties actually executing such counterparts and all of which together shall
constitute one and the same instrument.
Section 13.4 Entire Agreement. This Agreement, the Exhibits hereto and the
----------------
Registration Rights Agreement set forth the entire agreement and understanding
of the parties relating to the subject matter hereof and supersedes all prior
and contemporaneous agreements, negotiations and understandings between the
parties, both oral and written relating to the subject matter hereof. The terms
and conditions of all Exhibits to this Agreement are incorporated herein by this
reference and shall constitute part of this Agreement as if fully set forth
herein.
Section 13.5 Survival; Severability. The representations, warranties,
----------------------
covenants and agreements of the parties hereto shall survive each Closing
hereunder. In the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that such severability shall
<PAGE>
be ineffective if it materially changes the economic benefit of this Agreement
to any party.
Section 13.6 Title and Subtitles. The titles and subtitles used in this
-------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
Section 13.7 Reporting Entity for the Common Stock. The reporting entity
-------------------------------------
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement shall
be Bloomberg, L.P. or any successor thereto. The written mutual consent of the
Investor and the Company shall be required to employ any other reporting entity.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Stock Purchase
Agreement to be executed by the undersigned, thereunto duly authorized, as of
the date first set forth above.
KINGSBRIDGE CAPITAL LIMITED
By: /s/ Valentine O'Donoghue
-------------------------------------------
Valentine O'Donoghue
Director
SONIC SOLUTIONS
By: /s/ Clay Leighton
-------------------------------------------
Clay Leighton
Senior Vice President Worldwide Operations,
Finance and CFO
<PAGE>
EXHIBIT A
ADJUSTMENT PERIOD NOTICE
SONIC SOLUTIONS
Notice is hereby granted that the Board of Directors of Sonic Solutions
(the "Company") anticipates executing a merger or acquisition agreement within
ninety (90) days of the date hereof.
The following five-week period is hereby designated as an Adjustment Period
pursuant to Section 2.4 of the Stock Purchase Agreement, dated as of May 20,
1999, by and between the Company and Kingsbridge Capital Limited.
Beginning: ______________________
(no sooner than twenty-one (21) days from the date this notice is deemed to
be delivered)
Expiring:_______________________
The undersigned has executed this Certificate this ____ day of ________,
199_.
____________________________________
Robert J. Doris
Chairman and Chief Executive Officer
26
<PAGE>
EXHIBIT B
FORM OF OPINION OF THE COMPANY'S INDEPENDENT COUNSEL
[FORM TO BE PROVIDED BY COUNSEL TO THE COMPANY]
27
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
SONIC SOLUTIONS
The undersigned, Robert J. Doris, hereby certifies, with respect to shares
of common stock of the Sonic Solutions (the "Company") issuable in connection
with the Purchase Notice, dated _____________ (the "Notice"), delivered pursuant
to Article II of the Stock Purchase Agreement, dated May 20, 1999, by and
between the Company and Kingsbridge Capital Limited (the "Agreement"), as
follows:
1. The undersigned is the duly elected Chairman and Chief Executive
Officer of the Company.
2. The representations and warranties of the Company set forth in
Article IV of the Agreement are true and correct in all material respects as
though made on and as of the date hereof.
3. The Company has performed in all material respects all covenants and
agreements to be performed by the Company on or prior to the Closing Date
related to the Notice and has complied in all material respects with all
obligations and conditions contained in Article VII of the Agreement.
The undersigned has executed this Certificate this ____ day of ________,
199_.
____________________________________
Robert J. Doris
Chairman and Chief Executive Officer
28
<PAGE>
EXHIBIT D
INSTRUCTIONS TO TRANSFER AGENT
SONIC SOLUTIONS
_______________, 1999
[Name, address and phone and fax number of Transfer Agent]
Dear Sirs:
Reference is made to the Stock Purchase Agreement (the "Agreement"), dated
as of May 20, 1999 between Kingsbridge Capital Limited (the "Investor") and
Sonic Solutions (the "Company"). Pursuant to the Agreement, subject to the
terms and conditions set forth in the Agreement the Investor has agreed to
purchase from the Company and the Company has agreed to sell to the Investor
from time to time during the term of the Agreement shares of Common Stock of the
Company, no par value (the "Common Stock"). As a condition to the effectiveness
of the Agreement, the Company has agreed to issue to you, as the transfer agent
for the Common Stock (the "Transfer Agent"), these instructions relating to the
Common Stock to be issued to the Investor (or a permitted assignee) pursuant to
the Agreement. All terms used herein and not otherwise defined shall have the
meaning set forth in the Agreement.
1. ISSUANCE OF COMMON STOCK WITHOUT THE LEGEND
Pursuant to the Agreement, the Company is required to prepare and file with
the Commission, and maintain the effectiveness of, a registration statement or
registration statements registering the resale of the Common Stock to be
acquired by the Investor under the Agreement. The Company will advise the
Transfer Agent in writing of the effectiveness of any such registration
statement promptly upon its being declared effective. The Transfer Agent shall
be entitled to rely on such advice and shall assume that the effectiveness of
such registration statement remains in effect unless the Transfer Agent is
otherwise advised in writing by the Company and shall not be required to
independently confirm the continued effectiveness of such registration
statement. In the circumstances set forth in the following two paragraphs, the
Transfer Agent shall deliver to the Investor certificates representing Common
Stock not bearing the Legend without requiring further advice or instruction or
additional documentation from the Company or its counsel or the Investor or its
counsel or any other party (other than as described in such paragraphs).
