<PAGE>
As filed with the Securities and Exchange Commission on July 19, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SONIC SOLUTIONS
(Exact Name of Sonic Solutions as Specified in Its Charter)
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<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.[_]
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
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====================================================================================================================
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
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<S> <C> <C> <C> <C>
Common Stock, no par value 2,500,000 $4.03125 $10,078,125 $2,661.00
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====================================================================================================================
</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 July 18, 2000, as reported in The Wall Street
Journal.
________________________
Sonic Solutions hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until Sonic Solutions
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
PRELIMINARY PROSPECTUS - SUBJECT TO COMPLETION. DATED JULY 19, 2000
SONIC SOLUTIONS
2,500,000 Shares
Common Stock
This prospectus may be used only for the resale of up to 2,500,000 shares
of common stock by Kingsbridge Capital. See "Selling Security Holder."
Kingsbridge may acquire these shares from us pursuant to the private equity line
agreement which we executed with Kingsbridge on May 4, 2000. 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 private equity agreement, however, we will receive the
proceeds from the sale of the shares to Kingsbridge in an aggregate total amount
of up to $20,000,000. 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 July 13, 2000, the closing price for our common stock, as reported
on the Nasdaq National Market, was $4.0938 per share.
Beginning on page 2, we have listed several "RISK FACTORS" which you should
consider. You should read the entire prospectus carefully before you make your
investment decision.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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 our common stock only in jurisdictions where offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or of any sale of the shares.
The date of this Prospectus is July 19, 2000.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
----
<S> <C>
SUMMARY INFORMATION.................................................................... 1
RISK FACTORS........................................................................... 2
USE OF PROCEEDS........................................................................ 6
THE EQUITY LINE AGREEMENT.............................................................. 6
SELLING SECURITY HOLDER................................................................ 8
PLAN OF DISTRIBUTION................................................................... 8
THE BUSINESS........................................................................... 9
COMPANY OPERATIONS..................................................................... 23
PROPERTIES............................................................................. 27
MARKET FOR SONIC SOLUTIONS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............. 28
SELECTED FINANCIAL DATA................................................................ 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................................. 30
MANAGEMENT............................................................................. 35
EXECUTIVE COMPENSATION................................................................. 37
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES..... 39
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................... 40
DESCRIPTION OF CAPITAL STOCK........................................................... 41
LEGAL MATTERS.......................................................................... 42
EXPERTS................................................................................ 42
INDEX TO FINANCIAL STATEMENTS.......................................................... F-1
INDEPENDENT AUDITORS' REPORT........................................................... F-2
</TABLE>
ii
<PAGE>
______________________
SUMMARY INFORMATION
Sonic Solutions
We develop workstations used by professionals to edit and process digital
audio and digital video information.
We market workstations to professional customers. Our workstation 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 (CDs),
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. In September 1999, we
began shipments of DVD Fusion(TM). DVD Fusion, which is a part of our DVD
Creator product line provides video producers and editors a comprehensive set of
tools for encoding, authoring and proofing DVD-Video titles derived from
projects created on non-linear video editing systems such as those provided by
Avid Technology and Media 100.
In the past year, we have started supplying software products outside of
our traditional professional audio/video market. In September 1999, we began
shipping DVDit! DVDit! is a DVD-Video authoring software product which provides
simplified DVD authoring capabilities to consumer, "prosumer," and certain
professional users. We currently are offering three versions of DVDit! -
DVDit!-SE ("Standard Edition") and DVDit!-LE ("Limited Edition") and DVDit!-PE
("Professional Edition").
The Offering
We and Kingsbridge entered into a private equity agreement on May 4, 2000.
Pursuant to that agreement, we are entitled to sell from time to time up to
$20,000,000 of common stock to Kingsbridge. In no event, however, can we sell
any shares in an amount in excess of 19.9% of our outstanding common stock. The
agreement also requires us to file a registration statement covering the resale
of the shares sold to Kingsbridge. This prospectus is part of that registration
statement.
<TABLE>
<S> <C>
Common Stock offered by Kingsbridge................... Up to 2,500,000 shares of Common Stock
Offering Price........................................ Determined at the time of resale by Kingsbridge.
Common Stock outstanding as of March 31, 2000......... 12,050,214 shares.
Use of Proceeds....................................... We will not receive any of the proceeds from sales
by Kingsbridge pursuant to this prospectus. Any
proceeds from the sale of shares by us to
Kingsbridge will be used for general corporate
purposes.
Nasdaq National Market Symbol......................... SNIC
</TABLE>
1
<PAGE>
Summary Consolidated Financial Information
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(in thousands, except share amounts)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net revenue.................................... $13,944 15,911 19,881 21,899 20,827
Gross profit................................... 6,600 8,479 9,672 12,352 11,835
Operating loss................................. (4,902) (5,095) (5,225) (1,557) (5,542)
Net loss....................................... $(3,557) (5,191) (5,876) (1,859) (5,694)
Basic loss per share........................... $ (0.48) (0.69) (0.76) (0.21) (0.56)
Weighted average shares used in computing per
share amounts................................. 7,447 7,542 7,761 8,896 10,460
Diluted loss per share......................... $ (0.48) (0.69) (0.76) (0.21) (0.56)
Weighted average shares used in computing per
share amounts................................. 7,447 7,542 7,761 8,896 10,460
BALANCE SHEET DATA:
Working capital................................ $ 8,384 6,263 1,164 1,167 4,976
Total assets................................... $16,107 15,889 12,630 13,765 14,968
Preferred stock................................ -- -- 1,500 956 506
Shareholders' equity........................... $12,912 8,430 5,418 5,932 8,750
</TABLE>
RISK FACTORS
Purchasing our 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 our shares
will decline in value in the future. For at least some period of time in the
future our 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 each of the past five years and we may not be
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profitable in the future. We were unprofitable during each of the last five
------------------------
fiscal years. For example, in fiscal year 1999, we had a net loss of $1,859,000
and in fiscal year 2000 we had a net loss of $5,694,000. We were unprofitable
during each quarter of the 1998 fiscal year, the first three quarters of the
1999 fiscal year and during each quarter of the 2000 fiscal year. We may not be
profitable at any time in the future. Our lack of profitability could cause our
share price to decline. The other risks identified below could also cause the
value of our shares to decline. We cannot, however, estimate the likelihood
that our shares will decline in value or the amount by which they may decline.
2
<PAGE>
During the last three years we had negative operating cash flows and
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expect this to continue. We might need additional financing in order to
-----------------------
continue to operate. During the last three fiscal years we had a negative
operating cash flow of $1,412,000, $124,000 and $2,628,000 for the fiscal years
ended March 31, 1998, 1999 and 2000, respectively. This means that without
access to outside capital we would have had to cease or significantly curtail
operations. We believe that we may continue to run a negative operating cash
flow for the foreseeable future, and might continue to need to obtain additional
financing to continue to operate. If we are unable to obtain such financing,
then we may have to cease or significantly curtail operations.
Our prior stock purchase agreement with Kingsbridge Capital Limited
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has been exhausted prior to the date of this prospectus and is unavailable to us
--------------------------------------------------------------------------------
to help meet our future cash needs. In May 1999, we entered into an agreement
----------------------------------
with Kingsbridge Capital Limited which allowed us to sell up to a total of
1,800,000 shares of stock to Kingsbridge from time to time. As of the date of
this prospectus, we had sold the maximum amount of 1,800,000 shares to
Kingsbridge and the agreement was terminated on March 14, 2000. The prior
agreement with Kingsbridge is therefore unavailable to meet our needs.
If new digital formats are unsuccessful, it is unlikely that we will
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generate sufficient revenues to recover our development cost. Our business
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involves new digital audio and video formats, such as DVD-Video and DVD-Audio.
If these formats prove to be unsuccessful or are not accepted for any reason,
there will be only limited demand for our products.
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 costs to redesign our products to handle these
changes. We cannot estimate the amount of these costs or the likelihood that we
will have to redesign our products.
Our reliance on outsourcing and single suppliers makes us vulnerable
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to supplier operational problems. Our outsourcing program commits
--------------------------------
responsibility for almost all of our manufacturing activities to a single
supplier. In addition, we often use components that are only available from a
single source. Reliance on a single supplier for manufacturing or for certain
manufacturing components makes us vulnerable to operating or financial problems
encountered by those suppliers.
If we fail to protect our products' intellectual property rights, such
----------------------------------------------------------------------
as trade secrets, we may not be able to market our products successfully. Our
------------------------------------------------------------------------
products are based in large part on proprietary technology. 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. In addition, we make extensive use of trade secrets that we may
not be able to protect. To the extent we are unable to protect our proprietary
rights, competitors may enter the market offering products identical to ours,
with a negative impact on sales of our products.
Other companies' intellectual property rights may prevent our current
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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 owned by third parties that relate to our
products. If so, we could incur substantial costs defending against patent
infringement claims or we could 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.
3
<PAGE>
Our products are designed to adhere to industry standards, such as
DVD-ROM, DVD-Video, DVD-Audio and MPEG video. A number of companies and
organizations hold various patents that claim to cover various aspects of DVD
and MPEG technology. We have entered into license agreements with certain
companies relative to some of these technologies. For instance, we have entered
into license agreements with Dolby Licensing Corporation covering Dolby Digital
Audio and Meridian Lossless Packing. Such license agreements may not be
sufficient to grant all of the intellectual property rights to us necessary to
market our produts..
Regarding claims for patent infringement, some of the purchase and
license agreements we have with our customers allocate responsibility to our
customers for satisfying any such claims, while some of our customer purchase
and license agreements allocate such responsibility to us. Regardless of the
provisions of our customer purchase and license agreements, third parties could
pursue us claiming that our products infringe various patents. Patent
infringement litigation is likely to be time consuming and costly. If any such
litigation resulted in an unfavorable outcome for us, we could be subject to
substantial damage claims and a requirement that we obtain a royalty or license
agreement to continue using the technology in issue. Such royalty or license
agreements might not be available to us on acceptable terms resulting in serious
harm to our business. In this regard a group of companies have formed an
organization called MPEG-LA to enforce the rights of certain holders of certain
patents covering aspects of MPEG-2 video technology. We have been asked by MPEG-
LA to enter into a license agreement with them. We have not entered into such an
agreement with MPEG-LA, though we are continuing to evaluate the situation.
Because a majority of our professional products operate only on
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Macintosh computers, the potential success of our products is tied to success of
--------------------------------------------------------------------------------
this platform. All of our current products, except DVDit!, and many of our
-------------
future products are likely to 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 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.
In April 2000 Apple Computer announced the acquisition of the DVD
authoring business of Astarte Gmbh. Prior to the acquisition Astarte sold a DVD
authoring system that competed primarily with our DVD Fusion product. At this
point it is unclear what Apple plans to do with the assets acquired from
Astarte. However Apple has significantly greater financial resources than we do
and if Apple decides to develop and sell DVD authoring products, this could have
a significant negative impact on our sales.
4
<PAGE>
Some of our competitors possess greater technological and financial
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resources than we do. There is a substantial risk that competing companies will
--------------------
produce better or more cost-effective products, or will be equipped to promote
them more effectively.
We have little ability to reduce expenses to compensate for reduced
-------------------------------------------------------------------
sales. We tend to close the greatest number of sales in the last month or last
-----
weeks of a quarter and we generally do not know until quite late in a quarter
whether our sales expectations for the quarter will be met. Because most of our
quarterly operating expenses and our inventory purchasing is committed prior to
quarter end, we have little ability to reduce expenses to compensate for reduced
sales.
Approximately 11% of our revenue derives from sales to a single
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company and another 10% was derived from sales to a large distributor. During
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the last two fiscal years, 1999 and 2000, approximately 11% of our revenue was
derived from sales of audio processing subsystems to Discreet Logic. During
fiscal year 2000, an additional 10% of our revenue was derived from sales to our
Japanese dealer, Sanshin Electronics Company. A decrease or interruption in
either Discreet Logic's or Sanshin's business or their demand for our products
would cause a significant decrease in our revenue.
A significant portion of our revenue derives from sales made to
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foreign customers located primarily in Europe and Japan. Revenue derived from
-------------------------------------------------------
these customers accounted for approximately 47% of our revenues in fiscal year
2000. These foreign customers expose us to the following risks, among others:
. 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.
Additional sales of stock to Kingsbridge will dilute the relative
-----------------------------------------------------------------
ownership of existing common stockholders and could result in lower market price
--------------------------------------------------------------------------------
for our stock. Under the private equity line agreement with Kingsbridge, we
-------------
have the right to sell common stock to Kingsbridge in an amount up to 19.9% of
our outstanding common stock over the two year period beginning on the date the
registration statement of which this prospectus forms a part becomes effective.
As a result, our net income or loss per share could be significantly affected in
future periods causing a reduction in the market price of our common stock.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and
other documents with the Commission. You may read and copy any document we file
at the Commission'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 Commission also maintains
an internet site at http://www.sec.gov where information regarding issuers,
including Sonic Solutions, may be found. Such reports, proxy statements and
other information can also be inspected at the Commission's regional offices at
7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison,
Chicago, Illinois 60661, and at the offices of the Nasdaq Stock Market at 9513
Key West Avenue, Rockville, Maryland 20850-3389.
This prospectus is part of a registration statement that we filed with
the Commission.The registration statement contains more information than this
prospectus regarding Sonic Solutions and its common stock, including additional
exhibits and schedules. You can get a copy of the registration statement from
the Commission at the address listed above or from its internet site.
5
<PAGE>
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.
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.
USE OF PROCEEDS
We 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
. payment of product development costs.
THE EQUITY LINE AGREEMENT
On May 4, 2000, we entered into a private equity line agreement with the
selling security holder, Kingsbridge. This agreement authorized us to issue and
sell from time to time up to an aggregate of $20,000,000 of our common stock to
Kingsbridge. In no event, however, are we authorized to sell stock in excess of
19.9% of our outstanding common stock.
