As filed with the Securities and Exchange Commission on November 8, 2001
Registration No. 333-41796
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
POST-EFFECTIVE
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SONIC SOLUTIONS
(Exact Name of Sonic Solutions as Specified in Its Charter)
California 7373 93-0925818
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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:
Kyle V. Guse A. Clay Leighton
Heller Ehrman White & McAuliffe LLP Sonic Solutions
275 Middlefield Road 101 Rowland Way, Ste. 110
Menlo Park, California 94025 Novato, California 94945
Telephone: (650) 324-7000 Telephone: (415) 893-8000
Facsimile: (650) 324-0638 Facsimile: (415) 893-8008
Approximate date of commencement of proposed sale to the public: As soon as
practicable following the effectiveness of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration number of the earlier
effective registration statement for the same offering: [_] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_] _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
__________________
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
Title of Securities to be Price Offering Registration
to be Registered Registered (1) Per Share (1) Price (2) Fee (3)
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Common Stock, no par value 2,500,000 $4.03125 $10,078,125 $2,661.00
- ------------------------------------------------------------------------------------------------
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(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.
(3) Amount previously paid in connection with registration statement filed on
July 20, 2000.
__________________
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.
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Explanatory Note: This Post-Effective Amendment (the "Post-Effective
----------------
Amendment") No. 1 to Registration Statement on Form S-1 relates to Registration
Statement on Form S-1 (333-41796) filed with the Securities and Exchange
Commission on July 20, 2000 and declared effective on November 19, 2000. The
Post-Effective Amendment contains updated financial and other information about
the Company.
PRELIMINARY PROSPECTUS - SUBJECT TO COMPLETION. DATED NOVEMBER 8, 2001
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. As of
October 31, 2001, we have issued 1,548,686 shares of our common stock to
Kingsbridge under this agreement.
Our common stock trades on the Nasdaq National Market under the symbol
"SNIC". On October 31, 2001, the closing price for our common stock, as
reported on the Nasdaq National Market, was $1.240 per share.
Beginning on page 3, we have listed several "RISK FACTORS" which you should
consider. You should read the entire prospectus carefully before you make your
investment decision.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. Kingsbridge is offering to sell, and seeking
offers to buy, shares of 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 November __, 2001.
The information in the prospectus may be changed. We may not sell these
securities until the post-effective amendment to the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and we are not soliciting offers to buy
these securities in any state where the offer is not permitted.
TABLE OF CONTENTS
Page
----
SUMMARY................................................................. 1
THE OFFERING............................................................ 2
SUMMARY CONSOLIDATED FINANCIAL INFORMATION.............................. 3
RISK FACTORS............................................................ 4
USE OF PROCEEDS......................................................... 10
THE EQUITY LINE AGREEMENT............................................... 11
SELLING SECURITY HOLDER................................................. 13
PLAN OF DISTRIBUTION.................................................... 14
SELECTED FINANCIAL DATA................................................. 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... 17
THE BUSINESS............................................................ 22
MARKET FOR SONIC SOLUTIONS' COMMON EQUITY............................... 42
MANAGEMENT.............................................................. 43
EXECUTIVE COMPENSATION.................................................. 45
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......... 47
DESCRIPTION OF CAPITAL STOCK............................................ 50
LEGAL MATTERS........................................................... 52
EXPERTS................................................................. 52
INDEX TO FINANCIAL STATEMENTS........................................... F-1
INDEPENDENT AUDITORS' REPORT............................................ F-2
i
SUMMARY
Sonic Solutions
This summary highlights selected information from this prospectus and may
not contain all of the information that is important to you. You should
carefully read this entire document and the other documents to which this
document refers you.
We primarily develop, market and support workstations used by professionals
to edit and process digital audio and digital video information. Our
workstation products are computer based, and usually include applications
software and sometimes plug-in hardware installed on a personal computer. Our
customers use various kinds of peripheral devices -- for example, disk drives,
streaming tape drives, audio and video tape recorders, and CD and DVD 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". Some of our workstation products are
based on Apple Macintosh personal computers, while others are intended for use
on personal computers equipped with the Microsoft Windows operating system.