At any time after the effective date of the applicable registration
statement (provided that the Company has not informed the Transfer Agent in
writing that such registration statement is not effective) upon any surrender of
one or more certificates evidencing Common Stock which bear the Legend, to the
extent accompanied by a notice requesting the issuance of new certificates free
of the Legend to replace those surrendered, the Transfer Agent shall deliver to
the Investor the certificates representing the Common Stock not bearing the
Legend, in such names and denominations as the Investor shall request, provided
that:
(a) in connection with such event, the Investor (or its permitted
assignee) shall confirm in writing to the Transfer Agent that (i) the
Investor confirms to the transfer agent that it has sold, pledged or
otherwise transferred or agreed to sell, pledge or otherwise transfer
such Common Stock in a bona fide transaction to a designated transferee
that is not an affiliate of the Company; and (ii) the Investor confirms
to the transfer agent that the Investor has complied with the prospectus
delivery requirement;
(b) the Investor (or its permitted assignee) shall represent that it is
permitted to dispose thereof with limitation as to amount of manner of
sale pursuant to Rule 144(k) under the Securities Act; or
(c) the Investor, its permitted assignee, or either of their brokers
confirms to the transfer agent that (i) the Investor has held the shares
of Common Stock for at least one year, (ii) counting the shares
surrendered as being sold upon the date the unlegended Certificates would
be delivered to the Investor (or the Trading Day immediately following if
such date is not a Trading Day), the Investor will not
29
<PAGE>
have sold more than the greater of (a) one percent (1%) of the total
number of outstanding shares of Common Stock or (b) the average weekly
trading volume of the Common Stock for the preceding four weeks during
the three months ending upon such delivery date (or the Trading Day
immediately following if such date is not a Trading Day), and (iii) the
Investor has complied with the manner of sale and notice requirements of
Rule 144 under the Securities Act.
Any advice, notice or instructions to the Transfer Agent required or
permitted to be given hereunder may be transmitted via facsimile to the Transfer
Agent's facsimile number of (___)-___-____.
2. MECHANICS OF DELIVERY OF CERTIFICATES
REPRESENTING COMMON STOCK
In connection with any Closing pursuant to which the Investor acquires
Common Stock under the Agreement, the Transfer Agent shall deliver certificates
representing Common Stock (with or without the Legend, as appropriate) as
promptly as practicable, but in no event later than three business days, after
such Closing.
3. FEES OF TRANSFER AGENT; INDEMNIFICATION
The Company agrees to pay the Transfer Agent for all fees incurred in
connection with these Irrevocable Instructions. The Company agrees to indemnify
the Transfer Agent and its officers, employees and agents, against any losses,
claims, damages or liabilities, joint or several, to which it or they become
subject based upon the performance by the Transfer Agent of its duties in
accordance with the Irrevocable Instructions.
4. THIRD PARTY BENEFICIARY
The Company and the Transfer Agent acknowledge and agree that the Investor
is an express third party beneficiary of these Irrevocable Instructions and
shall be entitled to rely upon, and enforce, the provisions hereof.
SONIC SOLUTIONS
By:____________________________________
Robert J. Doris
Chairman and Chief Executive Officer
AGREED:
[NAME OF TRANSFER AGENT]
By:_____________________
Name:
Title:
30
<PAGE>
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of May 20,
1999, is made and entered into between SONIC SOLUTIONS, a California corporation
(the "Sonic Solutions"), and KINGSBRIDGE CAPITAL LIMITED (the "Investor").
WHEREAS, Sonic Solutions and the Investor have entered into that certain
Stock purchase agreement, dated as of the date hereof (the "Stock purchase
agreement"), pursuant to which Sonic Solutions will issue and sell to the
Investor and the Investor will purchase, from time to time, up to $12,000,000
worth of shares of Common Stock (as determined pursuant to the Stock purchase
agreement);
WHEREAS, pursuant to the terms of, and in consideration for, the Investor's
agreement to enter into the Stock purchase agreement, Sonic Solutions has agreed
to provide the Investor with certain registration rights with respect to the
Registrable Securities;
NOW, THEREFORE, in consideration of the premises, the representations,
warranties, covenants and agreements contained herein and in the Stock purchase
agreement, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, intending to be legally bound
hereby, the parties hereto agree as follows (capitalized terms used herein and
not defined herein shall have the meaning ascribed to such terms in the Stock
purchase agreement):
<PAGE>
ARTICLE I
REGISTRATION RIGHTS
Section I.1. REGISTRATION STATEMENT.
(a) Filing of Registration Statement. Subject to the terms and
--------------------------------
conditions of this Agreement, Sonic Solutions shall file with the SEC
within thirty (30) days following the Subscription Date a registration
statement on Form S-3 under the Securities Act for the registration of the
Registrable Securities for resale by the Investor to the public (the
"Registration Statement").
(b) Effectiveness of the Registration Statement. Sonic Solutions
-------------------------------------------
shall use its reasonable best efforts to have the Registration Statement
declared effective by the SEC by no later than one hundred twenty (120)
days following Subscription Date and to ensure that the Registration
Statement remains in effect throughout the term of this Agreement as set
forth in Section 4.2, subject to the terms and conditions of this
Agreement; provided, however, that if the Stock purchase agreement shall be
-------- -------
terminated in accordance with Section 2.5 thereof, Sonic Solutions shall
have no further obligation to cause the Registration Statement to become
effective.
(c) Intentionally Omitted.
(d) Failure to Maintain Effectiveness of Registration Statements.
------------------------------------------------------------
In the event Sonic Solutions fails to maintain the effectiveness of a
Registration Statement (or the underlying prospectus) throughout the
period set forth in Section 4.2, other than temporary suspensions as set
forth in Section 1.1(f), and the Investor holds any Registrable
Securities at any time during the period of such ineffectiveness (an
"Ineffective Period"), Sonic Solutions shall pay to the Investor in
immediately available funds into an account designated by the Investor an
amount equal to one half of one percent (0.5%) of the aggregate Purchase
Price of all of the Registrable Securities then held by the Investor for
the each of the first four seven-calendar-day periods (or portion
thereof) of an Ineffective Period and one percent (1.0%) of such
aggregate Purchase Price for each subsequent seven-calendar-day periods
(or pro rata portion thereof) of such Ineffective Period. Such amounts
shall not be payable with respect to suspensions of the effectiveness of
a Registration Statement (or use of the underlying prospectus), in
accordance with Section 1.1(f). Such payments shall be made on the first
Trading Day after the earliest to occur of (i) the expiration of the
Commitment Period, (ii) the expiration of an Ineffective Period, (iii)
the expiration of the first twenty-eight (28) calendar days of an
Ineffective Period and (iv) the expiration of each additional twenty-
eight calendar-day period during an Ineffective Period.