We may start selling stock to Kingsbridge under the agreement on the date
the SEC declares the registration statement, which includes this prospectus,
effective. We may at our discretion continue to sell stock from time to time
for the following 24-month period.
For purposes of a stock sale under the private equity line agreement we
compute the "Current Average Market Price" of our common stock by taking the
average of the lowest trading prices of our common stock reported on the Nasdaq
National Market System over a five day period. This period begins two trading
days before, and end two trading days after the day on which we notify
Kingsbridge of our intention to sell common stock to them.
The price at which we may sell shares to Kingsbridge is:
. 88% of the then Current Average Market Price of our common stock if
that price is $5.00 or less;
. 90% of the Current Average Market Price if that price is greater
than $5.00 but less than $9.00;
. 91% of the Current Average Market Price if that price is equal to
or greater than $9.00 but less than $13.00; and
6
<PAGE>
. 92% of the Current Average Market Price if that price is equal to
or greater than $13.00.
Certain conditions, none of which are within the control of Kingsbridge,
must be satisfied before we can sell shares of common stock, and before
Kingsbridge becomes obligated to purchase shares. These conditions include, but
are not limited to, the following:
. The registration statement, which includes this prospectus, must
have been declared effective by the SEC;
. Our representations and warranties to Kingsbridge set forth in the
private equity agreement must be accurate as of the date of each
sale;
. No statute, rule, regulation, executive order, decree, ruling or
injunction is in effect that prohibits or directly and adversely
affects any of the transactions contemplated by the private equity
agreement;
. No material adverse change in our business, operations, properties,
prospects or financial condition since the date we filed our most
recent report with the SEC pursuant to the Exchange Act of 1934 has
occurred.
. Our common stock has not 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 sell, does not exceed 9.9% of the
total amount of our common stock that would be outstanding upon
completion of the sale;
. At least 15 trading days must have elapsed since the date of the
last notice of sale if the sale is for $650,000 or less, and at
least 20 days must have elapsed if the sale is for more than
$650,000.
. The average trading volume of our common stock for a 15-day period
must be at least 10,000 shares per day.
The maximum value of shares we may sell at any one time is as follows:
. $150,000 if the Current Average Market Price of our stock is less
than $3.00;
. $500,000 if the average daily volume of shares of common stock
traded during the preceding 10 trading days is 40,000 shares or
less;
. $750,000 if the average daily volume of shares of common stock
traded during the preceding 10 trading days is greater than 40,000
shares and less than 60,000 shares; and
. $1,000,000 if the average daily volume of shares of common stock
traded during the preceding 10 trading days is equal to or greater
than 60,000 shares.
We may not be able to satisfy all conditions required under the private
equity agreement. Therefore, we may not be able to sell any shares to
Kingsbridge.
As required by the private equity line agreement, we have filed a
registration statement, which includes this prospectus, in order to permit
Kingsbridge to resell any common stock it buys pursuant to the private equity
line agreement. We will prepare and file amendments and supplements to the
registration statement as may be necessary until Kingsbridge no longer holds any
common stock acquired under the private equity agreement or until Kingsbridge
can resell the common stock without a registration statement. As explained in
the "Plan of Distribution," we have agreed to bear certain expenses, excluding
broker discounts and commissions, if any, in connection with the registration
statement.
7
<PAGE>
SELLING SECURITY HOLDER
The following table sets forth certain information regarding beneficial
ownership of our common stock by Kingsbridge as of May 31, 2000. The number of
shares beneficially owned by Kingsbridge prior to the offering is less than one
percent of our 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, a stock
purchase agreement with Sonic Solutions dated May 20, 1999 and a private equity
line agreement with Sonic Solutions dated May 4, 2000.
<TABLE>
<CAPTION>
Common Stock Common Common Stock
Beneficially Owned Stock Beneficially Owned
Prior to Offering to be After Offering
------------------------- --------------------------
Number Percent sold Number Percent
---------- ---------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Kingsbridge Capital Ltd...... 62,850 * 2,500,000 -- --
Dawson Building
Main Street
Road Town
Tortola, BVI
Total:.................. 62,850 * 2,500,000 -- --
</TABLE>
* Less than one percent
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 participate in the distribution may under certain circumstances
also be deemed to be "underwriters" within the meaning of the Securities Act,
and any commissions received by such broker-dealers and any profits realized on
the resale of shares by them may be deemed to be underwriting discounts and
commissions under the Securities Act. We have agreed to indemnify Kingsbridge
with respect to the shares offered hereby against certain liabilities,
including, without limitation, certain liabilities under the Securities Act, or,
if such indemnity is unavailable, to contribute toward amounts required to be
paid in respect of such liabilities.
Any broker-dealer participating in such transactions as agent may receive
commissions from Kingsbridge (and, if they act as agent for the purchaser of
such shares, from such purchaser). Broker-dealers may agree with Kingsbridge to
sell a specified number of shares at a stipulated price per share, and, to the
extent such a broker-dealer is unable to do so acting as agent for Kingsbridge,
to purchase as principal any unsold shares at the price required to fulfill the
broker-dealer commitment to Kingsbridge. Broker-dealers who acquire shares as
principal may thereafter resell such shares from time to time in transactions
(which may involve crosses and block transactions and which may involve sales to
and through other broker-dealers,
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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. 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 our common stock 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
our shares of common stock by the selling security holder.
Kingsbridge will pay all commissions, transfer taxes, and certain other
expenses associated with the sale of securities by them. The shares offered
hereby are being registered pursuant to contractual obligations and we have paid
the expenses of the preparation of this prospectus.
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 us to Kingsbridge
will be 88% of the average market price on the date we issue shares if the
average market price is equal to or less than $5.00; 90% of the average market
price on the date we issue shares if the average market price is greater than
$5.00 and less than $9.00; 91% of the average market price if the average market
price is $9.00 or greater and less than $13; and, 92% of the average market
price if the average market price is $13 or greater. Assuming an aggregate put
amount of $1,000,000 and an average market price of $5.00 or less, underwriting
compensation to Kingsbridge would equal $120,000.
THE BUSINESS
Overview
We develop software and workstations used to edit and process digital audio
and digital video.
We market workstations to professional customers. Our workstation products
are computer based, and usually include both plug-in hardware and application
software installed on a personal computer. Our customers use various kinds of
peripheral devices -- for example, disk drives, streaming tape drives, and
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audio and video tape recorders -- along with our products. Although we do not
manufacture or sell the personal computers or peripheral devices used with our
products, we typically refer to the complete configuration of personal computer,
Sonic hardware, Sonic software, and peripherals as a Sonic workstation.
We currently market two workstation product lines: SonicStudio(TM) and DVD
Creator(TM). SonicStudio is a line of professional audio workstations that our
customers use to prepare audio for release on Digital Audio Compact Discs
(CD's), for release with video and film entertainment, and for broadcast on
radio. DVD Creator is a line of DVD-Video/Audio production workstations which
supports the preparation and assembly of video and audio assets for release on
the new DVD-Video disc format and the upcoming DVD-Audio disc format. In
September 1999, we began shipments of DVD Fusion(TM). DVD Fusion, which is a
part of our DVD Creator product line provides video producers and editors a
comprehensive set of tools for encoding, authoring and proofing DVD-Video titles
derived from projects created on non-linear video editing systems such as those
provided by Avid Technology and Media 100.
In the past year, we have started supplying software products outside of
our traditional professional audio/video market. In September 1999, we began
shipments of the first version of DVDit! DVDit! is a DVD-Video authoring
software product which provides simplified DVD authoring capabilities to
consumer, "prosumer," and certain professional users. We currently offer three
versions of DVDit! -- DVDit!-SE ("Standard Edition"), DVDit!-LE ("Limited
Edition") and DVDit!-PE ("Professional Edition").
Professional Video and Audio Industry
Customers
Our professional customers are mainly facilities that process and prepare
audio, video and film programming. Most of this programming is for
entertainment, though a significant portion of it is also used for educational
and business communications purposes.
Some of our professional customers are independent organizations that
supply services to audio and video content holders and publishers. Some of our
customers are in-house facilities that are owned by particular content holders
or publishers.
Our customers range in size from relatively small organizations with few
employees to larger facilities with hundreds of employees. Among our customers
are facilities that are independent, privately owned companies, as well as
facilities which are part of much larger public, private, or non-profit
organizations. While we have entered into corporate purchasing agreements with
certain customer organizations that have multiple facilities, decisions even
within such organizations to purchase and deploy our products are usually made
at the facility level.
Most of the time we market our products as Sonic Solutions products, and
not as part of another company's products. From time to time we have concluded
agreements with other companies in which they incorporate some product of ours
into their product line (this is commonly referred to as an "OEM" arrangement).
At the present time there is one such relationship which accounts for a
significant portion of our professional audio revenues. Please see further
discussion about this below under "OEM Customers; Sales Concentration."
The Shift to Digital
The professional audio and video industry has shifted significantly from
analog to digital technology over the past twenty years. Digital technology
encodes sound and video as numbers and stores them as a kind of computer data.
In contrast, analog technology records sound and video by making a physical
representation analogous to the original audio or visual signal. Long-playing
records ("LP") and Digital Audio Compact Discs ("CD-A"), are good examples of
analog (LP's) and digital (CD-A's) media. In an LP the grooves cut
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into the vinyl record have a physical shape analogous to the original sound
pressure wave. In a CD-A the original sound pressure wave is encoded into
numbers that are recorded as tiny pits on the surface of an optical disc.
The shift to digital encompasses the tools used to edit, process and
prepare audio and video prior to release, as well as audio and video release
formats -- the form in which the audio or video actually reaches the intended
consumer. Different applications and segments within the professional audio and
video industry have shifted to digital technology at different times. Complete
conversion to digital technology has not yet occurred. We expect that the shift
will continue for the next several years until some point in the first decade of
the 21/st/ century when analog technology will effectively cease being used in
the professional audio and video industries.
There are a number of reasons why digital technology has been attractive to
audio and video professionals:
. Higher Quality -- Digital technology permits higher quality audio
and video to be recorded and replayed under most circumstances.
Of course, this assumes that the recordings involved are made at
a high resolution.
. 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 an 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 consumes large amounts 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
three 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.
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. Analog Release Formats -- In many ways release formats have been
the slowest areas to shift to digital. Even today almost all
video programs reaching consumers arrive via analog formats (VCR
cassettes, conventional broadcast television, and conventional
cable television). The Digital Audio Compact Disc, of course, now
accounts for the majority of pre-recorded music sold to consumers
in industrialized countries. But most broadcast radio, as well as
the audio accompanying broadcast video, theatrical feature films,
and pre-recorded video, is still delivered mostly using analog
formats. Slow transition of release formats to digital technology
has tended to retard adoption of digital technology by
professionals for "upstream" processes such as editing.
Our company was founded to pursue the opportunities presented by this major
transition, and to facilitate the transition by offering professionals
compelling alternatives to traditional analog production tools.
Professional Workstation 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.
Current reliance on the Macintosh computer creates risks for our Company.
SonicStudio
A SonicStudio digital audio workstation consists of:
1. one or more of our audio signal processing cards installed on a
Macintosh personal computer;
2. one or more outboard interface boxes (which contain various
styles of professional interface connections used to link the
workstation to other audio devices in the studio); and,
3. extensive applications software.
Applications for SonicStudio
Our customers use their SonicStudio systems to manipulate audio, applying a
number of processes to digital sound to prepare it for final release. Some of
these processes are quite specialized and technical. To give you a sense of the
capabilities of our workstations, here are some of the tasks typically performed
using SonicStudio workstations:
. Editing -- SonicStudio permits very precise and elegant editing
of sound. Editing is the process by which pieces of sound are
combined to create a single resulting sound in such a way that
the existence of the original individual pieces is imperceptible
to the listener. Editing is used extensively in professional
audio work. For example, movie sound tracks are heavily edited to
include sound effects and replacement dialog (virtually none of
the sound effects or dialog you hear in the theater was actually
recorded when the picture was being shot). Another example:
classical music recordings are in most cases the result of
intensive editing of multiple performances of the same program
(our classical music editing customers tell us that an edit every
six seconds on average is not uncommon).
. EQ -- SonicStudio can be used to equalize ("EQ") the sound, a
process by which certain frequencies are emphasized or de-
emphasized. EQ is similar in concept to manipulating
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the bass and treble controls on a consumer audio system, but with
much greater precision and sophistication.
. Mixing -- SonicStudio can be used to mix or combine together two
sound recordings into one. Mixing is often used in professional
audio work because it is more convenient to record individual
elements at different times and under different conditions. The
individual elements or tracks are combined or mixed together to
produce the resulting sound used in release.
. 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.
SonicStudio Customers
We have supplied SonicStudio workstations to many professional audio
facilities around the world. As of March 31, 2000, more than 4,000 SonicStudio
systems had been shipped to customers since the product was first introduced in
1990.
SonicStudio 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 $12,000 for a fully-featured SonicStudio system
configured for multi-track editing and mixing. One of our new SonicStudio
HD(TM) Systems, configured for multi-track high resolution audio editing, and
OneClick(TM) DVD-Audio authoring software would be priced at approximately
$50,000. Please remember that we do not include the cost of the personal
computer or peripheral devices in our illustrative pricing. Remember also that
revenue as we report it on our financial statements is usually based on the net
price we receive from dealers, and is thus lower on average per system than
indicated by these illustrative prices, which are based on end user list prices.
Competition
We encounter competition from a number of companies when selling
SonicStudio. We compete with companies offering:
. traditional analog production tools,
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. digital audio recording tools,
. digital audio processing devices, and
. digital audio workstations.
The key elements of competition include:
. product features,
. cost effectiveness,
. product quality,
. customer support,
. marketing and sales.