We currently market multiple professional workstation product lines:
SonicStudio(TM), DVD Creator(TM), DVD Fusion(TM), ReelDVD(TM), and Sonic
Scenarist(TM). SonicStudio is a line of Macintosh based 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. All of our other workstation products are used by
professional customers to prepare video and audio content for release on DVD-
Video/Audio discs. DVD Creator is a Macintosh based DVD-Video/Audio production
workstation which supports the preparation and assembly of video and audio
assets for release on the DVD-Video disc format and the new DVD-Audio disc
format. DVD Fusion which is available for both Macintosh and Windows PCs,
provides video producers and editors a lower priced set of tools for encoding,
authoring and proofing DVD-Video titles. DVD Fusion is often used with non-
linear video editing systems such as those provided by Avid Technology and Media
100. Sonic Scenarist is a Windows based workstation product used by high end
professional customers to prepare DVD-Video titles. ReelDVD is a Windows based
product targeted at corporate and "prosumer" users to prepare DVD-Video titles.
In the past two years we have started supplying software products outside
of our traditional professional audio/video market. In September 1999, we began
shipping DVDit!(TM) -- a Windows based DVD-Video authoring software product
which provides simplified DVD authoring capabilities to consumer, "prosumer,"
and some professional users. In the fall of 2000 we introduced a simplified
Windows based DVD-Video creation product called MyDVD(TM) intended for use by
consumers, and targeted to be used with a new generation of low cost DVD
recording devices which are being introduced to the personal computing market
during 2001.
1
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.
Common Stock offered by Kingsbridge.......................... Up to 2,500,000 shares of Common Stock.
Common Stock outstanding as of October 15, 2001.............. 14,393,916 shares
Use of Proceeds.............................................. We will not receive any of the proceeds from sales
by Kingsbridge pursuant to this prospectus.
Nasdaq National Market Symbol................................ SNIC
2
Summary Consolidated Financial Information
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, 2001 are derived from the financial statements of Sonic Solutions, which
financial statements have been audited by KPMG LLP, independent certified public
accountants. The financial statements as of March 31, 2001 and 2000, and for
each of the years in the three-year period ended March 31, 2001, and the report
thereon, are included elsewhere in this document. The statement of operations
data for the three months ended June 30, 2000 and June 30, 2001 and the balance
sheet information as of June 30, 2000 and June 30, 2001 are unaudited but
include, in the opinion of management, all adjustments, including normal
recurring adjustments, necessary for a fair presentation of such information.
Results for the three months ended June 30, 2001 are not necessarily indicative
of results which may be expected for any other interim periods or for the year
as a whole.
Years Ended March 31, Quarters Ended June 30,
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1997 1998 1999 2000 2001 2000 2001
---- ---- ---- ---- ---- ---- ----
(in thousands, except share amounts) (unaudited)
STATEMENT OF OPERATIONS DATA:
Net revenue.................................... $15,911 19,881 21,899 20,827 16,519 5,001 4,204
Gross profit................................... 8,479 9,672 12,352 11,835 10,627 3,267 2,815
Operating loss................................. (5,095) (5,225) (1,557) (5,542) (5,745) (1,204) (1,642)
Net loss....................................... $(5,191) (5,876) (1,859) (5,694) (5,855) (1,246) (1,643)
Basic loss per share........................... $ (0.69) (0.76) (0.21) (0.56) (0.47) (0.10) (0.12)
Weighted average shares used in computing per
share amounts................................. 7,542 7,761 8,896 10,460 12,402 12,201 13,399
Diluted loss per share......................... $ (0.69) (0.76) (0.21) (0.56) (0.47) (0.10) (0.12)
Weighted average shares used in computing per
share amounts................................. 7,542 7,761 8,896 10,460 12,402 12,201 13,399
BALANCE SHEET DATA:
Working capital................................ $ 6,263 1,164 1,167 4,976 458 4,035 (103)
Total assets................................... $15,889 12,630 13,765 14,968 11,738 14,142 11,369
Preferred stock................................ -- 1,500 956 506 1,750 -- 1,774
Shareholders' equity........................... $ 8,430 5,418 5,932 8,750 5,455 7,522 4,494
3
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.
We have had losses in each of the past five years and in the first quarter
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of fiscal year 2002.
- -------------------
We were unprofitable during each of the last five fiscal years and in the
first quarter of fiscal year 2002 ended June 30, 2001. For example, in fiscal
year 2001, we had a net loss of $5,855,000, in fiscal year 2000 we had a net
loss of $5,694,000 and for the first quarter in fiscal year 2002 we had a net
loss of $1,643,000. We were unprofitable during the first three quarters of the
1999 fiscal year, during each quarter of the 2000 and 2001 fiscal years and
during the first quarter of the 2002 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.