(e) SEC Disapproval. Sections 1.1 (b) and (c) notwithstanding,
the date by which a Registration Statement is required to become
effective shall be extended for up to sixty (60) days without default or
penalty in the event that Sonic Solutions' failure to obtain
effectiveness of a Registration Statement by no later than one hundred
twenty (120) days after Subscription Date results solely from the SEC's
disapproval of the structure of the transactions contemplated by the
Stock purchase agreement. In such event, the parties agree to cooperate
with one another in good faith to arrive at a resolution acceptable to
the SEC and Sonic Solutions shall not be in default hereunder or under
the Stock purchase agreement and no liquidated damages or penalties shall
accrue against or be owing by Sonic Solutions if the parties are unable
to arrive at such a resolution.
(f) Deferral and Suspension. Sections 1.1(b), (c) and (d)
------------------------------------------------------
notwithstanding, if Sonic Solutions shall furnish to the Investor notice
signed by the Chairman and Chief Executive Officer of Sonic Solutions
stating that the Board of Directors of Sonic Solutions has, by duly
authorized resolution, determined in good faith that it would be seriously
detrimental to Sonic Solutions and its shareholders for the Registration
Statement to be filed (or remain in effect) and it is therefore essential
to defer the filing of such Registration Statement (or temporarily suspend
the effectiveness of such Registration
1
<PAGE>
Statement or use of the related prospectus) (a "Blackout Notice"), Sonic
Solutions shall have the right to defer such filing (or suspend such
effectiveness) immediately for a period of not more than thirty (30) days
beyond such the date by which such Registration Statement was otherwise
required to be filed (or required to remain in effect). The Investor
acknowledges that it would be seriously detrimental to Sonic Solutions
and its shareholders for such Registration Statement to be filed (or
remain in effect) and therefore essential to defer such filing (or
suspend such effectiveness) and agrees to cease any disposition 2 of the
Registrable Securities immediately upon receipt of such notice. Sonic
Solutions may not utilize any of its rights under this Section 1.1(f) to
defer the filing of a Registration Statement (or suspend its
effectiveness) more than twice in any twelve (12) month period. Following
such deferral or suspension, the Investor shall be entitled to Blackout
Shares as set forth in Section 2.7 of the Stock purchase agreement.
(g) Liquidated Damages. The parties hereto acknowledge and agree
------------------
that the sums payable under Section 1(d) above shall constitute liquidated
damages and not penalties. The parties further acknowledge that (a) the
amount of loss or damages likely to be incurred is incapable or is
difficult to precisely estimate, (b) the amounts specified in such Sections
bear a reasonable proportion and are not plainly or grossly
disproportionate to the probable loss likely to be incurred in connection
with any failure by Sonic Solutions to obtain or maintain the effectiveness
of a Registration Statement, (c) one of the reasons for the parties
reaching an agreement as to such amounts was the uncertainty and cost of
litigation regarding the question of actual damages, and (d) the parties
are sophisticated business parties and have been represented by
sophisticated and able legal and financial counsel and negotiated this
Agreement at arm's length.
ARTICLE II
REGISTRATION PROCEDURES
Section II.1. FILINGS; INFORMATION. Sonic Solutions will effect the
registration and sale of such Registrable Securities in accordance with the
intended methods of disposition thereof. Without limiting the foregoing, Sonic
Solutions in each such case will do the following as expeditiously as possible,
but in no event later than the deadline, if any, prescribed therefor in this
Agreement:
(a) Sonic Solutions shall (i) prepare and file with the SEC a Registration
Statement on Form S-1 (if use of such form is then available to Sonic Solutions
pursuant to the rules of the SEC and, if not, on such other form promulgated by
the SEC for which Sonic Solutions then qualifies and which counsel for Sonic
Solutions shall deem appropriate and which form shall be available for the sale
of the Registrable Securities to be registered thereunder in accordance with the
provisions of this Agreement and in accordance with the intended method of
distribution of such Registrable Securities); (ii) use reasonable best efforts
to cause such filed Registration Statement to become and remain effective
(pursuant to Rule 415 under the Act or otherwise); (iii) prepare and file with
the SEC such amendments and supplements to such Registration Statement and the
prospectus used in connection therewith as may be necessary to keep such
Registration Statement effective for the time periods prescribed by Section
1.1(b); and (iv) comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such Registration Statement
during such period in accordance with the intended methods of disposition by the
Investor set forth in such Registration Statement.
(b) Sonic Solutions shall file all necessary amendments to the
Registration Statement in order to effectuate the purpose of this Agreement and
the Stock purchase agreement.
(c) If so requested by the managing underwriters, if any, or the holders
of a majority in aggregate principal amount of the Registrable Securities being
sold in connection with the filing of a Registration Statement under the
Securities Act for the offering on a continuous or delayed basis in the future
of all of the Registrable Securities (a "Shelf Registration"), Sonic Solutions
shall (i) promptly incorporate in a prospectus supplement or post-effective
amendment such information as the managing underwriters, if any, and such
2
<PAGE>
holders agree should be included therein, and (ii) make all required filings of
such prospectus supplement or post-effective amendment as soon as practicable
after Sonic Solutions has received notification of the matters to be
incorporated in such prospectus supplement or post-effective amendment;
provided, however, that Sonic Solutions shall not be required to take any action
pursuant to this Section 2.1(c)(ii) that would, in the opinion of counsel for
Sonic Solutions, violate applicable law.