Many of our competitors have greater financial, technical and marketing
resources than we do. Traditional professional audio competitors, such as Japan
Victor Corporation (JVC), Otari Corp., Sony Corporation and Studer AG (a
division of Harmon Industries), sell analog as well as digital systems. A
number of competitors supply digital audio workstations including Digidesign (a
division of Avid Technology), Fairlight, Studio Audio and Design, Ltd. (Sadie),
WaveFrame, Dalet, Augan and others. Our products compete also with various kinds
of single function digital audio processing devices. For example, noise
reduction modules from Cambridge Audio Research compete with the NoNOISE option
for SonicStudio.
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
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specialized hardware to ensure a fast, professional level of
system response, and to avoid processing bottlenecks in handling
bulky audio and video files.
. Efficiency Features - We designed SonicStudio to increase
operator efficiency. For example, every system allows background
loading of sound to the hard disks while the audio professional
works on other material already loaded on the hard disk. The re-
design of our applications software to support the new HDSP
involved a year-long effort and a number of customer focus groups
where we carefully analyzed actual customer use patterns to
improve SonicStudio's user interface.
. Modular Software-Based Solutions; Upgrades - We offer a modular
set of software applications including digital equalization,
filtering, dynamics, processing, mixing, dithering, time
compression, pitch shifting, varispeed and reverberation. We
package various features into options which can be added by
customers as they wish and as their business needs dictate. We
have also traditionally offered customers enrolled in our
SonicCare(TM) maintenance program relatively low priced hardware
upgrades when hardware versions change. This economical upgrade
path affords customers a degree of assurance that their
investment in a SonicStudio System will not quickly become
obsolete.
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 simultaneously (and
may also be selected for playback based on real-time user
decisions) -- to support different language dialog tracks, or to
allow stereo and surround versions of the same audio program.
Chapter marks may be specified for random access into the video
program. Subpictures (images overlaid on background video or
still images) may be included and can be used in a number of
ways, for example, to create animated "buttons" to facilitate
user interaction, or to display language subtitles. Still
pictures may be presented with audio and with subpictures.
Extensive navigation capabilities are available to permit users
to select from various program branches, to return to previous
branch points or menus, etc.
DVD-Creator Functions
DVD-Creator supports the three basic processes required to prepare audio
and video programming in the DVD-Video format. These are:
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. MPEG-2 Video Encoding -- MPEG-2 and MPEG-1 video are the
standards for DVD-Video discs. MPEG is a digital video format
that compresses the original digital video stream to reduce
bandwidth and storage requirements by 90 to 95% but with little
or no loss in perceived quality.
. Audio Preparation and Encoding -- DVD-Video supports uncompressed
("PCM") digital audio as well as MPEG-2 and Dolby Digital
compressed formats.
. Format Authoring -- To support the advanced features of DVD-
Video, particularly menu-drive interactivity and multiple video
and audio streams, the audio, video, graphic and text elements
included in the disc must be organized, linked and then "woven"
together.
Products
DVD Creator includes three principal separable subsystems that together
perform all the tasks necessary for producing a finished DVD-Video disc image,
which can then be replicated on manufactured DVD discs. Those are:
. Video Encoding: DVD Studio - The DVD-Video standard specifies
MPEG-2 and MPEG-1 compressed digital video as the video formats
to be used on DVD-Video discs. While a number of choices within
the standard are possible, the typically preferred format is
variable bit rate MPEG-2 operating at an average bit rate of
approximately four 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. We have 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.
. Audio Encoding: DVD Studio Audio - DVD Creator bundles a standard
SonicStudio system, running on the Macintosh, with special
software to perform Dolby Digital and MPEG-2 audio compression
and audition.
. Format Authoring: DVD Producer - DVD Creator's authoring
subsystem is DVD-Producer. The authoring step takes individual
compressed video, audio, graphics, still picture and subpicture
elements and combines and organizes them along with instructions
specifying interactivity (i.e., the response DVD players will
make based on user manipulation of front panel buttons or remote
control buttons). The output of the authoring step is an "asset
list," containing each of the individual elements, and a "script"
describing how the assets are combined and accessed via user
commands. Because of the large number of potential elements in a
DVD title and the high level of interactivity possible, DVD-
Producer is a complicated software package.
In addition to these main subsystems, DVD Creator includes two other
subsystems:
. Emulation: PrePlay - Because of the complexity of a DVD title,
users of DVD Creator require the ability to preview the results
of their edits before the time consuming and expensive step of
producing a final version. We offer a workstation that allows
this previewing.
. Formatting and Writing: Format Server and Imager -- We provide a
separate formatting engine as a standalone application called
Format Server. Format Server takes
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the output of a DVD-Producer authoring session and combines
navigation instructions with audio and video assets to create a
finished disc image. The image can then be played from computer
hard disk, or converted by another standalone application, called
Imager, into a streaming tape based image (the standard way in
which images are transmitted to the replication plant) or
recorded onto a recordable DVD disc.
In September 1999 we introduced a new DVD production system called DVD
Fusion. DVD Fusion is similar to DVD Creator, but somewhat more limited in
capabilities. We intended DVD Fusion to be used in conjunction with
professional video editing systems such as those supplied by Media 100 or Avid.
DVD Creator/Fusion (in the discussion which follows, "DVD Creator" should
be understood to include DVD Fusion as well) is sold in multiple versions for
between $2,999 and $99,999 (again, our prices do 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 $55,000 for their DVD Creator system.
Please remember also that revenue as we report it on our financial statements is
usually based on the net price we receive from dealers, and is thus lower on
average per system than indicated by these illustrative prices, which are based
on end user list prices
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 that the DVD-Video specification was
being finalized, the DVD Forum (the standards-setting industry association for
DVD) formed a working group to develop a DVD-Audio format, intended to be a
sister format to DVD-Video, but to emphasize more audio features.
The DVD-Audio working group spent more than two years developing the new
DVD-Audio specifications in close collaboration with the major record music
companies. The DVD Forum released Version 1.0 of the new DVD-Audio
specification in April 1999. The first commercially released players compatible
with the new format became available in late 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 introduced new releases of DVD-Audio support on a phased release
basis during the balance of 1999 working closely with player manufacturers and
early DVD-Audio content publishers.
The release of DVD-Audio players to the consumer market was delayed until
the middle of 2000 by concerns about copy protection systems, and some late
modifications to the format. The first full-specification DVD-Audio players
will reach market during the summer of 2000 along with the first DVD-Audio
titles. To date, we have detected only limited interest among music recording
companies in DVD-Audio. We plan to continue to monitor interest in this format
among our customers, and to set priorities in our development and marketing
activities accordingly.
Market
We divide the DVD-Creator market into 3 segments:
. "Hollywood" Segment - This segment includes facilities that
prepare film and video material for mass publication on DVD-Video
discs. It includes:
- film and television studios,
- production companies and other content owners, and
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- 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. We estimate that there are a
few thousand facilities and organizations in this segment,
worldwide.
. "Corporate" Segment - Customers in this segment prepare DVD-Video
discs for publishing a variety of kinds of information for sales,
training, and other communications purposes. The segment
includes:
- "in-house" departments of corporate, industrial, non-profit
or educational organizations, and
- independent facilities who specialize in assisting such
organizations in preparing such material.
Customers in this segment are typically somewhat more budget
constrained than customers in the "Hollywood" segment. 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 interactive entertainment or educational 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 in the DVD format. We
estimate that there are approximately 15,000 organizations that
might ultimately become involved in DVD-based production in this
segment.
DVD Creator is sold to professional audio and video facilities, production
studios, as well as CD/DVD plants and corporate customers. As of March 31, 2000
we have shipped more than 1,300 DVD Creator systems (including DVD Fusion
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:
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Astarte (purchased by Apple) Matsushita
C-Cube Microsystems Minerva Networks
Daikin Industries Mitsubishi
Digital Vision Optibase
Dolby Laboratories Philips
FutureTel Pinnacle
Innovacom Sony
Intec Spruce Technologies
Lucent Toshiba
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.
Strategy
We expect that our DVD related business will account for an increasing
portion of our overall business in the future. Our DVD strategy will continue
to be based on the following elements:
. Focus on Professional Applications -- Our DVD product and service
offerings are focused on video and audio professionals whose
primary concern is producing the highest quality DVD discs, in
complete compliance with worldwide standards, with a high level
of efficiency. We will continue to evolve DVD-related
premastering tools which are fully compatible with "industry-
standard" input formats and typical professional video and audio
equipment sets.
. High Performance Tools -- Our DVD tools will offer professional
users the highest levels of performance, both in terms of power
and sophistication of processing, and in terms of maximizing
facility efficiency.
. Flexible Configurations -- Because DVD premastering is relatively
new and still evolving, the balance of capabilities in typical
DVD premastering settings, and the typical workflow involved in
generating a DVD title are still in flux. We have engineered DVD
Creator as a "workgroup" solution incorporating modular audio,
video and authoring subsystems to make it easy for facilities to
re-arrange DVD workflow quickly, and to comply easily with
changing demands in the DVD universe. We plan to continue to
implement this philosophy in future DVD product offerings.
. Range of Product Offerings -- DVD has a number of potential uses,
including applications in corporate and industrial settings, and
in "prosumer" and consumer venues, as well as in delivery of mass
entertainment such as feature films, videos, and recorded music.
We plan to evolve each element of our 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!
In April 1999, we introduced our DVDit! product line. DVDit! is a highly
simplified interactive video authoring tool that can output a DVD image, or can
output the same program in certain other formats. We announced two versions of
DVDit! -- a standard version ("SE") and a more limited version ("LE"). We began
shipping DVDit!-LE in September and DVDit!-SE in December, 1999. DVDit!-LE
carries a suggested retail price of $199; DVDit!-SE carries a suggested retail
price of $499.
19
<PAGE>
In April 2000, we introduced a new addition to the DVDit! product
line--Sonic DVDit! Professional Edition ("PE"). DVDit!-PE increases DVDit!'s
reach with professional functionality previously found only on authoring systems
costing five to ten times as much. DVDit! PE carries a suggested retail price of
$999. Shipments of DVDit! PE began in June 2000.
End User Customers
DVDit! is intended to address the needs of a broad range of customers
who wish to author DVD-Video discs. Among DVDit!'s end user customers are:
. Consumers -- Individuals who use DVDit! to make DVD-Video discs from
home videos and the like for their personal enjoyment. We believe that
this group of customers demands software that is easy to learn, and is
reasonably priced.
. "Prosumers" -- The term "prosumer" describes both video enthusiasts
who make a significant investment of time and money in producing and
preparing amateur videos, and professional and business people who use
video in their work, but for whom video production is not a primary
business activity. Compared to consumers, this customer group tends to
be less price sensitive, and more concerned about a rich feature set,
but is unlikely to have deep knowledge of DVD-Video.
. "Professionals" -- This group of customers resembles very closely the
professional customers we described in discussing DVD Creator.
Trends Favoring DVDit!
We introduced DVDit! to take advantage of the following trends:
. Proliferation of MPEG Video -- Due to certain introductions by
chip and software makers, relatively high quality MPEG encoding
systems are becoming widely available starting in the year 2000
at prices ranging down to a few hundred dollars at retail.
. Availability of Accessible DVD Recording -- Until recently, DVD
recorders were high priced and supported less than a full-sized
4.7 Gigabyte disc. In 2000, we anticipate that more reasonably
priced DVD recorders will start to become available. We believe
that DVD recording devices could eventually be as cheap as
current day CD-R and CD-R/W devices (which currently are
available for under $200 and $300, respectively). Because of the
rapid adoption of DVD, we think that such consumer level pricing
will be reached within a few years rather than the eight or so
years required for CD recorders to fall from more than $10,000 to
under $500.
. Ubiquitous Digital Video -- Relatively high quality digital video
camera/recorders based on the DV format were introduced in the
past three years aimed at professionals as well as consumers.
Prices for consumer DV cameras will begin moving below $1,000 in
2000. Virtually every manufacturer of professional and prosumer
video editing systems is intending to release DV compatible
systems in 2000 as well.
. Rapid Growth in DVD Playback Units -- By the end of 1998,
approximately eight million DVD-Video playback units (including
both set-top players and DVD-equipped multimedia PCs) had been
installed worldwide, according to industry sources. By the end of
1999, this installed base had grown to approximately 30 million
and by the end of 2000 is forecast to have grown to as many as 60
million units.
20
<PAGE>
Distribution for DVDit!
Because DVDit! is aimed at a broader market than our traditional
professional products, we are building a distribution capability for it. There
are three elements to this effort:
1. We are adding dealers and distributors for DVDit!, some of which
already carry some of our professional products, but many of
which do not. In the near term we are targeting dealers and
distributors specializing in digital video applications. In the
longer term we plan to target dealers and distributors who
participate in the broader personal computer marketplace.
2. We are entering into "bundling" arrangements with various other
companies in which copies of DVDit! are included or "bundled"
with shipments of those companies' products. These companies (we
refer to them as "OEM Partners") are motivated to include our
software as a value added offering for their customers. We are
motivated to enter into bundling arrangements because it
generates revenue for us as well as creates a large installed
base of customers to whom we can sell upgraded or enhanced
versions of our products. To facilitate such bundling
arrangements we have designed different versions of DVDit!.
Currently we are shipping three such versions - DVDit! LE
("Limited Edition"); DVDit! SE ("Standard Edition"); and DVDit!
PE ("Professional Edition").
3. We have initiated a web-based retail store for our DVDit!
products. Our web store is intended both to meet retail demand
for our DVDit! products as well as to service upgrade orders for
our products, in particular, the upgrade orders which derive from
our bundle shipments by our OEM partners.
Building distribution for DVDit! will be a time-consuming and expensive
process. Since this is a new kind of product for us, there is significant risk
that our efforts, or at least some of them, will not be successful.