During the last three years we had negative operating cash flows and expect
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this to continue.
- ----------------
We might need additional financing in order to continue to operate. We had
a negative operating cash flow of $124,000, $2,628,000 and $848,000 for the
fiscal years ended March 31, 1999, 2000 and 2001, respectively. This means that
without access to outside capital we would have had to cease or significantly
curtail operations. During the first quarter of fiscal year 2002, we had a small
positive operating cash flow of $7,000. 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 equity line agreement with Kingsbridge Capital Limited may be
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unavailable or insufficient to meet our future cash needs.
- ----------------------------------------------------------
In May 2000, we entered into an equity line agreement with Kingsbridge
Capital Limited which allows us to sell our common stock to Kingsbridge from
time to time. Under the agreement we may sell up to $20,000,000 worth of our
common stock, but only up to that number of shares of common stock which equals
19.9% of our outstanding shares. When we sell shares to Kingsbridge, the price
per share is equal to the market price of our common stock around the time of
the sale to Kingsbridge minus a discount. That discount ranges from 8% to 12%.
Issuance of stock under that agreement may also dilute our stockholders,
------------------------------------------------------------------------
adversely affect our earnings per share, and may reduce our share price.
- -----------------------------------------------------------------------
As of October 31, 2001, we have sold under this agreement 1,548,686 shares
of common stock with gross proceeds to us of approximately $1,600,000. Because
of the 19.9% limit on the number of shares we may sell to Kingsbridge, the
maximum number of shares we could sell after October 31, 2001 under this
agreement would be approximately 951,000 shares. Sale of the maximum number of
shares would result in dilution to our shareholders of approximately 6.6%.
Stated another way, if we sold the maximum number of shares to Kingsbridge,
current shareholders (other than Kingsbridge) would own approximately 91.6% of
our company.
Our ability to sell stock to Kingsbridge is contingent upon a number of
terms and conditions, including, for example, continued listing of our stock on
NASDAQ, effectiveness of a registration statement, continued accuracy of
representations and warranties made to Kingsbridge and lack of material adverse
4
changes to our business. Sales are also limited by the market price and trading
volume of our stock. The risk to us is that because of these limitations at the
time we need cash in the future, the equity line arrangement with Kingsbridge
may be unavailable or insufficient to meet our cash needs causing us to cease or
significantly curtail operations.
Issuance of shares under the equity line agreement with Kingsbridge will
result in a greater number of our shares outstanding. As a result, to the
extent we have net income in the future, net income per share will be lower due
to the larger number of shares outstanding.
The risk of dilution from sales of stock to Kingsbridge may cause our stock
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price to decline.
- ----------------
The perceived risk of dilution from sales of stock to Kingsbridge may cause
holders of our stock to sell their shares, or it may encourage short-sales.
This could contribute to a decline in our share price.
Any failure to successfully integrate the business we have acquired could
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negatively impact us.
- --------------------
In February 2001, we acquired the DVD business and assets of Daikin by
issuing 700,000 shares of Series D convertible preferred stock and 395,000
shares of common stock. The Daikin assets we acquired added significantly to our
balance sheet. Before acquiring the Daikin assets we had assets of $8,772,000
and after the acquisition, at fiscal year end March 31, 2001, we had $11,738,000
of assets. Approximately 25% of our assets are therefore derived from the
acquisition. The acquisition and integration of the Daikin business involves
risks for us and for our shareholders. These risks include:
. Distracting management from day-to day operations of our business;
. Costs, delays and inefficiencies associated with integrating acquired
operations, products and personnel;
. Incurring increased software amortization expenses related to the
acquired assets;
. The potential dilution resulting from conversion of the preferred
stock issued to Daikin;
. Undiscovered and unknown problems, defects or other issues related to
the Daikin products that become known to us only some time after
consummation of the acquisition;
. Negative reactions from our current resellers, or our current
customers, to the acquisition; and
. Negative reactions from the current resellers or the current customers
of the Daikin business to the acquisition of that business by us.
The Daikin DVD business was not profitable when owned by Daikin and there
was concern that the business would have been unable to operate as a going
concern. It is possible that the Daikin DVD business will not be a positive
contributor to our operations but instead will constitute a drain on our
resources.