(d) In connection with the filing of a Shelf Registration, Sonic Solutions
shall enter into such agreements and take all such other reasonable actions in
connection therewith (including those reasonably requested by the managing
underwriters, if any, or the holders of a majority in aggregate principal amount
of the Registrable Securities being sold) in order to expedite or facilitate the
disposition of such Registrable Securities, and in such connection, whether or
not an underwriting agreement is entered into and whether or not the
registration is an underwritten registration, (i) make such representations and
warranties to the holders of such Registrable Securities and the underwriters,
if any, with respect to the business of Sonic Solutions (including with respect
to businesses or assets acquired or to be acquired by Sonic Solutions), and the
Registration Statement, prospectus and documents, if any, incorporated or deemed
to be incorporated by reference therein, in each case, in form, substance and
scope as are customarily made by issuers to underwriters in underwritten
offerings, and confirm such representations and warranties if and when
requested; (ii) if an underwriting agreement is entered into, the same shall
contain indemnification provision and procedures no less favorable to the
selling holders of such Registrable Securities and the underwriters, if any,
than those set forth herein (or such other provisions and procedures acceptable
to the holders of a majority in aggregate principal amount of Registrable
Securities covered by such Registration Statement and the managing underwriters,
if any); and (iii) deliver such documents and certificates as may be reasonably
requested by the holders of a majority in aggregate principal amount of the
Registrable Securities being sold, their counsel and the managing underwriters,
if any, to evidence the continued validity of their representations and
warranties made pursuant to clause (i) above and to evidence compliance with any
customary conditions contained in the underwriting agreement or other agreement
entered into by Sonic Solutions.
(e) Five (5) Trading Days prior to filing the Registration Statement or
prospectus, or any amendment or supplement thereto (excluding amendments deemed
to result from the filing of documents incorporated by reference therein), Sonic
Solutions shall deliver to the Investor and one firm of counsel representing the
Investor, in accordance with the notice provisions of Section 4.8, copies of
such Registration Statement as proposed to be filed, together with exhibits
thereto, which documents will be subject to review by such parties, and
thereafter deliver to the Investor and its counsel, in accordance with the
notice provisions of Section 4.8, such number of copies of such Registration
Statement, each amendment and supplement thereto (in each case including all
exhibits thereto), the prospectus included in such Registration Statement
(including 4 each preliminary prospectus) and such other documents or
information as the Investor or counsel may reasonably request in order to
facilitate the disposition of the Registrable Securities.
(f) Sonic Solutions shall deliver, in accordance with the notice
provisions of Section 4.8, to each seller of Registrable Securities covered by
such Registration Statement such number of conformed copies of such Registration
Statement and of each amendment and supplement thereto (in each case including
all exhibits and documents incorporated by reference), such number of copies of
the prospectus contained in such Registration Statement (including each
preliminary prospectus and any summary prospectus) and any other prospectus file
under Rule 424 promulgated under the Securities Act relating to such seller's
Registrable Securities, and such other documents, as such seller may reasonably
request to facilitate the disposition of its Registrable Securities.
(g) After the filing of the Registration Statement, Sonic Solutions shall
promptly notify the Investor of any stop order issued or threatened by the SEC
in connection therewith and take all reasonable actions required to prevent the
entry of such stop order or to remove it if entered.
(h) Sonic Solutions shall use its reasonable best efforts to (i) register
or qualify such Registrable Securities under such other securities or blue sky
laws of such jurisdictions in the United States as the Investor may reasonably
(in light of its intended plan of distribution) request, and (ii) cause such
Registrable Securities
3
<PAGE>
to be registered with or approved by such other governmental agencies or
authorities in the United States as may be necessary by virtue of the business
and operations of Sonic Solutions and do any and all other acts and things
that may be reasonably necessary or advisable to enable the Investor to
consummate the disposition of the Registrable Securities; provided that Sonic
Solutions will not be required to qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
paragraph (h), subject itself to taxation in any such jurisdiction, or consent
or subject itself to general service of process in any such jurisdiction.
(i) Sonic Solutions shall immediately notify the Investor upon the
occurrence of any of the following events in respect of a Registration Statement
or related prospectus in respect of an offering of Registrable Securities: (i)
receipt of any request for additional information by the SEC or any other
federal or state governmental authority during the period of effectiveness of
the Registration Statement for additional information, amendments or supplements
to the Registration Statement or related prospectus; (ii) the issuance by the
SEC or any other federal or state governmental authority of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose; (iii) receipt of any notification with respect
to the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
that makes any statement made in the Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the Registration Statement, related prospectus or documents so that,
in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to 5 state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (v) Sonic
Solutions' reasonable determination that a post-effective amendment to the
Registration Statement would be appropriate; and Sonic Solutions will promptly
make available to the Investor any such supplement or amendment to the related
prospectus.
(j) Sonic Solutions shall enter into customary agreements and take such
other actions as are reasonably required in order to expedite or facilitate the
disposition of such Registrable Securities (whereupon the Investor may, at its
option, require that any or all of the representations, warranties and covenants
of Sonic Solutions also be made to and for the benefit of the Investor).
(k) Sonic Solutions shall make available to the Investor (and will deliver
to Investor's counsel), subject to restrictions imposed by the United States
federal government or any agency or instrumentality thereof, copies of all
correspondence between the SEC and Sonic Solutions, its counsel or auditors and
will also make available for inspection by the Investor and any attorney,
accountant or other professional retained by the Investor (collectively, the
"Inspectors"), all financial and other records, pertinent corporate documents
and properties of Sonic Solutions (collectively, the "Records") as shall be
reasonably necessary to enable them to exercise their due diligence
responsibility, and cause Sonic Solutions' officers and employees to supply all
information reasonably requested by any Inspectors in connection with such
Registration Statement. Records that Sonic Solutions determines, in good faith,
to be confidential and which it notifies the Inspectors are confidential shall
not be disclosed by the Inspectors unless (i) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in such Registration
Statement or (ii) the disclosure or release of such Records is requested or
required pursuant to oral questions, interrogatories, requests for information
or documents or a subpoena or other order from a court of competent jurisdiction
or other process; provided that prior to any disclosure or release pursuant to
clause (ii), the Inspectors shall provide Sonic Solutions with prompt notice of
any such request or requirement so that Sonic Solutions may seek an appropriate
protective order or waive such Inspectors' obligation not to disclose such
Records; and, provided further, that if failing the entry of a protective order
or the waiver by Sonic Solutions permitting the disclosure or release of such
Records, the Inspectors, upon advice of counsel, are compelled to disclose such
Records, the Inspectors may disclose that portion of the Records which counsel
has advised the Inspectors that the Inspectors are compelled to disclose. The
Investor agrees that information obtained by it solely as a result of such
inspections (not
4
<PAGE>
including any information obtained from a third party who, insofar as is known
to the Investor after reasonable inquiry, is not prohibited from providing
such information by a contractual, legal or fiduciary obligation to Sonic
Solutions) shall be deemed confidential and shall not be used by it as the
basis for any market transactions in the securities of Sonic Solutions or its
affiliates unless and until such information is made generally available to
the public. The Investor further agrees that it will, upon learning that
disclosure of such Records is sought in a court of competent jurisdiction,
give notice to Sonic Solutions and allow Sonic Solutions, at its expense, to
undertake appropriate action to prevent disclosure of the Records deemed
confidential.