DVDit! OEM Partners
As mentioned above, we have implemented a bundling distribution strategy
for DVDit! Our current OEM partners include:
. Avid Technologies
. Dazzle
. Margi
. Matrox
. Media 100 (including its subsidiaries Terran Interactive and Wired)
. NEC
. Sigma Designs
. Sony
21
<PAGE>
Competition
We have encountered only limited competition to DVDit! since its
introduction. However, we believe that a number of companies will introduce
products that compete directly or in part with DVDit! We believe that Daikin
Industries and Spruce Technologies, among others, are developing and will
introduce products which compete with all or at least some of the products in
the DVDit! product line. In April 2000 Apple Computer announced that they had
agreed to purchase the DVD authoring technology and business of Astarte GmbH,
who had competed with us in the professional market. Apple could choose to
embody the Astarte technology in products which will compete with DVDit!
DVDit! for the Macintosh
Our current versions of DVD it! run on various versions of the Microsoft
Windows operating system. In April 2000, we announced that we plan to develop
versions of DVDit! to run on the Macintosh operating system. We can not
guarantee that we will be able to successfully complete this development or
that, once completed, there will be a market for the Macintosh versions of
DVDit!.
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 addition to those listed above for DVDit!), in which those
companies included our products as part of the their product offerings. At the
present time we have one significant OEM relationship with Discreet Logic
("Discreet"), 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 11% of our total revenues in the fiscal years ended
March 31, 1999, and 2000. Although we consider our relations with Discreet to
be good, we anticipate that at some point in the next two fiscal years, Discreet
may implement changes to its product line replacing or eliminating our
subsystems.
During the fiscal year ended March 31, 2000, sales to our Japanese
distributor, Sanshin Electronics Company ("Sanshin"), amounted to 10% of total
revenues. Sanshin is a distributor of all of our products.
Apart from sales to Discreet and Sanshin, 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 (with the exception of DVDit!-PE)
operate on Macintosh computers marketed by Apple Computer. 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.
22
<PAGE>
COMPANY OPERATIONS
Marketing, Sales and Distribution
Marketing and Product Management
Our marketing organization plans and manages development of our products
and manages promotion of them in the market. We currently have eight employees
in marketing, all based in our headquarters office in Novato, California,
including product marketing managers, and marketing communications and design
professionals.
Field Sales Force
We sell our professional workstation products through our field sales force
in combination with a network of professional audio/video dealers. We currently
employ 19 people in our field sales organization. Sales personnel are based in
our headquarters office in Novato, California as well as at our offices in
London (covering Europe) and in Tokyo (covering the Pacific Rim). We have other
sales personnel based out of home offices in Chicago, Los Angeles, Atlanta,
Minneapolis, Milwaukee, Boston, Taipei 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
compensation is contingent upon performance relative to revenue targets.
Although all members of our sales organization are familiar with all of our
products, some of our sales personnel focus on DVD Creator, some on DVDit!, and
some on SonicStudio.
Dealers
The vast majority of our workstation sales are procured by our dealers.
Dealers play an important role in our sales and support efforts. They stimulate
demand in their regions, they prospect for and qualify potential new customers,
they give product demonstrations, they close sales, and they assist in post-sale
installation, training and support. Dealers very often sell peripheral
equipment along with our products so that customers can obtain a complete
workstation configuration from one source.
We have dealers in most areas of the world. We generally do not grant
contractual exclusivity to our dealers, though as a matter of practice,
depending on the dealer's territory and competence, we may maintain only one
dealer in a particular region.
Recruiting and maintaining dealers can be a difficult process. Because our
products are sophisticated, our dealers need to be technically proficient and
very familiar with professional audio and video production work. Dealer
organizations sometimes have limited financial resources, and may experience
business reversals for reasons unrelated to our product lines. The attractive
dealers in a region may be carrying competing products.
Our dealers are specialized to some extent by product line. Many
SonicStudio dealers do not carry DVD Creator products, and likewise many DVD
Creator dealers do not carry SonicStudio products. DVDit! dealers often do not
carry our professional product lines. Some dealers carry two or all three of
our product lines. The following table shows our current dealer count by
product line and region of the world:
23
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
SonicStudio DVD Creator DVDit! Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Americas 20 40 5 62
------------------------------------------------------------------------------------------------
Europe 15 33 2 41
------------------------------------------------------------------------------------------------
Pacific Rim 4 7 2 11
------------------------------------------------------------------------------------------------
</TABLE>
Please note that the "Total" is less than the sum of columns because one
dealer organization sometimes carries more than one of our product lines.
Employees
At March 31, 2000, we employed 92 full-time-equivalent employees, including
the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
#
Employees Function
---------------------------------------------------------------------
<S> <C>
40 Marketing, Sales and Customer Support
32 Software and Hardware Engineering
9 Manufacturing
11 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 quite tight,
and demand for technology professionals has been very strong. To make matters
worse, our company participates in what is perceived to be a "hot" area of the
"high tech" industry. We have found that recruiting high caliber individuals is
difficult and have had to expend considerable efforts in this area.
No labor unions represent any of our employees. We have never experienced a
work stoppage, slowdown or strike. We believe that our employee relations are
good.
Customer Support
Customer support is important to professional users. This is why we offer
our customers the SonicCare(TM) maintenance program. Customers purchase annual
SonicCare service contracts from us that provide for:
. ongoing software upgrades,
. telephone support,
. "swap" replacement hardware in case of hardware failure, and
. preferential access to new products and new versions of software.
Customers typically add a SonicCare option to their initial system purchase
and a significant portion of customers renew 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.
24
<PAGE>
Research and Development
Our research and development staff includes a total of 32 hardware and
software engineers and technicians and technical specialists. We tend to hire
research and development personnel with backgrounds in digital audio signal
processing, digital video image processing, distributed networking and computer
systems design. Our development team exhibits a number of technology
capabilities including the following that we believe are particularly important
in light of our strategy and market position:
. Digital Signal Processing - This is the term used to describe
the sophisticated mathematical processing by which aural and
visual signals are processed in computer based settings. Our
engineering team includes individuals experienced at providing
sophisticated digital signal processing solutions to meet the
quality and performance requirements of audio and video
professionals.
. Real Time Architectures - Our engineers are experienced in
dealing with the requirements of high bandwidth, real time data
in computer-based settings. We believe that has helped us to
develop products that provide cost effective solutions for
professional applications.
. Craft Familiarity - Our engineers are experienced in the needs
and work patterns of audio, film and video professionals. This
helps us develop products which can be adopted more quickly by
creative audio and video professionals.
Backlog
We schedule our production of products based on our projections of customer
demand, and we generally ship products within a few days of acceptance of a
customer purchase order so at any given time we have little or no order backlog.
With few exceptions, customers may cancel or delay orders with little or no
penalty. Thus, even to the extent that we have backlog, we do not think that it
is a reliable indicator of future revenue levels.
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 three 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 complete, tested assemblies which are then released to
us according to
25
<PAGE>
our instructions. Our current outsourcing arrangement is with Arrow/Bell. 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 2000
fiscal year, we produced approximately 85% of our hardware via outsourcing. We
plan to continue this outsourcing approach.
While we believe that outsourcing is advantageous for Sonic, it makes us
very dependent on a single production source. Financial, operational, or supply
problems encountered by our outsourcing partner or its sub-contractors could
seriously hamper or interrupt our ability to manufacture, sell and ship our
products.
Proprietary Rights
General Approach
We rely on a combination of the following to protect our proprietary rights
in our products:
. patents,
. trade secret law,
. copyright law,
. 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. 5,812,790:
"Variable encoding rate plan generation" covering certain aspects of MPEG-2
Video encoding technology; and U.S. Patent No. 6,047,356: "Method of dynamically
allocating network node memory's partitions for caching distributed files"
covering a distributed file system, 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. Nor 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 by patent holders to respond to
infringement claims. If such patents were held to be valid, and if they covered
a portion of our technology for which there was no ready substitute, we might
suffer significant market and financial losses.
26
<PAGE>
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"), we believe that not all relevant patent holding companies have
joined this entity. We also believe that many companies have refrained from
executing the licenses offered by MPEG/LA even though their products arguably
involve technologies covered by the MPEG/LA patents. We plan to continue to
monitor this area and we hope 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 of
our 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 also 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.
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, 2000, 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, we are exposed to a number of factors that
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.
Properties
Our 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.
We also have sales offices located in London and Tokyo.
27
<PAGE>
MARKET FOR SONIC SOLUTIONS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Nasdaq National Market. As of March 31,
2000 there were approximately 175 registered holders of our common stock. We
believe, however, that many beneficial holders of our 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
our common stock during the last eight quarters and as of July 10, 2000 are as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Low Price High Price
--------- ----------
----------------------------------------------------------------------------------------------------
<S> <C> <C>
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
Quarter ended September 30, 1999........................... $ 2.000 $ 5.000
Quarter ended December 31, 1999............................ $ 1.688 $ 5.313
Quarter ended March 31, 2000............................... $ 3.875 $12.500
Period ended July 10, 2000................................. $4.0000 $ 4.469
----------------------------------------------------------------------------------------------------
</TABLE>
We have not paid any dividends on our Common Stock during the periods set
forth above. It is presently the policy of the Board of Directors to retain
earnings for use in expanding and developing our business. Accordingly, we do
not anticipate paying dividends on the Common Stock in the foreseeable future.
28
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements and related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this registration statement. The selected financial data presented
below under the caption "Statement of Operations Data" and "Balance Sheet Data"
for, and as of the end of, each of the years in the five-year period ended March
31, 2000 are derived from our financial statements, which financial statements
have been audited by KPMG LLP, independent certified public accountants. The
financial statements as of March 31, 2000 and 1999, and for each of the years in
the three-year period ended March 31, 2000, and the report thereon, are included
elsewhere in this document.
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------
1996 1997 1998 1999 2000
------- ------ ------ ------ ------
(in thousands, except share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue.................................... $13,944 15,911 19,881 21,899 20,827
Cost of revenue................................ 7,344 7,432 10,209 9,547 8,992
------- ------ ------ ------ ------
Gross profit................................... 6,600 8,479 9,672 12,352 11,835
Operating expenses:
Marketing and sales........................... 5,873 6,000 7,257 7,216 8,938
Research and development...................... 2,961 5,737 6,037 5,137 6,155
General and administrative.................... 2,668 1,837 1,603 1,556 2,284
------- ------ ------ ------ ------
Total operating expenses....................... 11,502 13,574 14,897 13,909 17,377
------- ------ ------ ------ ------
Operating loss................................. (4,902) (5,095) (5,225) (1,557) (5,542)
Other income (expense)......................... 176 (96) (651) (302) (249)
Provision (benefit) for income taxes........... (1,169) - - - (97)
------- ------ ------ ------ ------
Net loss....................................... $(3,557) (5,191) (5,876) (1,859) (5,694)
======= ====== ====== ====== ======
Basic loss per share........................... $ (0.48) (0.69) (0.76) (0.21) (0.56)
Weighted average shares used in computing per
share amounts................................. 7,447 7,542 7,761 8,896 10,460
Diluted loss per share......................... $ (0.48) (0.69) (0.76) (0.21) (0.56)
Weighted average shares used in computing per
share amounts................................. 7,447 7,542 7,761 8,896 10,460
BALANCE SHEET DATA:
Working capital................................ $ 8,384 6,263 1,164 1,167 4,976
Total assets................................... $16,107 15,889 12,630 13,765 14,968
Shareholders' equity........................... $12,912 8,430 5,418 5,932 8,750
</TABLE>
29
<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.
30
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items from Sonic Solutions'
statements of operations as a percentage of net revenue for fiscal years 1998
through 2000:
<TABLE>
<CAPTION>
Years ended March 31,
-----------------------------------
1998 1999 2000
-----------------------------------
<S> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0%
Cost of revenue 51.4 43.6 43.2
----- ----- -----
Gross profit 48.6 56.4 56.8
Operating expenses:
Marketing and sales 36.5 33.0 42.8
Research and development 30.4 23.5 29.6
General and administrative 8.0 7.0 11.0
----- ----- -----
Total operating expenses 74.9 63.5 83.4
----- ----- -----
Operating loss (26.3) (7.1) (26.6)
Other expense (3.3) (1.4) (1.2)
Provision (benefit) for income taxes --- --- (0.5)
----- ---- -----
Net loss (29.6)% (8.5)% (27.3)%
===== ==== =====
</TABLE>
COMPARISON OF FISCAL YEARS ENDED MARCH 31
Net Revenue. Our net revenue increased from $19,881,000 in fiscal 1998 to
$21,899,000 in fiscal 1999 and decreased to $20,827,000 in fiscal 2000,
representing an increase of 10.2% from fiscal 1998 to fiscal 1999 and a decrease
of 4.9% from fiscal 1999 to fiscal 2000. The increase in fiscal 1999 was
primarily due to increased sales of DVD Creator systems. The decrease in fiscal
2000 was primarily due to the decrease in sales of our audio products which was
partially offset by increases in sales of our DVD systems, including our two
newer products, DVDit! and DVD Fusion.
International sales accounted for 52%, 47% and 47% of our net revenue for
the 1998, 1999, and 2000 fiscal years, respectively. See Note 10 of Notes to
Financial Statements. Our international sales decreased in fiscal 1999 due to
the increased sales of DVD Creator systems in the U.S. markets. Our
international sales remained consistent in fiscal 2000 primarily due to the
continuation of more 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 decreased from 51.4% of net revenue
in fiscal 1998 to 43.6% in fiscal 1999 and decreased to 43.2% in fiscal 2000.
The decrease in cost of revenue in fiscal year 1999 and fiscal year 2000 is
primarily due to a shift in sales product mix towards higher margin DVD Creator
system and DVDit! sales. In general we have been selling less hardware as a
percentage of revenue in our professional systems and our new product DVDit!
includes no hardware.
