<PAGE>
As filed with the Securities and Exchange Commission on August 12, 1999
Registration No. 333-79387
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
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 (3)
- --------------------------------------------------------------------------------------------------------------------
<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.
(3) The registration fee was paid by the Registrant in connection with the
filing of its Registration Statement on Form S-1 with the Securities and
Exchange Commission on May 27, 1999.
----------------
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 August 9, 1999, the closing price for our common stock, as reported
on the Nasdaq National Market, was $2.75 per share.
Beginning on page 3, 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.
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 date of this Prospectus is August 11, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY INFORMATION...................................................... 1
RISK FACTORS............................................................. 3
USE OF PROCEEDS.......................................................... 7
THE STOCK PURCHASE AGREEMENT............................................. 7
SELLING SECURITY HOLDER.................................................. 8
PLAN OF DISTRIBUTION................................................
..... 9
THE BUSINESS............................................................. 11
COMPANY OPERATIONS....................................................... 21
PROPERTIES............................................................... 25
MARKET FOR SONIC SOLUTIONS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS................................................................. 25
SELECTED FINANCIAL DATA.................................................. 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 27
DIRECTORS................................................................ 32
EXECUTIVE OFFICERS....................................................... 33
EXECUTIVE COMPENSATION................................................... 35
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES........................................................... 37
SECURITY OWNERSHIP OF C
ERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 38
DESCRIPTION OF CAPITAL STOCK............................................. 39
LEGAL MATTERS............................................................ 39
EXPERTS.................................................................. 39
INDEX TO FINANCIAL STATEMENTS............................................ F-1
INDEPENDENT AUDITORS' REPORT............................................. F-2
</TABLE>
<PAGE>
SUMMARY INFORMATION
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, ena
bling 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.
1
<PAGE>
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.
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...........
9,468,12
3 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 SNIC
Symbol......................
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
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
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>
2
<PAGE>
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.
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 ti
me 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 had losses in four of the five past years 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 $1,500,000 debt to Hambrecht and Quist 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 $1,500,000 due Hambrecht and Quis
t
in October of 1999. We owe this amount to Hambrecht and Quist under a
financing facility that was originally put in place in December, 1996. This
facility was used to finance our operations and to lease equipment. Repayment
of these debts will seriously deplete our cash balances, and might therefore
cause us to cease or significantly curtail our operations.
During the last three years we had 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 h
ave 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 devel
opment 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
3
<PAGE>
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 activitie
s 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, such as trade secrets,
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.
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
4
<PAGE>
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. These customers are located primarily in Europe, Japan, Taiwan and
Singapore.
Revenue derived from customers in Japan, Taiw
an and Singapore, expose us to
the following risks particular to these countries:
. 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.
Our suppliers and customers may not be 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.
If our vendors or customers are not Year 2000 compliant, the most reasonably
likely worst case scenario is a systematic failure beyond our control. For
example, a failure in telecommunications, power, water or the banking system.
If these failures occur, our business would be significantly disrupted. We
would not be able to obtain inventory in a timely manner and we would lose
customers or orders. This would result in increased costs and reduced revenues.
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. On March 31, 1999, we had
9,468,123 shares of common stock outstanding. We may sell up to an additional
1,800,000 shares pursuant to this prospectus, representing about 19% of our
outstanding common stock. As a result, our net income or loss per share could
be significantly affected in future periods causing a reduction in t
he 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.
Forward Looking Statements
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.
5
<PAGE>
A number of risks and uncertainties, including those discussed under the
caption "Risk Factors" above 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.
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. 333-79387. 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.
6
<PAGE>
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.
These corporate purposes may include, for example:
. repayment of debt owed to Hambrecht and Quist;
. payment of trade payables; and
. product development costs.
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 t
o 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
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.
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.
7
<PAGE>
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.