(l) Sonic Solutions shall deliver, in accordance with the notice
provisions of Section 4.8, to the Investor a signed counterpart, addressed to
the Investor, of (1) an opinion or opinions of counsel to Sonic Solutions, and
(2) to the extent required by law or reasonably necessary to effect a sale of
Registrable Securities in accordance with prevailing business practices at the
time of any sale of Registrable Securities pursuant to a Registration Statement,
a comfort letter or comfort letters from Sonic Solutions' independent public
accountants, each in customary form and covering such matters of the type
customarily covered by opinions or comfort letters, as the case may be, as the
Investor therefor reasonably requests.
(m) Sonic Solutions shall otherwise comply with all applicable rules and
regulations of the SEC, including, without limitation, compliance with
applicable reporting requirements under the Exchange Act.
(n) Sonic Solutions shall appoint a transfer agent and registrar for all
such Registrable Securities covered by such Registration Statement not later
than the effective date of such Registration Statement.
(o) Sonic Solutions may require the Investor to promptly furnish in
writing to Sonic Solutions such information as may be legally required in
connection with such registration including, without limitation, all such
information as may be requested by the SEC or the National Association of
Securities Dealers. The Investor agrees to provide such information requested
in connection with such registration within ten (10) business days after
receiving such written request and Sonic Solutions shall not be responsible for
any delays in obtaining or maintaining the effectiveness of the Registration
Statement caused by the Investor's failure to timely provide such information.
Section II.2. REGISTRATION EXPENSES. In connection with each Registration
Statement, Sonic Solutions shall pay all registration expenses incurred in
connection with the registration thereunder (the "Registration Expenses"),
including, without limitation: (i) all registration, filing, securities exchange
listing and fees required by the National Association of Securities Dealers,
(ii) all registration, filing, qualification and other fees and expenses of
compliance with securities or blue sky laws (including reasonable fees and
disbursements of counsel in connection with blue sky qualifications of the
Registrable Securities), (iii) all word processing, duplicating, printing,
messenger and delivery expenses, (iv) Sonic Solutions' internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), (v) the fees and expenses
incurred in connection with the listing of the Registrable Securities, (vi)
reasonable fees and disbursements of counsel for Sonic Solutions and customary
fees and expenses for independent certified public accountants retained by Sonic
Solutions (including the expenses of any special audits or comfort letters or
costs associated with the delivery by independent certified public accountants
of such special audit(s) or comfort letter(s) requested pursuant to Section
2.1(l) hereof), (vii) the fees and expenses of any special experts retained by
Sonic Solutions in connection with such registration, (viii) all
5
<PAGE>
ARTICLE III
INDEMNIFICATION AND CONTRIBUTION
Section III.1. INDEMNIFICATION BY SONIC SOLUTIONS. Sonic Solutions agrees to
indemnify and hold harmless the Investor, its partners, affiliates, officers,
directors, employees and duly authorized agents, and each Person or entity, if
any, who controls the Investor within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, together with the partners,
Affiliates, officers, directors, employees and duly authorized agents of such
controlling Person or entity (collectively, the "Controlling Persons"), from and
against any loss, claim, damage, liability, costs and expenses (including,
without limitation, reasonable attorneys' fees and disbursements and costs and
expenses of investigating and defending any such claim) (collectively,
"Damages"), joint or several, and any action or proceeding in respect thereof to
which the Investor, its partners, affiliates, officers, directors, employees and
duly authorized agents, and any such Controlling Person may become subject under
the Securities Act or otherwise as incurred and, insofar as such Damages (or
actions or proceedings in respect thereof) arise out of, or are based upon, any
untrue statement or alleged untrue statement of a material fact contained in any
Registration Statement or prospectus relating to the Registrable Securities or
any preliminary prospectus, or arises out of, or are based upon, any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
the same are based upon information furnished in writing to Sonic Solutions by
the Investor expressly for use therein, and shall reimburse the Investor, its
partners, affiliates, officers, directors, employees and duly authorized agents,
and each such Controlling Person for any legal and other expenses reasonably
incurred by the Investor, its partners, affiliates, officers, directors,
employees and duly authorized agents, or any such Controlling Person, as
incurred, in investigating or defending or preparing to defend against any such
Damages or actions or proceedings; provided, however, that Sonic Solutions shall
not be liable to the Investor to the extent that any such Damages arise out of
or are based upon an untrue statement or omission made in any preliminary
prospectus if (i) the Investor failed to send or deliver a copy of the final
prospectus delivered by Sonic Solutions to the Investor with or prior to the
delivery of written confirmation of the sale by the Investor to the Person
asserting the claim 8 from which such Damages arise, and (ii) the final
prospectus would have corrected such untrue statement or alleged untrue
statement or such omission or alleged omission.