Marketing and Sales. Our marketing and sales expenses decreased from
$7,257,000 in fiscal 1998 to $7,216,000 in fiscal 1999 and increased to
$8,938,000 in fiscal 2000. Marketing and sales represented 36.5%, 33.0% and
42.8% of net revenue for fiscal 1998, 1999 and 2000, respectively. Our
marketing and sales expenses remained relatively consistent in dollar terms from
fiscal 1998 to fiscal 1999. Our marketing and sales expenses increased in fiscal
2000 primarily due to increases in salary expenses as a result of the increase
in headcount, and increases in advertising and marketing costs related to our
DVDit! and our DVD product lines. Our marketing and sales headcount increased
from thirty-seven at March 31, 1999 to forty at March 31, 2000. Included in our
marketing and sales expenses are dealer and employee commission expenses, which
as a percentage of net revenue decreased from 5.2% in fiscal 1998 to 4.7% in
both fiscal 1999 and fiscal 2000.
31
<PAGE>
Research and Development. Our research and development expenses decreased
from $6,037,000 in fiscal 1998 to $5,137,000 in fiscal 1999 and increased to
$6,155,000 in fiscal 2000. Our research and development expense as a percentage
of net revenue was 30.4% in fiscal 1998, 23.5% in fiscal 1999, and 29.6% in
fiscal 2000. 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 decreased in
fiscal 1999 due to decreases in consulting and prototype expenses associated
with new product introductions. Research and development expenses increased in
fiscal 2000 primarily due to increased headcount from thirty at March 31, 1999
to thirty-two at March 31, 2000 and due to consulting expenses associated with
introductions of new products, including our DVDit! product. 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 $1,603,000 in fiscal 1998 to $1,556,000 in fiscal 1999 and
increased to $2,284,000 in fiscal 2000. These expenses represented 8.0% of net
revenue in fiscal 1998, 7.0% of net revenue in fiscal 1999 and 11.0% of net
revenue in fiscal 2000. Our general and administrative expenses decreased in
fiscal 1999 due to reductions in bad debt and other general expenses. Our
general and administrative expenses increased in fiscal 2000 primarily due to a
charge to bad debt expense of $600,000 which represented an additional reserve
for sales to audio professionals and distributors who are experiencing liquidity
difficulties due to a decline in their business. We anticipate that general and
administrative expenses (exclusive of the bad debt expense) will increase in the
future as costs increase and 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 1998, 1999 and 2000 fiscal
years, we incurred interest and other financing charges related to financing
agreements we had with entities associated with Hambrecht & Quist, as well as
borrowings under our bank credit line.
Provision for Income Taxes. In accordance with Statement of Financial
Accounting Standards No. 109, we made no provision for income taxes for our
1998, 1999 fiscal years. For the 2000 fiscal year a benefit was recorded
(during the quarter ended June 30, 1999) to reflect the refund due us following
the conclusion of an Internal Revenue Service audit. During the 2000 fiscal year
we exhausted our ability to carryback tax losses resulting from operations in
the fiscal year ended March 31, 1996
Liquidity and Capital Resources. In December, 1996 we entered into a Loan
and Security Agreement with Silicon Valley Bank. This agreement, which we
sometimes refer to as our "bank credit line", has been modified or renewed at
various times since December 1996. The current bank credit line (renewed in
September, 1999) provides for up to $2,500,000 in available borrowings based
upon our eligible accounts receivable balances. The current bank credit line
will expire on September 28, 2000. 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 of one and one quarter percent in excess of the prime
rate. On March 31, 2000 there were no borrowings outstanding under this
agreement. 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
32
<PAGE>
& 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 fair 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 Series C Convertible Preferred Stock (see
note 7 of Notes to Financial Statements) and $1,500,000 of debt. The interest
rate on such restructured debt was 7.25% and was 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 was 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 years ended March 31, 1999 and March 31, 2000,
167,500 and 292,000 shares of the Preferred Stock were converted into common
stock pursuant to this financing arrangement.
In October 1999, we renegotiated our financing arrangement with Hambrecht &
Quist Guaranty Finance. The agreement we reached involved the restructuring of
$1,500,000 debt into 153,846 shares of Series C Convertible Preferred Stock and
$1,000,000 of debt. The interest rate on the restructured debt is 7.25% and the
debt and interest are payable in monthly installments through April 30, 2001. In
connection with this agreement, we issued warrants to purchase 120,000 common
shares at an exercise price of $2.50. These warrants expire on April 30, 2006.
We also enhanced the conversion rate of Hambrecht and Quist's existing Series C
Convertible Preferred Stock so that each share of Series C Convertible Preferred
Stock is convertible into 1.625 shares of Common Stock. The beneficial
conversion feature, warrants and new debt were recorded at their relative fair
values. We recorded $345,000 of deferred financing costs attributable to this
finance restructuring with Hambrecht & Quist Guaranty. This amount is being
amortized using the effective interest rate method to interest expense over the
term of the financing facility (18 months). The fair value of the warrants was
estimated using the Black-Scholes option pricing model and the following
assumptions: volatility of .50, risk free interest rate of 6% and expected life
equal to the contractual terms. We filed a Form S-3 Registration Statement under
the Securities Act of 1933 to register the shares of the common stock which
underlie the Series C Convertible Preferred Stock and the 120,000 shares of our
common stock which underlie the warrants issued to Hambrecht & Quist Guaranty
Finance.
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 common stock. Pricing of the common stock issued was based
on the market price of our common stock at the time of a draw subject to a 14%
discount and a 4% commission payable in common stock. The availability of the
credit line, and the amounts and timing of draws under the line were subject to
a number of conditions. In January, 1998, we filed a Form S-3 Registration
Statement under the Securities Act of 1933 to register the resale of shares
issued under this credit line. During the fiscal year ended March 31, 1998, we
drew $1,450,000 from this credit line for which we issued 618,130 shares of
common stock. During the fiscal year ended March 31, 1999, we drew an
additional $2,358,000 from this credit line for which we issued 903,870 shares
of common stock. This facility is no longer available to us.
On May 20, 1999, we secured a new equity-based line of credit by entering
into a new stock purchase agreement with Kingsbridge. Under this arrangement,
we were able to draw up to $12,000,000 in cash
33
<PAGE>
in exchange for common stock. Pricing of the common stock issued under this
arrangement was based on the market price of our common stock at the time of a
draw, discounted by 10% or 12%, depending upon the price of our common stock.
The availability of the credit line, and the amounts and timing of draws under
the line were subject to a number of conditions. On May 27, 1999, we filed a
Registration Statement on Form S-1 to register for resale the shares we may
issue to Kingsbridge under this credit line and on August 12, 1999 the Statement
became effective. During the fiscal year ended March 31, 2000, we drew
$7,408,000 from the credit line for which we issued 1,800,000 shares of common
stock. Because of limitations on the total number of shares that could be issued
under this line of credit, this facility is no longer available to us and was
terminated on March 14, 2000.
On May 4, 2000, we secured a new equity-based line of credit by entering
into a new stock purchase agreement with Kingsbridge. Under the new agreement,
we may draw up to $20,000,000 in cash in exchange for common stock. Pricing of
the common stock issued under this agreement is based on the market price of our
common stock at the time of a draw subject to discounts ranging from 8% to 12%.
This Registration Statement on Form S-1 will register for resale the shares we
may issue to Kingsbridge under this credit line. The availability of the credit
line, and the amounts and timing of draws under the lines are subject to a
number of conditions, including the effectiveness of this S-1 Registration
Statement.
Our operating activities have used cash of $1,412,000 in fiscal year 1998,
$124,000 in fiscal year 1999 and $2,628,000 in fiscal year 2000. 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, and the receipt of income tax refunds in
certain fiscal years. In addition to our operating losses, we utilized cash
during the 1998, 1999, and 2000 fiscal years to purchase new fixed assets, pay
down debt obligations and to develop and purchase software that was added to
capitalized software.
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 and 2000 fiscal years we augmented cash on
hand primarily by drawing on the equity credit lines described above.
We believe that existing cash, cash equivalents and short term investments,
available credit and cash generated from operations, plus cash available through
the new equity based line of credit with Kingsbridge (when and if it becomes
available-see discussion above) will be sufficient to meet our cash requirements
at least through the end of fiscal year 2001.
As of March 31, 2000, we had cash and cash equivalents of $5,179,000 and
working capital of $4,976,000.
Impact of Year 2000 Issue. We have not experienced any major system
failures or disruptions as a result of the Year 2000 issue. In addition, we did
not incur significant incremental costs to become Year 2000 compliant.
Forward Looking Statements. Certain statements in this Prospectus,
including statements contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations", constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward looking statements involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements 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
our ability to develop and market products for the markets in which we operate,
to successfully integrate our acquired products and services, to adjust to
changes in technology, customer preferences, enhanced competition and new
competitors in the markets in which we operate.
Quantitative and Qualitative Disclosures about Market Risk. We do not have
material exposure to quantitative and qualitative market risks because we do not
own any risk sensitive financial instruments.
34
<PAGE>
MANAGEMENT
Our directors and executive officers and their ages as of March 31, 2000
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------ --- -------------------------------------------------------------
<S> <C> <C>
Robert J. Doris 47 President (Chief Executive Officer) and Director
Mary C. Sauer 47 Senior Vice President of Business Development and Director
A. Clay Leighton 43 Senior Vice President Worldwide Operations, Finance and Chief
Financial Officer
Christopher A. Kryzan 40 Senior Vice President of Engineering and Marketing
Robert M. Greber 61 Director
Peter J. Marguglio 52 Director
</TABLE>
Mr. Doris is married to Ms. Sauer. There are no other family relationships
between any director or executive officer of Sonic Solutions.
ROBERT J. DORIS. Mr. Doris founded Sonic Solutions in 1986 and has served
as President and Director of Sonic Solutions since that time. Prior to 1986 he
was President of The Droid Works, a subsidiary of Lucasfilm Ltd., which produced
computer-based video and digital audio systems for the film and television post-
production and music recording industries. Prior to founding The Droid Works,
Mr. Doris was a Vice President of Lucasfilm and General Manager of the Lucasfilm
Computer Division. Mr. Doris received B.A., J.D. and M.B.A. degrees from
Harvard University. Mr. Doris is married to Ms. Sauer.
MARY C. SAUER. Ms. Sauer founded Sonic Solutions in 1986 and has served as
a Vice President and Director of Sonic Solutions since that time. Ms. Sauer
became Senior Vice President of Marketing and Sales in February 1993. Prior to
1986, Ms. Sauer was Vice President of Marketing for The Droid Works and prior to
joining The Droid Works, Ms. Sauer was Director of Marketing for the Lucasfilm
Computer Division. Ms. Sauer received an M.B.A. in Finance and Marketing from
the Wharton School of the University of Pennsylvania and a B.F.A. from
Washington University in St. Louis. Ms. Sauer is married to Mr. Doris.
A. CLAY LEIGHTON. Mr. Leighton joined Sonic Solutions in February 1993 as
Vice President of Finance. In January, 1999, Mr. Leighton was named Senior Vice
President of Worldwide Operations and Finance and Chief Financial Officer.
Prior to joining Sonic, from January 1990 to July 1992 he was Vice President,
Finance and CFO for RESNA Industries Inc., an environmental services firm, and
from August 1988 to December 1989 he was Vice President, Finance and CFO for
Command Data Systems, a software company specializing in software for the public
safety market. Mr. Leighton has also worked as strategy consultant for the
Boston Consulting Group. Mr. Leighton received a B.A. from Wesleyan University
and an M.B.A. from the Amos Tuck School of Business Administration at Dartmouth
College.
CHRISTOPHER A. KRYZAN. Mr. Kryzan joined Sonic Solutions in March 1996 as
Vice President of Marketing. In January, 1999, Mr. Kryzan was named Senior Vice
President of Marketing and Engineering. Prior to joining Sonic, from May 1994
through February 1996, he was an independent consultant specializing in Internet
business and marketing strategy development. 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 National
Sales Manager of
35
<PAGE>
Amdek, a subsidiary of Wyse. Mr. Kryzan received a B.S. in
Electrical Engineering from Northwestern University and an M.B.A. from Santa
Clara University.
Robert M. Greber. Mr. Greber has served as a director of the Company since
August 1993. Mr. Greber served as president and Chief Operating Officer of The
Pacific Stock Exchange since July 1990 and in January 1996 he was elected
Chairman and Chief Executive Officer. Prior to joining The Pacific Stock
Exchange, he was from 1985 to 1987 President and Chief Executive Officer of
Diagnostic Networks, Inc., a network of Magnetic Resonance Imaging Centers which
was merged into NMR America in 1987. Prior to DNI, Mr. Greber was President and
Chief Executive Officer of Lucasfilm Ltd. from 1981 to 1985 where, among other
duties, he oversaw development of digital technologies for video, film, audio,
and special effects and video games applications. Before joining Lucasfilm, Mr.
Greber was associated with the firm of Merrill Lynch where he was Vice President
and Manager of the Los Angeles Institutional Office. Mr. Greber holds a B.S. in
Finance from Temple University. Mr. Greber also serves on the Board of Bay View
Capital Corp.
Peter J. Marguglio. Mr. Marguglio has served as a Director of the Company
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.
36
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation for the fiscal years
ended March 31, 2000, 1999 and 1998 for the Chief Executive Officer and each of
the three other most highly compensated executive officers of Sonic Solutions
who served as executive officers at fiscal year end and who received salary and
bonuses of $100,000 or more. None of the named executive officers earned any
bonuses or compensation for these fiscal years other than as set forth in the
table or received any restricted stock awards, stock appreciation rights or
long-term incentive plan payouts.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
FISCAL YEAR -------------------------- COMPENSATION
NAME AND PRINCIPAL POSITION ENDED MARCH 31, SALARY ($) BONUS ($) OPTIONS (#)
------------------------------------------ --------------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
Robert J. Doris 2000 $221,250 $ 0 85,000
President (Chief Executive Officer) 1999 $138,750 $ 0 85,000
and Director 1998 $180,000 $ 0 175,000 (1)(5)
Mary C. Sauer 2000 $112,675 $ 0 40,000
Senior Vice President, 1999 $111,000 $ 0 40,000
Business Development, 1998 $146,250 $ 0 112,000 (2)(5)
Secretary and Director
Christopher A. Kryzan 2000 $185,500 $45,031 25,000
Senior Vice President, 1999 $175,000 $32,300 40,000
Engineering and Marketing 1998 $161,550 $29,584 100,000 (3)(5)
A. Clay Leighton 2000 $176,250 $15,000 65,000
Senior Vice President Worldwide Operations 1999 $112,920 $15,000 25,000
Finance and Chief Financial Officer 1998 $130,625 $20,000 155,000 (4)(5)
</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 (5) below regarding the repricing of options.