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 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> <C>
Kingsbridge Capital Ltd... 58,849 1,800,000 -- --
Dawson Building
Main Street
Road Town
Tortola, BVI
Total:................ 58,849 1,800,000 -- --
</TABLE>
8
<PAGE>
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 t
he 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. If a broker-dealer acts as agent for the
purchaser of such shares then it may receive a commission 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-deal
er 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
. the name of any such broker-dealers;
. the number of shares involved;
. the price at which such shares are to be sold;
.
the commissions paid or discounts or concessions allowed to such broker-
dealers, where applicable;
. 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
. other facts material to the transaction.
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. We will not pay any
commissions for the sales of shares offered by this prospectus. 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.
9
<PAGE>
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.
10
<PAGE>
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. 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 line
s: 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 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!".
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 communication
s 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 independent, privately owned companies, and 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 li
ne (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 and Digital Audio Compact Discs, 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 t
he surface of an optical disc.
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<PAGE>
The shift to digital encompasses the tools used to edit, process and
prepare audio and video prior to release, the tools are also used in audio and
video release formats. Released formats are 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 21st
century. At that time we expect that 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.
. 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 such as 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.
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<PAGE>
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"
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 workstatio
ns, 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.
. EQ--SonicStudio can be used to equalize 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
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<PAGE>
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.
. 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 customer, 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. Our financial statement figures are therefore 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,
. processing devices, and
. digital audio workstations.
The key elements of competition include:
. features,
. cost effectiveness,
. product quality,
. customer support,
. marketing, and
. sales
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<PAGE>
Many of our competitors have greater financial, technical and marketing
resources than we do. Traditional professional audio competitors, such as Japan
Victor Corporation, 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 compete with the NoNOISE option
for SonicStudio. For a further discussion of the risks associated with the
co
mpetition faced by SonicStudio, see "Risk Factors".
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. Our specialized hardware also helps 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 upgra
des 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.
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<PAGE>
DVD Creator
DVD-Video
Our DVD Creator(TM) workstations support preparation of DVD-Video discs.
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 sim
ultaneously. Audio streams 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, which are images overlaid on background video or still images, may
be included. Subpictures 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 di
scs. 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. This finished image 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 v
ideo 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, and facilitate the operation of DVD
Studio with standard professional video tape recorders and other typical
peripherals.
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<PAGE>
. 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.
Interactivity refers to 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,
including a 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
or recorded onto a recordable DVD disc.
DVD Creator is sold in multiple versions for between $20,000 and $99,999,
which does not include 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 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 Forum is the standards-setting industry association for DVD.
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.
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
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<PAGE>
. production companies and other content owners and
. 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 t
here 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 and
. independent facilities who specialize in assisting in preparing such
material.
Customers in this segment are typically somewhat more budget constrained
than customers in the "Hollywood" segment. In certain instances,
however, 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 tha
t 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.
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.
A number of companies compete with all or part of our DVD Creator offering.
Our competitors include:
<TABLE>
<CAPTION>
<S> <C>
Astarte Matsushita
C-Cube Microsystems Minerva Systems
Daikin Industries Mitsubishi
Digital Vision Optibase
Dolby Laboratories Philips
FutureTel Pioneer
Innovacom Sony
Intec Spruce Technologies
Lucent Toshiba
</TABLE>
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<PAGE>
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 premaster
ing 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 n
umber 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 trend
s:
. Proliferation of MPEG--Due to certain introductions by chip makers,
relatively high quality MPEG encoding systems will become widely
available during the remainder of 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.
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<PAGE>
. Rapid Growth in DVD Playback Units--By the end of 1998 approximately 8
million DVD-Video playback units had been installed worldwide, according
to industry sources. These include both set-top players and DVD-equipped
multimedia PCs. 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, 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 w
e 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".
20
<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 and in Tokyo. The London office covers E
urope and the Tokyo office
covers 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 ofte
n 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 Soni
cStudio 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. Notice that the "Total" column in the following chart
is less than the sum of individual columns because one dealer organization
sometimes covers both product lines.