Section III.2. CONDUCT OF INDEMNIFICATION PROCEEDINGS. Promptly after receipt
by any person or entity in respect of which indemnity may be sought pursuant to
Section 3.1 (an "Indemnified Party") of notice of any claim or the commencement
of any action, the Indemnified Party shall, if a claim in respect thereof is to
be made against the person or entity against whom such indemnity may be sought
(the "Indemnifying Party"), notify the Indemnifying Party in writing of the
claim or the commencement of such action; in the event an Indemnified Party
shall fail to give such notice as provided in this Section 3.2 and the
Indemnifying Party to whom notice was not given was unaware of the proceeding to
which such notice would have related and was materially prejudiced by the
failure to give such notice, the indemnification provided for in Section 3.1
shall be reduced to the extent of any actual prejudice resulting from such
failure to so notify the Indemnifying Party; provided, that the failure to
notify the Indemnifying Party shall not relieve the Indemnifying Party from any
liability that it may have to an Indemnified Party otherwise than under Section
3.1. If any such claim or action shall be brought against an Indemnified Party,
and it shall notify the Indemnifying Party thereof, the Indemnifying Party shall
be entitled to participate therein, and, to the extent that it wishes, jointly
with any other similarly notified Indemnifying Party, to assume the defense
thereof with counsel reasonably satisfactory to the Indemnified Party. After
notice from the Indemnifying Party to the Indemnified Party of its election to
assume the defense of such claim or action, the Indemnifying Party shall not be
liable to the Indemnified Party for any legal or other expenses subsequently
incurred by the Indemnified Party in connection with the defense thereof other
than reasonable costs of investigation; provided that the Indemnified Party
shall have the right to employ separate counsel to represent the Indemnified
Party and its Controlling Persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the Indemnified Party
against the Indemnifying Party, but the fees and expenses of such counsel shall
be for the account of such Indemnified Party unless (i) the Indemnifying Party
and the Indemnified Party
6
<PAGE>
shall have mutually agreed to the retention of such counsel or (ii) in the
reasonable judgment of Sonic Solutions and such Indemnified Party,
representation of both parties by the same counsel would be inappropriate due
to actual or potential conflicts of interest between them, it being
understood, however, that the Indemnifying Party shall not, in connection with
any one such claim or action or separate but substantially similar or related
claims or actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more than
one separate firm of attorneys (together with appropriate local counsel) at
any time for all Indemnified Parties, or for fees and expenses that are not
reasonable. No Indemnifying Party shall, without the prior written consent of
the Indemnified Party, effect any settlement of any claim or pending or
threatened proceeding in respect of which the Indemnified Party is or could
have been a party and indemnity could have been sought hereunder by such
Indemnified Party, unless such settlement includes an unconditional release of
such Indemnified Party from all liability arising out of such claim or
proceeding. Whether or not the defense of any claim or action is assumed by
the Indemnifying Party, such Indemnifying Party will not be subject to any
liability for any settlement made without its consent, which consent will not
be unreasonably withheld.
Section III.3. OTHER INDEMNIFICATION. Indemnification similar to that
specified in the preceding paragraphs of this Article 3 (with appropriate
modifications) shall be given by Sonic Solutions and each seller of Registrable
Securities with respect to any required registration or other qualification of
securities under any federal or state law or regulation of any governmental
authority other than the Securities Act. The provisions of this Article III
shall be in addition to any other rights to indemnification, contribution or
other remedies which an Indemnified Party may have pursuant to law, equity,
contract or otherwise.
Section III.4. CONTRIBUTION. If the indemnification provided for in this
Article III is unavailable to the Indemnified Parties in respect of any Damages
referred to herein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Damages as between Sonic Solutions on the
one hand and the Investor on the other, in such proportion as is appropriate to
reflect the relative fault of Sonic Solutions and of the Investor in connection
with such statements or omissions, as well as other equitable considerations.
The relative fault of Sonic Solutions on the one hand and of the Investor on the
other shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by such party,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. Sonic Solutions
and the Investor agree that it would not be just and equitable if contribution
pursuant to this Section 3.4 were determined by pro rata allocation or by any
other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an Indemnified Party as a result of the Damages referred to
in the immediately preceding paragraph shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably incurred
by such Indemnified Party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 3.4, the
Investor shall in no event be required to contribute any amount in excess of the
amount by which the total price at which the Registrable Securities of the
Investor were sold to the public (less underwriting discounts and commissions)
exceeds the amount of any damages which the Investor has otherwise been required
to pay by reason of such untrue or alleged untrue statement or omission or
alleged omission. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
ARTICLE IV
MISCELLANEOUS
Section IV.1. NO OUTSTANDING REGISTRATION RIGHTS. Sonic Solutions represents
and warrants to the Investor that there is not in effect on the date hereof any
agreement by Sonic Solutions pursuant to which any holders of securities of
Sonic Solutions have a right to cause Sonic Solutions to register or qualify
such
7
<PAGE>
securities under the Securities Act or any securities or blue 10 sky laws of
any jurisdiction that would conflict or be inconsistent with any provision of
this Agreement or the Stock purchase agreement.
Section IV.2. TERM. The registration rights provided to the holders of
Registrable Securities hereunder shall terminate at such time as all Purchased
Shares (i) have been disposed of pursuant to the Registration Statement, (ii)
have been sold under circumstances under which all of the applicable conditions
of Rule 144 (or any similar provision then in force) under the Securities Act
("Rule 144") are met, (iii) have been otherwise transferred to holders who may
trade such shares without restriction under the Securities Act, and Sonic
Solutions has delivered a new certificate or other evidence of ownership for
such securities not bearing a restrictive legend, or (iv) may be sold without
any time, volume or manner limitations pursuant to Rule 144(k) (or any similar
provision then in effect) under the Securities Act in the opinion of counsel to
Sonic Solutions, which counsel shall be reasonably acceptable to the Investor;
provided, however, that such registration rights shall not terminate sooner than
- -----------------
two years following the Subscription Date. Notwithstanding the foregoing,
paragraphs (c) and (d) of Section 1.1, Article III, Section 4.8, and Section 4.9
shall survive the termination of this Agreement.