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 involves new digital audio and video formats, such as DVD-
Video and DVD-Audio, and, more recently, the new recordable DVD formats
including DVD-RAM, DVD-R/RW and DVD+RW. 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
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manufacturers discontinue or redesign their products.
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5
The hardware components of our products are based on integrated circuits or
"chips" produced by other companies. For example, we use the I960 chip
manufactured by IBM. If this chip manufacturer or another chip manufacturer
discontinues or redesigns 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 for our manufacturing and
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components makes us vulnerable to supplier operational problems.
- ---------------------------------------------------------------
Our outsourcing manufacturing program commits responsibility for almost all
of our manufacturing activities to a single supplier, Arrow Bell Electronics.
In addition, we often use components that are only available from a single
source. Those components include, for example, Phillip's Video Scaler and
various Xilinx devices. 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
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trade secrets, we may not be able to market our products successfully.
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Our products are based in large part on proprietary technology which we
have sought to protect with patents, trade-marks and trade-secrets. We have
several patents and have filed applications for additional patents. We have
also registered trademarks for the following: SonicStudio, DVD Creator, and DVD
Fusion, among others. 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 interfere with our
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current or future product development and sales.
- -----------------------------------------------
We have never conducted a comprehensive patent search relating to the
technology we use in our products. There may be issued or pending patents 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.
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
products.
We may become involved in costly and time-consuming patent litigation.
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Third parties could pursue us claiming that our products infringe various
patents. Patent infringement litigation could be time consuming and costly. If
the 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, or at all,
resulting in serious harm to our business.
6
For example, a group of companies have formed an organization called MPEG-
LA to enforce the rights of holders of 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. The cost to us of such a license
cannot be estimated at this time.
Because many of our products operate only on Macintosh computers, the
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potential success of our products is tied to the success of this platform.
- -------------------------------------------------------------------------
Many of our current products, including DVD Creator and DVD Fusion
(Macintosh version), operate only 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
computing platform in the professional and corporate audio and video markets,
there will likely be a decrease in demand for our products. If there are
changes in the operating system or architecture of the Macintosh, it is likely
that we will incur significant costs to adapt our products to the changes.
In this regard, in March of 2001 Apple Computer announced that Macintosh OS
X would now be available for use with its Macintosh computers. Recently, Apple
Computer has announced that new models of the Macintosh will be delivering with
OS X, though those machines will still be able to run the earlier 9.x versions
of the Macintosh OS. Industry observers anticipate that at some point before
the end of 2002, new Macintosh computers will be able only to run with OS X.
While OS X currently offers a "compatibility mode" which supports OS 9.x
compatible applications, we believe that we will soon have to modify our
Macintosh applications to OS X in order to continue to be able to run with the
latest Macintosh models. Such a modification may be difficult to accomplish and
if it proves to be lengthy our revenues could be significantly reduced in the
interim.
Some of our competitors possess greater technological and financial
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resources than we do, may produce better or more cost-effective products than
- -----------------------------------------------------------------------------
ours and may be more effective than we are in marketing and promoting their
- ---------------------------------------------------------------------------
products.
- ----------
There is a substantial risk that competing companies will produce better or
more cost-effective products, or will be better equipped than we are to promote
them in the marketplace. A number of companies have announced or are delivering
products which compete with our products. These include Apple Computer,
MedioStream, MGI, Pinnacle Systems, Roxio, and Ulead. Most of these companies
have greater financial and technological resources than ours.
In January 2001, Apple announced two new DVD authoring products. The first
product, iDVD is intended for consumer users and we believe will compete with
MyDVD and DVDit!. The second product, DVD Studio Pro, is intended for
professional users, and we believe will compete with DVDit!-PE, DVD Fusion and
ReelDVD. Apple also announced the availability of aggressively priced DVD
recorders with certain models of the Macintosh personal computer. More
recently, Apple has announced the upcoming availability of iDVD2, which adds
new, attractive functionality to the iDVD product. Also, Apple recently
purchased Spruce Technologies, a long-standing competitor or ours in the
professional DVD market that may bolster Apple's DVD technology base and make it
more difficult for our products to compete with theirs.
We have little ability to reduce expenses to compensate for reduced sales.
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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. For example, in
recent quarters, as much as 75% of sales have been procured in the last month of
the quarter. Because most of our quarterly operating expenses and our inventory
purchasing are committed prior to quarter end, we have little ability to reduce
expenses to compensate for reduced sales.