(2) Of these options, 40,000 represent new options granted to replace the same
number of canceled options previously granted in fiscal year 1998 with
higher exercise prices. See (5) below regarding the repricing of options.
(3) Of these options, 20,000 represent new options granted to replace the same
number of canceled options previously granted in fiscal year 1998 with
higher exercise prices and 80,000 options represent new options granted to
replace canceled options shown as granted in fiscal year 1996 with higher
exercise prices. See (5) below regarding the repricing of options.
(4) 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 (5)
below regarding the repricing of options.
(5) 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
37
<PAGE>
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 our success 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 our product development.
The following table sets forth certain information regarding grants of
stock options made during the fiscal year ended March 31, 2000 to the executive
officers named in the Summary Compensation Table. Since inception, we have not
granted any stock appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE AT
NUMBER OF TOTAL OPTIONS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OR OPTION TERM (3)
OPTIONS FISCAL BASE PRICE EXPIRATION -----------------------------
NAME GRANTED (#) YEAR ($/SH)(1) DATE(2) 5% 10%
-------------------- ----------- ------------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Doris 85,000 11% $2.656 09/09/09 $141,979 $359,803
Mary C. Sauer 40,000 5% $2.656 09/09/09 $ 66,814 $169,319
Christopher A. Kryzan 25,000 3% $2.750 08/20/09 $ 43,237 $109,570
A. Clay Leighton 40,000 5% $2.656 09/09/09 $ 66,814 $169,319
25,000 3% $2.750 08/20/09 $ 43,237 $109,570
</TABLE>
______________________
(1) The exercise price is equal to the fair market value of our Common Stock on
the date of grant, as determined by reference to the closing price of our
Common Stock on the Nasdaq National Market.
(2) These options are subject to earlier expiration in the event of the
officer's termination of employment with us.
(3) Potential realizable value is based on an assumption that the fair market
value of the stock on the date of grant appreciates at the stated rate,
compounded annually, from the date of grant until the end of the option
term. These values are calculated based on requirements promulgated by the
Securities and Exchange Commission and do not reflect our estimate of
future stock price appreciation.
38
<PAGE>
The following table sets forth information regarding the number and value
of options exercised during the fiscal year ended March 31, 2000 and of
unexercised options held by the named executive officers on March 31, 2000.
Value is considered to be the difference between exercise price and the closing
price of $9.250 per share of the Common Stock as quoted on the Nasdaq National
Market on March 31, 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTION AT VALUE OF IN-THE-MONEY
SHARES ACQUIRED ON AGGREGATE VALUE FISCAL YEAR END AT FISCAL YEAR END
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE(1)
--------- --- --- ------------- ---------------
<S> <C> <C> <C> <C>
Robert J. Doris 0 0 316,666/28,334 $2,186,738/186,834
Mary C. Sauer 0 0 178,666/13,334 $ 1,227,316/87,924
Christopher A. Kryzan 0 0 140,833/45,166 $ 955,352/178,378
A. Clay Leighton 40,000 377,500 169,250/58,750 $1,186,453/389,151
</TABLE>
__________________
(1) These values have not been, and may not be, realized, and are based on the
positive spread between the respective exercise prices of the outstanding
stock options and the closing price of our Common Stock at March 31, 2000
($9.250).
We did not make any awards during the fiscal year ended March 31, 2000
to any of our 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 our directors may not
exceed 140,000 shares. The plan provides for issuing both incentive stock
options, which must be granted at fair market value at the date of grant, and
nonqualified stock options, which must be granted at not less than 85% of fair
market value of the stock. All options to date have been granted as incentive
stock options. Options under the plan generally vest over four years from the
date of grant. The options generally expire ten years from the date of grant and
are canceled three months after termination of employment. The Board of
Directors and/or the President administer the plan.
During 1995, we adopted the 1994 NonEmployee Directors Stock Option
Plan which provides for the grant of stock options to our nonemployee directors.
Under this plan, stock options are granted annually at the fair market value of
our 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
39
<PAGE>
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.
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, 2000 (i) by each person
who is known by us to own beneficially more than five percent of the Common
Stock, (ii) by each of our directors, (iii) by each of Sonic Solutions'
executive officers named in the Summary Compensation Table under the caption
"Executive Compensation" below, and (iv) by all directors and executive officers
as a group.
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
OF SHARES OF SHARES
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OWNED(1) OWNED(1)
----------------------------------------------------------- ------------ ------------
<S> <C> <C>
Hambrecht & Quist Guaranty Finance, LLC 7,722 *
One Bush Street
San Francisco, CA 94104
Kingsbridge Capital Ltd. 129,450 1.0%
Dawson Building
Main Street
Road Town
Tortola, BVI
Robert J. Doris (2) 1,545,889 12.8%
Mary C. Sauer(3) 772,994 6.4%
Peter J. Marguglio(4) 216,672 1.8%
Robert M. Greber(5) 292 *
Christopher A. Kryzan(6) 140,833 1.2%
A. Clay Leighton(7) 171,917 1.4%
All directors and executive officers as a group (11 persons) 3,043,794 25.3%
</TABLE>
--------
*Less than one percent.
(1) This table is based upon information supplied by directors, officers and
principal shareholders. Applicable percentage ownership for each
shareholder is based on 12,050,214 shares of Common Stock outstanding as of
March 31, 2000, together with applicable options for such shareholders.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities, subject to the community
property laws where applicable. Shares of Common Stock subject to options
are deemed outstanding for the purpose of computing the percentage
ownership of the person holding such options, but are not treated as
outstanding for computing the percentage ownership of any other person.
(2) Includes 1,229,223 shares owned by Mr. Doris, and 316,666 shares issuable
upon exercise of options which will be exercisable within 60 days of March
31, 2000.
(3) Includes 594,328 shares owned by Ms. Sauer, 178,666 shares issuable upon
exercise of options which will be exercisable within 60 days of March 31,
2000.
40
<PAGE>
(4) Includes 208,443 shares owned by Mr. Marguglio, and 8,229 shares issuable
upon exercise of options which will be exercisable within 60 days of March
31, 2000.
(5) All shares issuable upon exercise of options which will be exercisable
within 60 days of March 31, 2000, all of which were granted pursuant to
Sonic Solutions Nonemployee Director Stock Option Plan.
(6) All shares issuable upon exercise of options which will be exercisable
within 60 days of March 31, 2000.
(7) Includes 38,500 shares owned by Mr. Leighton and 133,417 shares issuable
upon exercise of options which will be exercisable within 60 days of March
31, 2000.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that our directors, executive
officers and persons who own more than ten percent of a registered class
of our securities ("10% shareholders") to file with the Commission and the
National Association of Securities Dealers, Inc. reports of ownership on
Form 3 and reports on change in ownership on Form 4 or Form 5. Such
directors, executive officers and 10% shareholders are also required by
the Commission's rules to furnish us with copies of all Section 16(a)
forms that they file. To our knowledge based solely on a review of copies
of forms submitted to us, or written representations from certain
reporting persons we believe that none of the required reports were filed
on a timely basis during 1999, as Robert J. Doris, Mary C. Sauer, A. Clay
Leighton, Christopher Kryzan, Robert Greber and Peter Marguglio each
failed to file a Form 5 in a timely manner.
DESCRIPTION OF CAPITAL STOCK
As of the date of this Prospectus, the authorized capital stock of
Sonic Solutions consists of 30,000,000 shares of Common Stock, no par value
("Common Stock"), and 10,000,000 shares of Preferred Stock, no par value
("Preferred Stock") .
Common Stock
As of March 31, 2000, there were 12,050,214 shares of Common Stock
outstanding held of record by approximately 175 registered stockholders. We
believe 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 our business, 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 Sonic Solutions 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.
41
<PAGE>
This could have the effect of decreasing the market price of the Common Stock.
In October 1999, we issued 153,846 shares of Series C Convertible Preferred
Stock to Hambrecht & Quist Guaranty Finance in return for restructuring the debt
owed to them. During fiscal year end March 31, 2000, Hambrecht & Quist Guaranty
Finance converted 292,340 shares of Preferred Stock into Common Stock. During
June 2000, Hambrecht & Quist Guaranty Finance converted all their remaining
shares of Preferred Stock (155,544 shares) into Common Stock. We have no present
plans to issue any additional shares of Preferred Stock.
Warrants
In connection with the receipt by Sonic Solutions of a financing facility
in December 1996, we issued warrants to purchase 130,100 shares of Common Stock
at an exercise price of $7.00 per share (the "$7 Warrants") and warrants to
purchase 130,100 shares of Common Stock at an exercise price of $10.00 per share
(the "$10 Warrants"). The warrants may be exercised at any time on or before
December 24, 2003. In December 1997, all of the $7 Warrants were exercised. In
March 1998, in connection with renegotiation of the terms of the financing
facility, the exercise price of 90,000 of the $10 Warrants was reduced to $3.25.
In October 1999, in connection with the Hambrect & Quist restructuring of debt
discussed above, we issued warrant to purchase 120,000 shares of Common Stock at
$2.50 per share.
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, 1999 and 2000 and for each of the years in the three year period ended
March 31, 2000 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.
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent auditors report........................................................... F-2
Balance Sheets as of March 31, 1999 and 2000.......................................... F-3
Statements of Operations for the years ended March 31, 1998, 1999 and 2000............ F-4
Statements of Shareholders' Equity for the years ended March 31, 1998, 1999 and 2000.. F-5
Statements of Cash Flows for the years ended March 31, 1998, 1999 and 2000............ F-6
Notes to Financial Statements......................................................... 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, 1999 and 2000, and the related statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended March
31, 2000 and the related financial statement schedule. These financial
statements and financial statement schedule are the responsibility of Sonic
Solutions' management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 1999 and 2000 and the results of its operations and its cash flows for each
of the years in the three-year period ended March 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the related 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.