<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>
21
<PAGE>
Employees
At March 31, 1999, we employed 87 full-time-equivalent employees, including
the following:
<TABLE>
<CAPTION>
No. Employees Group
------------- -----
<C> <S>
37 Marketing, Sales and Customer
Support
30 Software and hardware
engineering
10 Manufacturing
10 Administration and Finance
</TABLE>
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 qu
ite 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 optio
n 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 sy
stems 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 sophisticated digital signal
processing solutions to meet the quality and performance requirements of
audio and video professionals.
22
<PAGE>
. 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 lit
tle 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 singl
e 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.
Proprietary Rights
General Approach
We rely on a combination of the following to protect our proprietary rights:
. trade secret,
. copyright law,
23
<PAGE>
. trademark law,
. contracts and
. technical measures.
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 wa
s 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.
24
<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 fe
e 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:
<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
Quarter ended June 30, 1999........................... $3.875 $ 7.125
</TABLE>
Sonic Solutions has not paid any dividends on its Common Stock during the
periods set forth above. It is p
resently 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.
25
<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 capita
l................... 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>
26
<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.
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 operati
ng 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) a
nd SonicStudio sales. The increase in fiscal
1999 was primarily due to increased sales of DVD Creator systems.
27
<PAGE>
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 thi
rty-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 i
n 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
28
<PAGE>
interest and other financing charges related to financing agreements we had
with entities associated with Hambrecht & Quist, as well as borrowings under
our bank credit line.
Provision for Income Taxes. In accordance with Statement of Financial
Accounting Standards No. 109, 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 outstandin
g.
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 Dec
ember 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% an
d 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.
29
<PAGE>
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 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 t
his 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 s
oftware 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 ne
w 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, manufa
cturing 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.
30
<PAGE>
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 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 Prospect
us, 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.
31
<PAGE>
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 1986
and Director
Michael C. Child........ 44 Director 1993
Robert M. Greber........ 60 Director 1993
Peter J. Marguglio...
... 51 Director 1986
</TABLE>
32
<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. The
re 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
t
o 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. f
rom 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.
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 ve
nture
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
33
<PAGE>
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
Univer
sity. 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.
34
<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 $100,000 or more. None of the named executive officers earned any
bonuses or compensation for these fiscal years other than as set forth in the
table or received any restricted stock awards, stock appreciation rights or
long-term incentive plan payouts.
The following table includes information about options that were repriced in
March 1998. Following a significant decline in
the market price of Sonic
Solutions' Common Stock during the preceding months, the Board authorized the
repricing of certain options by the Chief Executive Officer. The options were
repriced as of March 3, 1998, with the effect of canceling the old options and
granting new options with an exercise price equal to the fair market value of
the Common Stock on such date. Other than the change in exercise price, the
terms of each repriced option, including the vesting schedule and expiration
date, are the same as that of the initial option. The Board authorized the
repricing of the options for the same reason it authorized the initial grants,
including promoting the retention of employees crucial to the success of Sonic
Solutions and motivating them to perform their duties in ways that will
contribute to the appreciation of stockholder value. In the opinion of the
Board, the regrant was a prudent way to reduce the risk of attrition of key
employees and thereby reduce the risks to Sonic Solutions' product deve
lopment.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual
Compensation
------------------ Long-Term
Fiscal Year Salary Compensation
Name and Principal Position Ended March 31, ($) Bonus ($) Options (#)
- --------------------------- --------------- -------- --------- ------------
<S> <C> <C> <C> <C>
Robert J. Doris............... 1999 $138,750 $ 0 85,000
President (Chief Executive 1998 $180,000 $ 0 175,000(1)
Officer)
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 World-
wide 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 discussion above 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 discussion above 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
35
<PAGE>
options granted to replace canceled options shown as granted in fiscal year
1996 with higher exercise prices. See discussion above 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 represent new options granted to replace canceled options
shown as granted in fiscal year 1996 with higher exercise prices. See
discussion above regarding the repricing of options.
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.