7
For example, in the fiscal quarter ending December 31, 2000, we experienced
a significant slowdown of demand for our professional DVD products in the last
month of that quarter, particularly in the North American and Japanese markets.
Although we attempted to control expenses in the face of this slowdown, the
changes we were able to make were quite small, leading to a significantly
greater operating loss for the quarter.
Approximately 10% of our revenue derives from sales to a single company and
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another 12% was derived from sales to a large distributor.
- ---------------------------------------------------------
During the last three fiscal years, 1999, 2000, 2001 and the first quarter
of fiscal year 2002, between 7% and 11%, of our revenue was derived from sales
of audio processing subsystems to Discreet Logic. During the fiscal years 2000,
2001 and the first quarter of fiscal year 2002, an additional 10%, 12% and 13%,
respectively, 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 foreign
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customers located primarily in Europe and Japan.
- -----------------------------------------------
Revenue derived from these customers accounted for approximately 47% of our
revenues in fiscal years 2000 and 2001 and approximately 54% in the first
quarter of fiscal year 2002. 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, such as, safety or radio emissions
regulations; and
. liquidity problems in various foreign markets.
The issuance of common stock to Daikin upon conversion of preferred stock
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will dilute the relative ownership of existing common stockholders and could
- ----------------------------------------------------------------------------
result in lower market price for our stock.
- ------------------------------------------
Based upon the number of shares of common stock outstanding on September
30, 2001, conversion of 850,000 shares of preferred stock into common stock
would dilute our shareholders by 6%. This potential dilution could reduce 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 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.
8
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 could affect such forward-looking statements and
could cause actual results to differ materially from the statements made.
9
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, including:
. funding operating losses;
. payment of trade payables; and
. payment of product development costs.
10
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. As of October 31, 2001, we had sold 1,548,686
shares to Kingsbridge for aggregate proceeds of $1,600,000.
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
. 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.
11
. 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 will prepare and file
amendments and supplements to the registration statement that was originally
declared effective on November 9, 2000, 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.
12
SELLING SECURITY HOLDER
The following table sets forth certain information regarding beneficial
ownership of our common stock by Kingsbridge as of October 15, 2001. 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".
Common Stock Common Common Stock
Beneficially Owned Stock Beneficially Owned
Prior to Offering to be After Offering
Number Percent sold Number Percent
--------- --------- ------------- --------- ---------
Kingsbridge Capital Ltd...... 233,856 2% 2,500,000(1) -- --
Dawson Building
Main Street
Road Town
Tortola, BVI
Total:.................. 233,856 2% 2,500,000 -- --
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.
- --------------------------
(1) Of the 2,500,000 registered initially, 1,548,686 shares have been issued
and sold as of October 15, 2001. We are not, however, able to determine the
number of shares resold by Kingsbridge using this prospectus.
13
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, 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.
14
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.
15
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, 2001 are derived from the financial statements of Sonic Solutions, which
financial statements have been audited by KPMG LLP, independent certified public
accountants. The financial statements as of March 31, 2001 and 2000, and for
each of the years in the three-year period ended March 31, 2001, and the report
thereon, are included elsewhere in this document. The statement of operations
data for the three months ended June 30, 2000 and June 30, 2001 and the balance
sheet information as of June 30,2000 and June 30, 2001 are unaudited but
include, in opinion of management, all adjustments, including normal recurring
adjustments, necessary for a fair presentation of such information. Results for
the three months ended June 30, 2001 are not necessarily indicative of results
which may be expected for any other interim periods or for the year as a whole.