Section IV.3. RULE 144. Sonic Solutions covenants that it will file all
reports required to be filed by it under the Act and the Exchange Act and that
it will take such further action as holders of Registrable Securities may
reasonably request, all to the extent required from time to time to enable the
Investor to sell Registrable Securities without registration under the Act
within the limitation of the exemptions provided by (a) Rule 144, as such Rule
may be amended from time to time, or (b) any similar rule or regulation
hereafter adopted by the SEC. If at any time Sonic Solutions is not required to
file such reports, it will, upon the request of any holder of Registrable
Securities, make publicly available other information so long as necessary to
permit sales pursuant to Rule 144. Upon the request of the Investor, Sonic
Solutions will deliver to the Investor a written statement as to whether it has
complied with such requirements.
Section IV.4. CERTIFICATE. Sonic Solutions will, at its expense, forthwith
upon the request of any holder of Registrable Securities, deliver to such holder
a certificate, signed by Sonic Solutions' principal financial officer, stating
(a) Sonic Solutions' name, address and telephone number (including area code),
(b) Sonic Solutions' Internal Revenue Service identification number, (c) Sonic
Solutions' Commission file number, (d) the number of shares of each class of
Stock outstanding as shown by the most recent report or statement published by
Sonic Solutions, and (e) whether Sonic Solutions has filed the reports required
to be filed under the Exchange Act for a period of at least ninety (90) days
prior to the date of such certificate and in addition has filed the most recent
annual report required to be filed thereunder.
Section IV.5. AMENDMENT AND MODIFICATION. Any provision of this Agreement may
be waived, provided that such waiver is set forth in a writing executed by both
parties to this Agreement. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given,
unless Sonic Solutions has obtained the written consent of the holders of a
majority of the then outstanding Registrable Securities. Notwithstanding the
foregoing, the waiver of any provision hereof with respect to a matter that
relates exclusively to 11 the rights of holders of Registrable Securities whose
securities are being sold pursuant to a Registration Statement and does not
directly or indirectly affect the rights of other holders of Registrable
Securities may be given by holders of at least a majority of the Registrable
Securities being sold by such holders; provided that the provisions of this
sentence may not be amended, modified or supplemented except in accordance with
the provisions of the immediately preceding sentence. No course of dealing
between or among any Person having any interest in this Agreement will be deemed
effective to modify, amend or discharge any part of this Agreement or any rights
or obligations of any person under or by reason of this Agreement.
Section IV.6. SUCCESSORS AND ASSIGNS; ENTIRE AGREEMENT. This Agreement and all
of the provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns. The Investor may
assign its rights under this Agreement to any subsequent holder the Registrable
Securities, provided that Sonic Solutions shall have the right to require any
holder of Registrable
8
<PAGE>
Securities to execute a counterpart of this Agreement as a condition to such
holder's claim to any rights hereunder; provided further that such holder is
an "accredited investor" as defined in Rule 501 of Regulation D of the
Securities Act. This Agreement, together with the Stock purchase agreement and
the Escrow Agreement sets forth the entire agreement and understanding between
the parties as to the subject matter hereof and merges and supersedes all
prior discussions, agreements and understandings of any and every nature among
them.
Section IV.7. SEPARABILITY In the event that any provision of this Agreement or
the application of any provision hereof is declared to be illegal, invalid or
otherwise unenforceable by a court of competent jurisdiction, the remainder of
this Agreement shall not be affected except to the extent necessary to delete
such illegal, invalid or unenforceable provision unless that provision held
invalid shall substantially impair the benefits of the remaining portions of
this Agreement.
Section IV.8. NOTICES. All notices, demands, requests, consents, approvals,
and other communications required or permitted hereunder shall be in writing and
shall be (i) personally served, (ii) deposited in the mail, registered or
certified, return receipt requested, postage prepaid, (iii) delivered by
reputable air courier service with charges prepaid, or (iv) transmitted by hand
delivery, telegram or facsimile, addressed as set forth below or to such other
address as such party shall have specified most recently by written notice. Any
notice or other communication required or permitted to be given hereunder shall
be deemed effective (a) upon hand delivery or delivery by facsimile, with
accurate confirmation generated by the transmitting facsimile machine, at the
address or number designated below (if delivered on a business day during normal
business hours where such notice is to be received), or the first business day
following such delivery (if delivered other than on a business day during normal
business hours where such notice is to be received) or (b) on the second
business day following the date of mailing by express courier service, fully
prepaid, addressed to such address, or upon actual receipt of such mailing,
whichever shall first occur. The addresses for such communications shall be:
If to Sonic Solutions, Inc.:
Robert J. Doris
President and Chief Executive Officer
Sonic Solutions
101 Rowland Way, Suite 110
Novato, California 94945
Telephone: (415) 893-8000
Facsimile: (415) 893-8008
with a copy to (which communication shall not constitute notice):
August J. Moretti, Esq.
Heller Ehrman White & McAuliffe
2500 Sand Hill Road, Suite 100
Menlo Park, California 94025-7063
Telephone: (650) 234-4229
Facsimile: (650) 234-4299
If to the Investor:
Adam Gurney
Kingsbridge Capital Limited
c/o Kingsbridge Corporate Services Limited
Main Street
Kilcullen, County Kildare
Republic of Ireland
Telephone: 011-353-45-481-811
Facsimile: 011-353-45-482-003
9
<PAGE>
with a copy to (which communication shall not constitute notice):
Keith M. Andruschak, Esq.
Rogers & Wells LLP
200 Park Avenue
New York, NY 10166
Telephone: (212) 878-8000
Facsimile: (212) 878-8375
Either party hereto may from time to time change its address or facsimile
number for notices under this Section 4.8 by giving at least ten (10) days'
prior written notice of such changed address or facsimile number to the other
party hereto.
Section IV.9. GOVERNING LAW. This Agreement shall be construed under the laws
of the State of California, without giving effect to provisions regarding
conflicts of law or choice of law.
Section IV.10. HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not constitute a part of this Agreement, nor shall they
affect their meaning, construction or effect.
Section IV.11. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute one and the same instrument.