The exercise price in the following table 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. All options indicated on the following table expire September
2, 2008, but are subject to earlier expiration in the event of the officer's
termination of employment with Sonic Solutions. Potential realizable value of
options in the following table 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 SEC and do
n
ot reflect Sonic Solutions' estimate of future stock price appreciation. The
following options granted to Mr. Kryzan 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. All other options in the following table were granted under Sonic
Solutions' Stock Option Plan, vest over a period of one year at a rate of
8.3333 percent per month.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Individual Grants Value at Assumed
------------------------------------------------ Annual Rates
Number of Percent of of Stock Price
Securities Total Options Apprecia
tion for
Underlying Granted to Exercise or Option Term
Options Employees in Base Price Expiration --------------------
Name Granted (#) Fiscal Year ($/sh) Date 5% 10%
---- ----------- ------------- ----------- ---------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Doris......... 85,000 13% 1.688 9/2/08 $ 91,921 $ 228,670
Mary C. Sauer........... 40,000 6% 1.688 9/2/08 42,463 107,609
Christopher A. Kryzan... 40,000 6% 1.688 9/2/08 42,463 107,609
A. Clay Leighton........ 25,000 4% 1.688 9/2/08 26,539 67,256
</TABLE>
36
<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. The values indicated in the following table 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 ($4.125).
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of
Aggregate Unexercised Option In-the-Money
Shares Acquired Value at Fiscal Year End at Fiscal Year
on Exercise Realized Exercisable/ End Exercisable/
Name (#) ($) Unexercisable Unexercisable
---- --------------- --------- -------------------- ----------------
<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>
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
grante
d 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
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.
37
<PAGE>
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.
The following 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 Commo
n 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.
<TABLE>
<CAPTION>
Number of Percentage
Shares of Shares
Beneficially Beneficially
Name and Address Owned Owned
---------------- ------------ ------------
<S>
<C> <C>
Hambrecht & Quist Guaranty Finance, LLC(1).......... 607 *
One Bush Street
San Francisco, CA 94104
Entities Affiliated with TA Associates(2)........... 570,627 6.0%
435 Tasso Street
Palo Alto, California 94301
Robert J. Doris(3).................................. 1,525,890 16.1%
Mary C. Sauer(4).................................... 767,995 8.1%
Peter J. Marguglio(5)............................... 122,356 1.3%
Michael C. Child(6)................................. 1,618 *
Robert M. Greber(7)................................. 27,021 *
Christopher A. Kryzan(8)............................ 84,166 *
A. Clay Leighton(9)................................. 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) Acc
ording to Schedule 13G filed by Hambrecht & Quist Guaranty Finance, LLC.
(2) 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).
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) All shares issuable upon exercise of options which will be exercisable
within 60 days of March 31, 1999.
(9) 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.
38
<PAGE>
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, and
10,000,000 shares of Preferred Stock, no par value .
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 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 and warrants to purchase 130,100
shares of Common Stock at an exercise price of $10.00 per share. 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.
39
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<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>
Preferred Unrealized
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.
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.
F-7
<PAGE>
SONIC SOLUTIONS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1997, 1998 and 1999
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 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.
F-8
<PAGE>
SONIC SOLUTIONS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1997, 1998 and 1999
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
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.
F-9
<PAGE>
SONIC SOLUTIONS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1997, 1998 and 1999
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):
<TABLE>
<CAPTION>
March 31,
---------
1998 1999
---- ----
<S> <C> <C>
Raw materials................................................... $468 603
Work-in-process................................................. 130 187
Original equipment manufacturer's goods......................... 36 17
---- ---
$634 807
==== ===
</TABLE>
F-10
<PAGE>
SONIC SOLUTIONS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1997, 1998 and 1999
(3) FIXED ASSETS
Fixed assets consist of (in thousands):
<TABLE>
<CAPTION>
March 31,
--------------
1998 1999
------ ------
<S> <C> <C>
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
====== ======
</TABLE>
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):
<TABLE>
<CAPTION>
March 31,
--------------
1998 1999
------ ------
<S> <C> <C>
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
====== ======
</TABLE>
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):
<TABLE>
<CAPTION>
March 31,
------------
1998 1999
------ -----
<S> <C> <C>
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
====== =====
</TABLE>
F-11
<PAGE>
SONIC SOLUTIONS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1997, 1998 and 1999
(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
F-12
<PAGE>
SONIC SOLUTIONS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1997, 1998 and 1999
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, 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.