Years Ended March 31, Quarters Ended June 30,
------------------------------------------- ------------------------
1997 1998 1999 2000 2001 2000 2001
------- ------ ------ ------ ------ ------ ------
(in thousands except share amounts) (unaudited)
STATEMENT OF OPERATIONS DATA:
Net revenue...................... $15,911 19,881 21,899 20,827 16,519 5,001 4,204
Cost of revenue.................. 7,432 10,209 9,547 8,992 5,892 1,734 1,389
------- ------ ------ ------ ------ ------ ------
Gross profit..................... 8,479 9,672 12,352 11,835 10,627 3,267 2,815
Operating expenses:
Marketing and sales............. 6,000 7,257 7,216 8,938 8,710 2,347 2,176
Research and development........ 5,737 6,037 5,137 6,155 5,148 1,351 1,448
General and administrative...... 1,837 1,603 1,556 2,284 2,514 773 450
Business integration............ - - - - - - 383
------- ------ ------ ------ ------ ------ ------
Total operating expenses......... 13,574 14,897 13,909 17,377 16,372 4,471 4,457
------- ------ ------ ------ ------ ------ ------
Operating loss................... (5,095) (5,225) (1,557) (5,542) (5,745) (1,204) (1,642)
Other expense, net............... (96) (651) (302) (249) (110) (42) (1)
Benefit for income taxes......... - - - (97) - - -
------- ------ ------ ------ ------ ------ ------
Net loss......................... $(5,191) (5,876) (1,859) (5,694) (5,855) (1,246) (1,643)
======= ====== ====== ====== ====== ====== ======
Basic loss per share............. $(0.69) (0.76) (0.21) (0.56) (0.47) (0.10) (0.12)
Weighted average shares used in
computing per share amounts..... 7,542 7,761 8,896 10,460 12,402 12,201 13,399
Diluted loss per share........... $(0.69) (0.76) (0.21) (0.56) (0.47) (0.10) (0.12)
Weighted average shares used in
computing per share amounts..... 7,542 7,761 8,896 10,460 12,402 12,201 13,399
BALANCE SHEET DATA:
Working capital.................. $ 6,263 1,164 1,167 4,976 458 4,035 (103)
Total assets..................... $15,889 12,630 13,765 14,968 11,738 14,142 11,369
Shareholders' equity............. $ 8,430 5,418 5,932 8,750 5,455 7,522 4,494
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW; CERTAIN FACTORS THAT MAKE FUTURE RESULTS DIFFICULT TO PREDICT; CERTAIN
ITEMS TO REMEMBER WHEN READING OUR FINANCIAL STATEMENTS
Our quarterly operating results vary significantly depending on the timing
of new product introductions and enhancements by ourselves and by our
competitors. Our results also depend on the volume and timing of orders which
are difficult to forecast. Because our customers generally order on an as-
needed basis, and we normally ship products within one week after receipt of an
order, we don't have an order backlog which can assist us in forecasting
results. For all these reasons, our results of operations for any quarter are a
poor indicator of the results to be expected in any future quarter.
A large portion of our quarterly revenue is usually generated in the last
few weeks of the quarter. Since our ongoing operating expenses are relatively
fixed, and we plan our expenditures based primarily on sales forecasts, if
revenue generated in the last few weeks of a quarter do not meet our forecast,
operating results can be very negatively affected.
We capitalize a portion of our software development costs in accordance
with Statement of Financial Accounting Standard No. 86. Such capitalized costs
are amortized to cost of revenue over the estimated economic life of the
product, which is generally three years. See Note 4 of Notes to Financial
Statements.
RESULTS OF OPERATIONS
The following table sets forth certain items from Sonic Solutions'
statements of operations as a percentage of net revenue for fiscal years 1999
through 2001 and for the quarters ended June 30, 2000 and 2001:
Years ended March 31, Quarters ended June 30,
---------------------------------------- ------------------------------
1999 2000 2001 2000 2001
(unaudited) (unaudited)
Net revenue 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue 43.6 43.2 35.7 34.7 33.0
----- ------ ------ ------ ------
Gross profit 56.4 56.8 64.3 65.3 67.0
Operating expenses:
Marketing and sales 33.0 42.8 52.7 46.9 51.8
Research and development 23.5 29.6 31.2 27.0 34.4
General and administrative 7.0 11.0 15.2 15.5 10.7
Business integration --- --- --- --- 9.1
----- ------ ------ ------ ------
Total operating expenses 63.5 83.4 99.1 89.4 106.0
----- ------ ------ ------ ------
Operating loss (7.1) (26.6) (34.8) (24.1) (39.0)
Other expense (1.4) (1.2) (0.7) (0.8) (0.0)
Benefit for income taxes --- 0.5 --- --- ---
----- ------ ------ ------ ------
Net loss (8.5)% (27.3)% (35.5)% (24.9)% (39.0)%
===== ====== ====== ====== ======
Comparison of First Quarters Ended June 30, 2000 and 2001
Net Revenue. Our net revenue decreased from $5,001,000 for the first
quarter ended June 30, 2000 to $4,204,000 for the first quarter ended June 30,
2001, representing a decrease of 16%. The decrease in revenue is primarily due
to decreases in sales of our professional audio and DVD systems which were
partially offset by increases in sales of our consumer DVD products, including
DVDit!. Our professional audio and DVD sales
17
decreased from $4,467,000 for the first quarter ended June 30, 2000 to
$3,038,000 for the first quarter ended June 30, 2001, representing a decrease of
32%. Decreases in sales of our professional audio and DVD products were
partially offset in the first quarter ended June 30, 2001 by sales of Daikin
related products which we acquired in February, 2001. Sales of our consumer DVD
products increased from $534,000 for the first quarter ended June 30, 2000 to
$1,166,000 for the first quarter ended June 30, 2001, representing an increase
of 118%. We anticipate that we could continue to experience declines in sales of
our professional audio and DVD systems in the future, however, we anticipate
growth in sales of our consumer DVD products.