/s/ KPMG LLP
San Francisco, California
April 28, 2000, except as to note 11 which is as of May 4, 2000
F-2
<PAGE>
FINANCIAL STATEMENTS
SONIC SOLUTIONS
BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31
---------------------------
1999 2000
--------- -------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................................... $ 2,414 5,179
Accounts receivable, net of allowance for returns and doubtful accounts of
$599 and $930 at March 31, 1999 and 2000, respectively...................... 5,403 4,635
Inventory................................................................... 807 945
Prepaid expenses and other current assets................................... 287 425
-------- -------
Total current assets........................................................ 8,911 11,184
Fixed assets, net............................................................. 2,313 1,515
Purchased and internally developed software costs, net........................ 2,385 1,876
Other assets.................................................................. 156 393
-------- -------
Total assets................................................................ $ 13,765 14,968
======== =======
Liabilities And Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities.................................... $ 4,359 4,306
Bank note payable........................................................... 500 ---
Deferred revenue and deposits............................................... 1,318 1,224
Subordinated debt, current portion.......................................... 1,419 600
Current portion of obligations under capital leases......................... 148 78
-------- -------
Total current liabilities................................................... 7,744 6,208
Obligations under capital leases, net of current portion...................... 89 10
-------- -------
Total liabilities........................................................... 7,833 6,218
Commitments and contingencies
Shareholders' Equity
Convertible preferred stock, no par value, 10,000,000 shares authorized:
294,038 and 155,544 shares issued and outstanding at March 31, 1999, and
2000, respectively.......................................................... 956 506
Common stock, no par value, 30,000,000 shares authorized; 9,468,123 and
12,050,214 shares issued and outstanding at March 31, 1999 and 2000,
respectively................................................................ 18,121 27,083
Accumulated deficit.......................................................... (13,145) (18,839)
-------- -------
Total shareholders' equity................................................. 5,932 8,750
-------- -------
Total liabilities and shareholders' equity................................. $ 13,765 14,968
======== =======
</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,
------------------------------------
1998 1999 2000
------- ----------- ------------
<S> <C> <C> <C>
Net revenue............................................................. $19,881 21,899 20,827
Cost of revenue......................................................... 10,209 9,547 8,992
------- ----------- ------------
Gross profit............................................................ 9,672 12,352 11,835
------- ----------- ------------
Operating expenses:
Marketing and sales.................................................... 7,257 7,216 8,938
Research and development............................................... 6,037 5,137 6,155
General and administrative............................................. 1,603 1,556 2,284
------- ----------- ------------
Total operating expenses............................................... 14,897 13,909 17,377
------- ----------- ------------
Operating loss......................................................... (5,225) (1,557) (5,542)
Other expense, net...................................................... (651) (302) (249)
------- ----------- ------------
Loss before income taxes............................................... (5,876) (1,859) (5,791)
Provision (benefit) for income taxes.................................... --- --- (97)
------- ----------- ------------
Net loss............................................................... (5,876) (1,859) (5,694)
Beneficial conversion feature given to preferred shareholders.......... --- --- 110
Dividends paid to preferred shareholders............................... --- 53 49
------- ----------- ------------
Net loss applicable to common shareholders............................. $(5,876) (1,912) (5,853)
======= =========== ============
Basic and diluted loss per share applicable to common shareholders..... $ (0.76) (0.21) (0.56)
======= =========== ============
Weighted average shares used in computing per share amounts............ 7,761 8,896 10,460
======= =========== ============
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
SONIC SOLUTIONS
STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Preferred stock Common stock
--------------- ------------ Total
Accumulated Shareholders'
Shares Amount Shares Amount deficit Equity
------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
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 of $197..................... --- --- 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 of $75...................... --- --- 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
Exercise of common stock options.............. --- --- 298 773 --- 773
Equity line of credit issuances, net of
issuance costs of $363..................... --- --- 1,800 7,053 --- 7,053
Issuance of preferred stock................... 154 500 --- --- --- 500
Conversion of preferred stock................. (292) (950) 464 950 --- ---
Preferred stock dividends..................... --- --- --- (49) --- (49)
Return to preferred stock shareholders as a
result of beneficial conversion feature.... --- --- --- (110) --- (110)
Preferred stock beneficial conversion
feature.................................... --- --- --- 110 --- 110
Issuance of warrants.......................... --- --- --- 235 --- 235
Exercise of warrants.......................... --- --- 20 --- --- ---
Net loss...................................... --- --- --- --- (5,694) (5,694)
---- ------ ------ ------ ------- ------
Balances at March 31, 2000..................... 156 $ 506 12,050 27,083 (18,839) 8,750
==== ====== ====== ====== ======= ======
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
SONIC SOLUTIONS
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------------------
1998 1999 2000
------------ --------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,876) (1,859) (5,694)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 2,255 2,621 2,958
Provision for returns and doubtful accounts, net of write-offs 29 (18) 331
Interest expense amortization 482 60 ---
Changes in operating assets and liabilities:
Accounts receivable (122) (2,187) 437
Inventory 641 (173) (138)
Refundable income taxes 450 148 ---
Prepaid expenses and other current assets 254 30 (138)
Other assets (200) (72) (237)
Accounts payable and accrued liabilities 344 1,044 (53)
Deferred revenue and deposits 331 282 (94)
------- ------ -------
Net cash used in operating activities (1,412) (124) (2,628)
------- ------ -------
Cash flows from investing activities:
Purchase of fixed assets (787) (913) (850)
Additions to purchased and internally developed software (1,849) (696) (801)
------- ------ ------
Net cash used in investing activities (2,636) (1,609) (1,651)
------- ------ -------
Cash flows from financing activities:
Proceeds from exercise of common stock options 84 143 773
Repayments of subordinated debt (55) (568) (84)
Proceeds from equity line financing 1,253 2,283 7,053
Borrowings on line of credit 500 420 422
Repayments of line of credit --- (420) (922)
Principal payments on capital leases (88) (137) (149)
Payment of dividends --- (53) (49)
Issuance of warrants 27 --- ---
------- ------ -------
Net cash provided by financing activities 1,721 1,668 7,044
------- ------ -------
Net increase (decrease) in cash and cash equivalents (2,327) (65) 2,765
Cash and cash equivalents, beginning of year 4,806 2,479 2,414
------- ------ -------
Cash and cash equivalents, end of year $ 2,479 2,414 5,179
======= ====== =======
Supplemental disclosure of cash flow information:
Interest paid during year $ 265 71 109
======= ====== =======
Income taxes paid during year $ 13 9 4
======= ====== =======
Noncash financing and investing activities:
Assets acquired through capital lease $ 221 --- ---
======= ====== =======
Conversion of preferred stock to common stock $ --- 544 956
======= ====== =======
Conversion of subordinated debt to preferred stock $ 1,500 --- 500
======= ====== =======
Issuance of warrants associated with conversion of
subordinated debt $ --- --- 235
======= ====== =======
Beneficial conversion feature given to preferred
shareholders $ --- --- 110
======= ====== =======
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
SONIC SOLUTIONS
NOTES TO FINANCIAL STATEMENTS
March 31, 1998, 1999 and 2000
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(a) Operations
We develop workstations used by professionals to edit and process digital
audio and digital video. Our products are computer based, and usually include
both plug-in hardware and applications software installed on a personal
computer. Our customers use various kinds of peripheral devices -- for example,
disk drives, streaming tape drives, and audio and video tape recorders -- along
with our products. Although we do not manufacture or sell the personal 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.
During the fiscal year ended March 31, 2000, we introduced and began
shipments of two new products: DVDit!(TM) and DVD Fusion(TM). DVD it! is an
authoring application which provides simplified DVD authoring capabilities to
consumer, "prosumer," and some professional users. DVD Fusion, which is a part
of our DVD Creator product line, provides video producers and editors a
comprehensive set of tools for encoding, authoring and proofing DVD-Video titles
derived from projects created on non-linear video editing systems.
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. We purchase these sole-source components pursuant to purchase
orders placed from time to time. We do not carry significant inventories of
these components, and 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.
F-7
<PAGE>
(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.
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.
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.
F-8
<PAGE>
(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.
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, 1998, 1999 and 2000 (in
thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------------
1998 1999 2000
-------------- -------------- -----------
<S> <C> <C> <C>
Net loss......................................................... $(5,876) (1,859) (5,694)
Beneficial conversion feature given to preferred shareholders.... -- -- 110
Dividends paid to preferred shareholders......................... -- 53 49
------- ------ ------
Net loss applicable to common shareholders....................... $(5,876) (1,912) (5,853)
======= ====== ======
Weighted average number of common shares outstanding............ 7,761 8,896 10,460
======= ====== ======
Basic and diluted net loss per share applicable to common
shareholders.....................................................
$ (0.76) (0.21) (0.56)
======= ====== ======
</TABLE>
As of March 31, 1998, 1999 and 2000 potentially dilutive shares totaling
2,060,166; 1,834,502; and 1,253,947, 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 (APB) 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
F-9
<PAGE>
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, 2000 and
1999.
(m) Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
as amended by SFAS No. 137, "Accounting for Derivative instruments and hedging
activities". We are required to adopt SFAS No. 133 in the first quarter of
fiscal year 2002. We do not anticipate that SFAS No. 133 will have a material
impact on our financial statements.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements", as amended by SAB 101A, which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue recognition policies.
We do not expect the adoption of SAB 101 to have a material effect on our
financial position or results of operations.
In March 2000, the Emerging Issues Task Force (EITF) Issue No. 00-2,
"Accounting for Web Site Development Costs", which outlines the accounting
criteria for costs related to the development of web sites. We will be required
to adopt EITF Issue No. 00-2 in fiscal quarters beginning after June 30, 2000.
We are in the process of assessing any impact that the adoption of EITF Issue
No. 00-2 will have on our financial position or results of operations.
In March 2000, the EITF published their consensus on EITF Issue No. 00-3,
"Application of AICPA Statement of Position 97-2, Software Revenue Recognition
to Arrangements that Include the Right to Use Software Stored on Another
Entity's Hardware". EITF Issue No. 00-3 outlines the accounting criteria for
hosting arrangements. We do not expect the adoption of EITF Issue No. 00-3 to
have a material effect on our financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting For Certain Transactions involving Stock
Compensation". FASB Interpretation No. 44 clarifies the application of APB
Opinion No. 25 for certain issues. The FASB Interpretation No. 44 is effective
July 1, 2000. We are in the process of assessing any impact that the adoption
of FASB Interpretation No. 44 will have on our financial statements.
(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 company's 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, 1998, 1999 and 2000, net income and
comprehensive income were equivalent. Accordingly, the adoption of SFAS No. 130
had no impact on our financial reporting.
F-10
<PAGE>
(2) INVENTORY
The components of inventory consist of (in thousands):
<TABLE>
<CAPTION>
March 31,
---------------------------
1999 2000
----------- ---------
<S> <C> <C>
Finished Goods $ 603 387
Work-in-process 187 75
Raw materials 17 483
----- ----
$ 807 945
===== ====
</TABLE>
(3) FIXED ASSETS
Fixed assets consist of (in thousands):
<TABLE>
<CAPTION>
March 31,
---------------------------
1999 2000
----------- --------
<S> <C> <C>
Equipment, furniture and fixtures $ 4,781 5,382
Demonstration equipment 1,733 1,888
Parts used in service, not held for sale 1,401 1,495
------- ------
7,915 8,765
Less accumulated depreciation (5,602) (7,250)
------- ------
$ 2,313 1,515
======= ======
</TABLE>
Depreciation expense was $1,397,000, $1,365,000 and $1,648,000 for the
years ended March 31, 1998, 1999, and 2000, respectively. As of March 31, 2000,
fixed assets held under capital lease totaled $315,000 and accumulated
depreciation on those assets totaled $253,000.
(4) PURCHASED AND INTERNALLY DEVELOPED SOFTWARE COSTS
Capitalized software costs consist of (in thousands):
<TABLE>
<CAPTION>
March 31,
---------------------------
1999 2000
----------- -----------
<S> <C> <C>
Purchased software $ 365 409
Internally developed software 5,278 6,035
------- ------
5,643 6,444
Accumulated amortization (3,258) (4,568)
------- ------
$ 2,385 1,876
======= ======
</TABLE>
F-11
<PAGE>
Amortization of capitalized software costs was $859,000, $1,255,000 and
$1,310,000 for the years ended March 31, 1998, 1999 and 2000, respectively.
(5) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
March 31,
--------------------------
1999 2000
---------- ----------
<S> <C> <C>
Accounts payable $1,988 1,089
Commissions payable 428 653
Accrued compensation and benefits 555 903
Accrued expenses 1,388 1,661
------ -----
$4,359 4,306
====== =====
</TABLE>
(6) CREDIT FACILITIES AND DEBT RESTRUCTURING
In December, 1996, we entered into a Loan and Security Agreement with
Silicon Valley Bank. This Agreement, which we sometimes refer to as our "bank
credit line", has been modified or renewed at various times since December 1996.
The current bank credit line (renewed in September, 1999) provides for up to
$2,500,000 in available borrowings based upon our eligible accounts receivable
balances. The current bank credit line will expire on September 28, 2000. 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 of one
and one quarter percent in excess of the prime rate. On March 31, 2000, there
were no borrowings outstanding under this agreement.
Since December 1996, we have entered into a couple of different financing
arrangements with Hambrecht & Quist Guaranty Finance, including a $5,100,000
financing facility and a $7,000,000 equity-based line of credit. In March 1998,
$3,000,000 of the $5,100,000 financing facility was restructured into $1,500,000
of convertible preferred stock (461,538 shares) and $1,500,000 of debt. The
debt had an interest rate of 7.25% and was due in October 1999. During the year
ended march 31, 2000, 292,000 shares of the convertible preferred stock were
converted to common stock.
In October, 1999, we renegotiated our financing arrangement with Hambrecht
& Quist Guaranty Finance. The agreement we reached involved the restructuring of
$1,500,000 debt into 153,846 shares of Series C Convertible Preferred Stock and
$1,000,000 of debt. The interest rate on the restructured debt is 7.25% and the
debt and interest are payable in monthly installments through April 30, 2001. In
connection with this agreement, we issued warrants to purchase 120,000 common
shares at an exercise price of $2.50. These warrants expire on April 30, 2006.
We also enhanced the conversion rate of Hambrecht & Quist's existing Series C
Convertible Preferred Stock so that each share of Series C Convertible Preferred
Stock is convertible into 1.625 shares of Common Stock. The beneficial
conversion feature, warrants and new debt were recorded at their relative fair
values. We recorded $345,000 of deferred financing costs attributable to this
finance restructuring with Hambrecht & Quist Guaranty. This amount is being
amortized using the effective interest rate method to interest expense over the
term of the financing facility (18 months). The value of the warrants was
estimated using the Black-Scholes option pricing model and the following
assumptions: volatility of .50, risk free interest rate of 6% and expected life
equal to the contractual terms. We filed a Form S-3 Registration Statement under
the Securities Act of 1933 to register the shares of the common stock which
underlie the Series C Convertible Preferred Stock and the 120,000 shares of our
common stock which underlie the warrants issued to Hambrecht & Quist Guaranty
Finance.
F-12
<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 common stock. Pricing of the common stock issued was based
on the market price of our common stock at the time of a draw subject to a 14%
discount and a 4% commission payable in common stock. The availability of the
credit line, and the amounts and timing of draws under the line were subject to
a number of conditions. In January, 1998, we filed a Form S-3 Registration
Statement under the Securities Act of 1933 to register the resale of shares
issued under this credit line. Under this equity-based line of credit, we drew
a total of $3,808,000 and issued 1,522,000 shares of our common stock during
fiscal years 1998 and 1999. This facility is no longer available to us.
On May 20, 1999, we secured an equity-based line of credit by entering into
a new stock purchase agreement with Kingsbridge. Under the arrangement, we were
able to draw up to $12,000,000 in cash in exchange for common stock; provided,
however, that in any event we could not sell more than a total of 1,800,000
shares to Kingsbridge under this arrangement. Pricing of the common stock issued
under this arrangement was based on the market price of our common stock at the
time of a draw, discounted by 10% or 12%, depending upon the price of our common
stock. The availability of the credit line, and the amounts and timing of draws
under the line were subject to a number of conditions. On May 27, 1999, we
filed a Registration Statement on Form S-1 to register for resale the shares we
issued to Kingsbridge under this credit line and on August 12, 1999 the
Statement became effective. During the fiscal year ended March 31, 2000, we
drew $7,408,000 from the credit line for which we issued 1,800,000 shares of
common stock. Because of limitations on the total number of shares that can be
issued under this line of credit, this facility is no longer available to us and
was terminated on March 14, 2000.
(7) SHAREHOLDERS' EQUITY
Convertible Preferred Stock
In October, 1999, we issued 153,846 shares of Series C Convertible
Preferred Stock to Hambrecht & Quist Guaranty Finance in conjunction with our
renegotiated financing arrangement with them. Also, in conjunction with the new
financing arrangement we changed the conversion rate of all of our outstanding
Series C Convertible Preferred Stock so that each share of Series C Convertible
Preferred Stock is convertible into 1.625 shares of Common Stock.
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 Officer 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. There were 22,000 options
outstanding at March 31, 2000, at prices of $2.6560, $2.5625 and $1.6880 per
share, of which 8,020 were exercisable.