F-13
<PAGE>
SONIC SOLUTIONS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1997, 1998 and 1999
A summary of Sonic Solutions' option plans is presented below:
<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
--------------------------------- -------------------------------
Number Weighted Average Number
Outstanding at Remaining Weighted Average Outstanding at Weighted Average
Range of 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
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>
F-14
<PAGE>
SONIC SOLUTIONS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1997, 1998 and 1999
(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
------ ------ ------
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.
F-15
<PAGE>
SONIC SOLUTIONS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1997, 1998 and 1999
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):
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------
Capital Operating
Leases Leases
---------- -----------
<S> <C> <C>
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)
Less current portion of obligations under
capital lease............................. (148)
----------
Long-term obligations under capital lease.. $ 89
==========
</TABLE>
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.
F-16
<PAGE>
SONIC SOLUTIONS
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 1997, 1998 and 1999
(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.
Our accounting system does not capture meaningful revenue information by
product line. Accordingly, such information has not been disclosed.
F-17
<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.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee $ 2,422
Accounting Fees 20,000
Legal Fees and Disbursements 50,000
Miscellaneous 20,000
-------
Total: $92,422
</TABLE>
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(1) Stock purchase agreement between Sonic Solutions and Kingsbridge Capital Limited dated as of May
20, 1999
4.2(1) Registration Rights Agreement between Sonic Solutions and Kingsbridge Capital Limited dated as of
May 20, 1999
5 (1) Opinion of Heller Ehrman White & McAuliffe
23.1(1) Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5)
23.2 Consent of KPMG LLP
24 (1) Power of Attorney (See Page II-4)
27 (1) Financial Data Schedule
</TABLE>
B. Financial Statement Schedules
Valuation and Qualifying Accounts
(1) Previously filed as an Exhibit to this Registration Statement.
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 Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in Novato, State of California, on the 11th day of
August, 1999.
Sonic Solutions
By: /s/ Robert J. Doris
--------------------------
Robert J. Doris, President
iii
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<S> <C>
August 11, 1999 /s/ Robert J. Doris
-------------------------------------------------
President and Director
Robert J. Doris
August 11, 1999 Mary C. Sauer *
-------------------------------------------------
Senior Vice President of Business Development and
Director Mary C. Sauer
August 11, 1999 Michael C. Child *
-------------------------------------------------
Director
Michael C. Child
August 11, 1999 Robert M. Greber *
-------------------------------------------------
Director
Robert M. Greber
August 11, 1999 Peter J. Marguglio *
-------------------------------------------------
Director
Peter J. Marguglio
August 11, 1999 A. Clay Leighton *
-------------------------------------------------
Senior Vice President of Worldwide Operations and
Finance and Chief Financial Officer (Principal
Financial Accounting Officer)
A. Clay Leighton
August 11, 1999 /s/ Rober J. Doris
-------------------------------------------------
* Rober J. Doris
(Attorney-in-fact)
</TABLE>
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 (1) Stock purchase agreement between Sonic Solutions and Kingsbridge Capital Limited
dated as of May 20, 1999
4.2 (1) Registration Rights Agreement between Sonic Solutions and Kingsbridge Capital
Limited dated as of May 20, 1999
5 (1) Opinion of Heller Ehrman White & McAuliffe
23.1 (1) Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5)
23.2 Consent of KPMG LLP
24 (1) Power of Attorney (See Page II-4)
27 (1) Financial Data Schedule
</TABLE>
(1) Previously filed as an Exhibit to this Registration Statement.
<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.
/S/ KPMG LLP
San Francisco, California
August 11, 1999