International sales accounted for 46.8% and 53.6% of our net revenue for the
first quarter ended June 30, 2000 and 2001, respectively. See Note 10 of Notes
to Condensed Financial Statements. 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, as a percentage of net revenue
decreased from 34.7% for the first quarter ended June 30, 2000 to 33.0% for the
quarter ended June 30, 2001. The decrease in cost of revenue is primarily due
to a shift in sales product mix towards higher margin consumer DVD systems and
to the reduction of hardware as a percentage of revenue in our professional DVD
systems. Additionally, the Daikin products we acquired in February 2001 carry a
higher margin as they are primarily software products. We anticipate that in
future periods we will continue to experience reductions in our cost of revenue,
as a percentage of net revenue, as our product mix continues to shift to sales
of the higher margin software-only products.
Marketing and Sales. Our marketing and sales expenses decreased from
$2,347,000 for the first quarter ended June 30, 2000 to $2,176,000 for the first
quarter ended June 30, 2001. Marketing and sales represented 46.9% and 51.8% of
net revenue for the first quarter ended June 30, 2000 and 2001, respectively.
Our marketing and sales expenses decreased primarily due to decreases in
advertising and marketing costs related to our DVD product lines and due to a
decrease in dealer and employee commissions. Our marketing and sales headcount
increased from forty-two at June 30, 2000 to forty-four at June 30, 2001.
Dealer and employee commission expenses, as a percentage of net revenue remained
constant at 4.0% for the first quarter ended June 30, 2000 and June 30, 2001 but
decreased 15% in dollar terms from $183,000 to $155,000.
Research and Development. Our research and development expenses increased
from $1,351,000 for the first quarter ended June 30, 2000 to $1,448,000 for the
first quarter ended June 30, 2001. Our research and development expenses
represented 27.0% and 34.4% of net revenue for the first quarter ended June 30,
2000 and 2001, respectively. We capitalize a portion of our software
development costs in accordance with Statement of Financial Accounting Standards
No. 86. (This means that a portion of the costs we incur for software
development are not recorded as an expense in the period in which they are
actually incurred. Instead they are recorded as an asset on our balance sheet.
The amount recorded on our balance sheet is then amortized over the estimated
life of the products in which the software is included.) Our research and
development expenses increased primarily due to higher salary expense associated
with an increase in headcount from thirty-four at June 30, 2000 to thirty-six at
June 30, 2001 and to increases in consulting expenses relating to our consumer
DVD products.
General and Administrative. Our general and administrative expenses
decreased from $773,000 for the first quarter ended June 30, 2000 to $450,000
for the first quarter ended June 30, 2001. Our general and administrative
expenses represented 15.5% and 10.7% of net revenue for the first quarter ended
June 30, 2000 and 2001, respectively. Included in general and administrative
expenses for the first quarter ended June 30, 2000 is a charge to bad debt
expense of $170,000, which represented an additional reserve for sales to audio
professionals and distributors who were experiencing liquidity difficulties due
to a decline in their business. We anticipate that general and administrative
expenses (exclusive of the bad debt expense) will increase in the future as
costs increase and our operations expand.
Business Integration Expense. In conjunction with the Daikin acquisition
completed in February 2001, we incurred expenses to transition the business to
our management. We anticipate that the integration expenses will decrease and
ultimately be eliminated over the next few quarters. Business integration
expenses
18
primarily consisted of engineering consulting expenses per the Daikin Consulting
Agreement dated February 27, 2001.
Other Income and Expense. Other income on our statement of operations
includes the interest we earned on cash balances and short term investments.
Other expense includes primarily the interest and other financing charges
related to financing agreements we had with entities associated with Hambrecht &
Quist.