F-13
<PAGE>
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-14
<PAGE>
A summary of Sonic Solutions' option plans is presented below:
<TABLE>
<CAPTION>
1998 1999 2000
--------------------------- ------------------------- ------------------------
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 829,699 $5.53 1,660,178 2.89 2,026,333 2.80
Granted 1,925,150 3.76 670,250 3.08 782,300 2.73
Exercised (50,062) 1.70 (64,225) 2.22 (298,208) 2.58
Forfeited (1,044,609) 6.66 (239,870) 4.32 (159,386) 4.94
---------- ----- --------- ---- --------- ----
Outstanding at end of year. 1,660,178 $2.89 2,026,333 2.80 2,351,039 2.67
========== ========= =========
Options exercisable at
year end 640,809 $2.82 1,179,191 2.65 902,506 2.54
Fair value of options granted
during the year $2.22 2.06 1.93
</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, 1998, 1999 and 2000 would have been
increased as indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended
March 31,
---------------------------------------
1998 1999 2000
---------- ------------ -----------
<S> <C> <C> <C> <C>
Net loss As Reported $5,876 1,859 5,694
Pro Forma $6,572 3,640 7,532
Net loss per share As Reported $ 0.76 0.21 0.56
Pro Forma $ 0.85 0.41 0.72
</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 1998, 1999 and 2000; risk-free interest rate of
5.97%, 4.65% and 6.04%, respectively; expected life of 4 years; 91%, 91% and 97%
expected volatility, respectively; 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 2000 and does not consider
compensation costs for stock options granted prior to April 1, 1995.
F-15
<PAGE>
The following table summarizes information about stock options outstanding
at March 31, 2000.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ---------------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Outstanding at Average
Exercise Price March 31, 2000 Contractual Life Exercise Price March 31, 2000 Exercise Price
------------------------ ----------------- ---------------- ---------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
From $1.43 to $1.75 359,527 7.87 $1.66 164,932 $1.64
From $2.00 to $2.91 1,662,678 8.11 2.56 659,346 2.56
From $3.44 to $3.94 219,084 8.85 3.73 51,304 3.69
From $4.18 to $4.75 27,250 8.89 4.64 10,037 4.63
From $5.25 to $5.75 48,500 8.14 5.52 16,887 5.69
From $6.00 to $6.88 34,000 7.00 6.17 - -
--------- ---- ----- ------- -----
2,351.039 8.14 $2.67 902,506 $2.54
========= ==== ===== ======= =====
</TABLE>
(8) INCOME TAXES
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,
-------------------------------------------------
1998 1999 2000
----------- --------- -----------
<S> <C> <C> <C>
Computed tax at statutory rate $(1,998) (630) (1,969)
Tax credits utilized 131 105 137
State taxes, net of federal benefit 3 5 4
Tax exempt interest income (36) (19) --
Current year net operating losses, temporary
differences and credits for which no benefit was
recognized 1,880 520 1,804
IRS tax refund -- -- (99)
Other 20 19 26
------- ---- ------
$ -- -- (97)
======= ==== ======
</TABLE>
The components of deferred taxes are as follows (in thousands):
F-16
<PAGE>
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------
1998 1999 2000
------------ ------------- ----------------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable $ 254 179 585
Inventories 542 123 49
Tax credit carryforwards 1,550 2,086 2,440
Net operating losses 4,103 4,732 6,109
Accrued vacation pay 62 55 101
Commissions 40 1 1
State income taxes 1 52 62
Warranty and other 42 51 37
------- ------ ------
Gross deferred tax assets 6,594 7,279 9,384
------- ------ ------
Valuation allowance (5,343) (6,309) (8,651)
------- ------ ------
Total deferred tax assets, net of valuation allowance 1,251 970 733
Deferred tax liabilities:
Fixed assets (174) (130) (127)
Internally developed software (1,077) (840) (606)
------- ------ ------
Total deferred tax liability (1,251) (970) (733)
------- ------ ------
Net deferred taxes $ - - -
======= ====== ======
</TABLE>
The net change in the valuation allowance for the year ended March 31, 1999
and 2000 was an increase of approximately $966,000 and $2,343,000, respectively.
Management believes that sufficient uncertainty exists regarding the future
realization of certain deferred tax assets and, that a valuation allowance is
required.
As of March 31, 2000, we have cumulative federal and California net
operating losses of approximately $16,483,000 and $7,263,000, respectively,
which can be used to offset future income subject to taxes. The federal tax
loss carryforwards will expire beginning in the year 2012 through 2020. The
California tax loss carryforwards will expire beginning in the year 2001 through
2005.
As of March 31, 2000, we have cumulative unused research and development
tax credits of approximately $1,747,000 and $858,000 which can be used to reduce
future federal and California income taxes, respectively. Federal credit
carryforwards expire from 2009 through 2020; California credits will
carryforward indefinitely.
As of March 31, 2000, 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):
F-17
<PAGE>
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------------
Capital Operating
Leases Leases
------------------ ------------------
<S> <C> <C>
2001 $120 705
2002 20 705
2003 - 117
2004 - -
2005 - -
Thereafter - -
---- -----
Total minimum lease payments 140 1,527
Less amount representing interest (52) =====
Less current portion of obligations under capital lease (78)
----
Long-term obligations under capital lease $ 10
====
</TABLE>
Rent expense under operating leases for the years ended March 31, 1998,
1999 and 2000 was approximately $847,000, $954,000 and $953,000, respectively.
(b) Benefit Plan
We sponsor a 401(k) savings plan covering most salaried employees. To
date, no contributions have been made to this plan by the Company.
(c) Other
We from time to time are subject to routine claims and litigation
incidental to our business. We believe that the results of these matters will
not have a material adverse effect on our financial condition.
(10) SIGNIFICANT CUSTOMER INFORMATION AND SEGMENT REPORTING
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which was
adopted by us in 1998. SFAS No. 131 requires companies to report financial and
descriptive information about its reportable operating segments, including
segment profit or loss, certain specific revenue and expense items and segment
assets, as well as information about the revenues derived from our products and
services, the countries in which we earn revenue and hold assets, and major
customers. The method for determining what information to report is based on
the way that management organized the operating segments within our company for
making operating decisions and assessing financial performance.
Our chief operating decision maker is considered to be our Chief Executive
Officer ("CEO"). The CEO reviews financial information presented on a
consolidated basis accompanied by desegregated information about revenue by
product line and revenue by geographic region for purposes of making operating
decisions and assessing financial performance. The consolidated financial
information reviewed by the CEO is identical to the information presented in the
accompanying statement of operations. Therefore, we operate in, and measure our
results in a single operating segment. As such, we are required to disclose the
following revenue by product line, revenue by geographic and significant
customer information:
F-18
<PAGE>
Revenues by Product Line:
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------------------------
1998 1999 2000
-------------- --------------- ------------------
<S> <C> <C> <C>
Revenues
Consumer DVD $ - - 1,805
Pro Audio/Video 19,881 21,899 19,022
------- ------ ------
Total net revenue $19,881 21,899 20,827
======= ====== ======
</TABLE>
Our accounting system does not capture meaningful gross margin and
operating income (loss) information by product line, nor is such information
used by the CEO for purposes of making operating decisions. Accordingly, such
information has not been disclosed.
Revenues by Geographic Location:
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------------
1998 1999 2000
-------------- ------------ ------------
<S> <C> <C> <C>
North America $ 9,612 11,702 11,027
Export:
Europe 4,949 5,707 5,489
Pacific Rim 4,009 4,218 4,034
Other international 1,311 272 277
------- ------ ------
Total net revenue $19,881 21,899 20,827
======= ====== ======
</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.
Significant customer information:
<TABLE>
<CAPTION>
Percent of Total
Accounts Receivable
Years Ended March 31, March 31,
---------------------------------------------------- ----------------------------------
1998 1999 2000 2000
------------ ------------------ --------------- ----------------------------------
<S> <C> <C> <C> <C>
Customer A 10% 11% 11% 6%
Customer B - - 10% 8%
</TABLE>
(11) SUBSEQUENT EVENTS
On May 4, 2000, we secured a new equity-based line of credit by entering
into a new Private Equity Line Agreement with Kingsbridge. Under the new
agreement, we may draw up to $20,000,000 in cash in exchange for up to 19.9% of
our common stock. Pricing of the common stock issued under this agreement is
based on the market price of our common stock at the time of a draw subject to
discounts ranging from 8% to
F-19
<PAGE>
12%. Borrowings from this credit facility are subject to the completion of a
Registration Statement on Form S-1 to register for resale the shares we may
issue to Kingsbridge under this equity-based line of credit.
F-20
<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 $ 2,661
Accounting Fees 10,000
Legal Fees and Disbursements 30,000
Miscellaneous 10,000
-------
Total: $52,661
=======
</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 15. Recent Sales of Unregistered Securities
(a) In March 1998, we issued 461,538 shares of Series C Convertible
Preferred Stock to Hambrecht & Quist Guaranty Finance in return for
restructuring $3,000,000 debt into $1,500,000 of Series C Convertible Preferred
Stock and $1,500,000 of debt. These securities were exempt from registration
pursuant to Section 4(2) of the Securities Act. These securities were sold to
one investor that represented it was sophisticated and accredited.
(b) In October 1999, we issued 153,846 shares of Series C Convertible
Preferred Stock and warrants to purchase 120,000 shares of Common Stock at $2.50
per share to Hambrecht & Quist Guaranty Finance in return for restructuring the
debt owed to Hambrecht & Quist Guaranty Finance. See Management's Discussion
and Analysis of Financial Condition and Results of Operations. Each share of
Series C Convertible Preferred Stock is convertible into 1.625 shares of Common
Stock. These securities were exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933. These securities were sold to one investor which
represented it was sophisticated and accredited.
(c) In December 1997, we secured a $7,000,000 equity-based line of credit
under which we had the right to draw up to $7,000,000 in cash in exchange for
our common stock. The price of our common stock was based on the market price of
our common stock at the time of a draw subject to a 14% discount and a 4%
commission payable in common stock. During fiscal year ended March 31, 1998, and
fiscal year March 31, 1999, we issued 618,130 shares of common stock and 903,870
shares of common stock, respectively. In exchange for the 1,522,000 total shares
of common stock issued under such line of credit, we drew $3,988,000. These
securities were exempt from registration pursuant to Section 4(2) of the
Securities Act.
<PAGE>
These securities were sold to one investor that represented it was sophisticated
and accredited.
(d) On May 20, 1999, we entered into an equity-based line of credit with
Kingsbridge under which we were authorized to draw up to $12,000,000 in cash in
exchange for our common stock. The price of our common stock was based on the
market price of our common stock at the time of a draw, discounted by 10% or
12%, depending upon the price of our common stock. During the fiscal year ended
March 31, 2000, we issued 1,800,000 shares of our common stock for $7,408,000.
These securities were exempt from registration pursuant to Section 4(2) of the
Securities Act. These securities were sold to one investor that represented it
was sophisticated and accredited.
Item 16. Exhibits and Financial Statement Schedule.
A. Exhibits
<TABLE>
<CAPTION>
Exhibit Description
--------- ---------------------------------------------------------
<S> <C>
4.1 (1) Private equity line agreement between Sonic Solutions and
Kingsbridge Capital Limited dated as of May 4, 2000
4.2 (1) Registration Rights Agreement between Sonic Solutions and
Kingsbridge Capital Limited dated as May 4, 2000
5 Opinion of Heller Ehrman White & McAuliffe
23.1 Consent of Heller Ehrman White & McAuliffe (included in
Exhibit 5)
23.2 Consent of KPMG LLP
24 Power of Attorney (See Page II-3)
27 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to exhibits to Annual Report on Form 10-K for the
Fiscal Year Ended March 31, 2000.
<PAGE>
B. Financial Statement Schedule.
Valuation and Qualifying Accounts
FINANCIAL STATEMENT SCHEDULE
SONIC SOLUTIONS
VALUATION AND QUALIFYING ACCOUNTS
Years Ended March 31, 1998, 1999 and 2000
(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, 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
==== === === ==== ===
Year ended March 31, 2000
Allowance for doubtful accounts............. $140 650 -- (319) 471
Allowance for returns....................... 459 -- -- -- 459
---- --- --- ---- ---
$599 650 -- (319) 930
==== === === ==== ===
</TABLE>
<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. 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, and the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in Novato, State of
California, on the 14th day of July, 2000.
<PAGE>
Sonic Solutions
By: /s/ Robert J. Doris
-----------------------------
Robert J. Doris, President
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert J. Doris or A. Clay Leighton, or
either of them, with the power of substitution, her or his attorney in fact, to
sign any amendments to this Registration Statement (including post-effective
amendments), and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorney-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C>
July 14, 2000 /s/ Robert J. Doris
------------------------------------------------------
President and Director
Robert J. Doris
July 14, 2000 /s/ Mary C. Sauer
------------------------------------------------------
Senior Vice President of Business Development and
Director Mary C. Sauer
July 14, 2000 /s/ Robert M. Greber
------------------------------------------------------
Director
Robert M. Greber
July 14, 2000 /s/ Peter J. Marguglio
------------------------------------------------------
Director
Peter J. Marguglio
July 14, 2000 /s/ A. Clay Leighton
------------------------------------------------------
Senior Vice President of Worldwide Operations and
Finance and Chief Financial Officer (Principal
Financial Accounting Officer)
A. Clay Leighton
</TABLE>
<PAGE>
SONIC SOLUTIONS
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit Description Pages
------------ ------- ---------------------------------------------------------------------- -----------
<S> <C> <C> <C>
4.1 (1) Private equity line agreement between Sonic Solutions and Kingsbridge
Capital Limited dated as of May 4, 2000
4.2 (1) Registration Rights Agreement between Sonic Solutions and Kingsbridge
Capital Limited dated as of May 4, 2000
5 Opinion of Heller Ehrman White & McAuliffe
23.1 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5)
23.2 Consent of KPMG LLP
24 Power of Attorney (See Page II-3)
27 Financial Data Schedule
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(1) Incorporated by reference to exhibits to Annual Report on Form 10-K for the
Fiscal Year Ended March 31, 2000.