Section IV.12. FURTHER ASSURANCES. Each party shall cooperate and take such
action as may be reasonably requested by another party in order to carry out the
provisions and purposes of this Agreement and the transactions contemplated
hereby.
Section IV.13. REMEDIES. In the event of a breach or a threatened breach by
any party to this Agreement of its obligations under this Agreement, any party
injured or to be injured by such breach will be entitled to specific performance
of its rights under this Agreement or to injunctive relief, in addition to being
entitled to exercise all rights provided in this Agreement and granted by law.
The parties agree that the provisions of this Agreement shall be specifically
enforceable, it being agreed by the parties that the remedy at law, including
monetary damages, for breach of any such provision will be inadequate
compensation for any loss and that any defense or objection in any action for
specific performance or injunctive relief that a remedy at law would be adequate
is waived.
IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be executed by the undersigned, thereunto duly authorized, as of
the date first set forth above.
SONIC SOLUTIONS
/s/ Clay Leighton
By:____________________________________________
Senior Vice President Worldwide Operations,
Finance and CFO
KINGSBRIDGE CAPITAL LIMITED
/s/ Valentine O'Donoghue
By:____________________________________________
Valentine O'Donoghue
Director
10
<PAGE>
EXHIBIT 5
{LETTERHEAD OF HELLER EHRMAN WHITE & MCAULIFFE}
May 20, 1999
SONIC SOLUTIONS
101 Rowland Way, Suite 110
Novato, California 94945
Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to Sonic Solutions, a California corporation (the
"Sonic Solutions"), in connection with the Registration Statement on Form S-1 to
be filed with the Securities and Exchange Commission (the "Commission") on or
about May 24, 1999 (the "Registration Statement") for the purpose of registering
under the Securities Act of 1933, as amended, an aggregate of 1,800,000 shares
of Sonic Solutions' Common Stock, no par value (the "Shares"). The Shares are
to be sold by the Holder under the Registration Statement.
I.
In connection with this opinion, we have assumed the authenticity of all
records, documents and instruments submitted to us as originals, the genuineness
of all signatures, the legal capacity of natural persons and the conformity to
the originals of all records, documents, and instruments submitted to us as
copies. In rendering our opinion, we have examined the following records,
documents, instruments and certificates:
(a) The Amended and Restated Articles of Incorporation of Sonic Solutions
certified by the Secretary of State of the State of California as of September
11, 1997, and certified to us by an officer of Sonic Solutions as being complete
and in full force and effect as of the date of this opinion;
(b) The Bylaws of Sonic Solutions certified to us by an officer of Sonic
Solutions as being complete and in full force and effect as of the date of this
opinion;
(c) A Certificate of an Officer of Sonic Solutions: (i) attaching records
certified to us as constituting all records of proceedings and actions of the
Board of Directors of Sonic Solutions and any committees of the Board of
Directors relating to the Shares; and (ii) certifying as to certain factual
matters;
(d) The Registration Statement; and
(e) A written statement from ChaseMellon Shareholder Services, Sonic
Solutions' transfer agent, as to the number of shares of Sonic Solutions' Common
Stock that were outstanding on March 31, 1999. This
<PAGE>
opinion is limited to the federal laws of the United States of America and the
laws of the State of California, and we disclaim any opinion as to the laws of
any other jurisdiction. We further disclaim any opinion as to any statute, rule,
regulation, ordinance, order or other promulgation of any other jurisdiction or
any regional or local governmental body or as to any related judicial or
administrative decision.
II.
Based upon the foregoing and our examination of such questions of law as we
have deemed necessary or appropriate for the purpose of this opinion, and
assuming that: (i) the Registration Statement becomes and remains effective
during the period when the Shares are offered and sold; (ii) the full
consideration stated in the stock purchase agreement dated as of May 20, 1999
pursuant to which the Shares are to be issued is paid for each Share; (iii)
appropriate certificates evidencing the Shares are executed and delivered by
Sonic Solutions; and (iv) all applicable securities laws are complied with, it
is our opinion that the Shares covered by the Registration Statement will be
legally issued, fully paid and nonassessable.
III.
This opinion is rendered to you in connection with the Registration
Statement and is solely for your benefit. This opinion may not be relied upon
by you for any other purpose, or relied upon by any other person, firm,
corporation or other entity for any purpose, without our prior consent. We
disclaim any obligation to advise you of any change of law that occurs, or any
facts of which we may become aware, after the date of this opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Heller Ehrman White & McAuliffe
<PAGE>
Exhibit 23.2
The Board of Directors
Sonic Solutions:
The audits referred to in our report dated April 26, 1999, included the related
financial statement schedule as of March 31, 1999, and for each of the years in
the three-year period ended March 31, 1999, included in the registration
statement. The financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein and to the reference to our
firm under the headings "Experts" and "Selected Financial Data" in the
registration statement.
KPMG LLP
San Francisco, California
May 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998
<PERIOD-START> APR-01-1998 APR-01-1997
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 2,414 2,479
<SECURITIES> 0 0
<RECEIVABLES> 6,002 3,815
<ALLOWANCES> 599 617
<INVENTORY> 807 634
<CURRENT-ASSETS> 8,911 6,776
<PP&E> 7,915 7,003
<DEPRECIATION> 5,602 4,237
<TOTAL-ASSETS> 13,765 12,630
<CURRENT-LIABILITIES> 7,744 5,612
<BONDS> 0 0
0 0
956 1,500
<COMMON> 18,121 15,204
<OTHER-SE> (13,145) (11,286)
<TOTAL-LIABILITY-AND-EQUITY> 5,932 5,418
<SALES> 21,899 19,811
<TOTAL-REVENUES> 21,899 19,811
<CGS> 9,547 10,209
<TOTAL-COSTS> 13,909 14,897
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 302 651
<INCOME-PRETAX> (1,859) (5,876)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,859) (5,876)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,859) (5,876)
<EPS-BASIC> (0.21) (0.76)
<EPS-DILUTED> (0.21) (0.76)
</TABLE>