Provision for Income Taxes. In accordance with Statement of Financial
Accounting Standards No. 109, no provision was made for income taxes for the
first quarters ended June 30, 2000 and 2001. During the 2001 fiscal year, we
exhausted our ability to carryforward some of our tax losses resulting from
operations in the fiscal year ended March 31, 1997.
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 2001, 2000 and 1999
Net Revenue. Our net revenue decreased from $21,899,000 in fiscal 1999 to
$20,827,000 in fiscal 2000 to $16,519,000 in fiscal 2001, representing a
decrease of 5% from fiscal 1999 to fiscal 2000 and a decrease of 21% from fiscal
2000 to fiscal 2001. The decreases in fiscal 2000 and fiscal 2001 were
primarily due to decreases in sales of our professional audio and DVD systems
which were partially offset by increases in sales of our consumer DVD products,
including DVDit!. Our professional audio and DVD sales decreased approximately
13% in fiscal 2000 and 26% in fiscal 2001. Decreases in our professional audio
and DVD sales were partially offset in fiscal 2001 by sales of Daikin related
products subsequent to our purchase of Daikin's DVD business in late February.
Sales of our consumer DVD products commenced during fiscal year 2000, in fiscal
year 2001 sales of these products increased 35%.
We anticipate that we will continue to experience declines in sales of our
professional audio and DVD systems, however, we anticipate significant growth in
sales of our consumer DVD products in the future.
International sales accounted for 47%, of our net revenue in each of the
fiscal years 1999, 2000, and 2001. See Note 10 of Notes to Financial
Statements. 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 as a percentage of revenue decreased
from 43.6% of net revenue in fiscal 1999 to 43.2% in fiscal 2000 to 35.7% in
fiscal 2001. The decreases in cost of revenue in fiscal year 2000 and fiscal
year 2001 were primarily due to a shift in sales product mix towards higher
margin consumer DVD systems and to the reduction of hardware as a percentage of
revenue in our professional DVD systems. We anticipate that we will continue to
experience reductions in our cost of revenue as a percentage of revenue in
future periods, as our shift in the sales product mix continues to the higher
margin software-only products.
Marketing and Sales. Our marketing and sales expenses increased from
$7,216,000 in fiscal 1999 to $8,938,000 in fiscal 2000 and decreased to
$8,710,000 in fiscal 2001. Marketing and sales represented 33.0%, 42.8% and
52.7% of net revenue for fiscal 1999, 2000 and 2001, respectively. Our
marketing and sales expenses increased in fiscal 2000 primarily due to increases
in salary expenses as a result of an increase in headcount, and increases in
advertising and marketing costs related to our DVD product lines. Our marketing
and sales expenses decreased in fiscal 2001 primarily due to lower commission
expenses. Our marketing and sales headcount increased from thirty-seven at March
31, 1999 to forty at March 31, 2000 to forty-nine at March 31, 2001. Dealer and
employee commission expenses, as a percentage of net revenue decreased from 4.7%
in fiscal 1999 and fiscal 2000 to 4.4% and fiscal 2001.
Research and Development. Our research and development expenses increased
from $5,137,000 in fiscal 1999 to $6,155,000 in fiscal 2000 and decreased to
$5,148,000 in fiscal 2001. Our research and development expenses as a
percentage of net revenue were 23.5% in fiscal 1999, 29.6% in fiscal 2000, and
19
31.2% in fiscal 2001. We capitalize a portion of our software development costs
in accordance with statement of Financial Accounting Standard No. 86. (This
means that a portion of the costs we incur for software development are not
recorded as an expense in the period in which they are actually incurred.
Instead they are recorded as an asset on our balance sheet. The amount recorded
on our balance sheet is then amortized over the estimated life of the products
in which the software is included.) Our research and development expenses
increased in fiscal 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.
Research and development expenses decreased in fiscal 2001 due to reduced
consulting expenses associated with new product development. Headcount remained
consistent at thirty-two from March 31, 2000 to March 31, 2001. Consulting
expenses can fluctuate significantly from period to period depending upon the
status of software development projects and our schedule of new product
introductions.
General and Administrative. Our general and administrative expenses
increased from $1,556,000 in fiscal 1999 to $2,284,000 in fiscal 2000 to
$2,514,000 in fiscal 2001. These expenses represented 7.0% of net revenue in
fiscal 1999, 11.0% of net revenue in fiscal 2000 and 15.2% of net revenue in
fiscal 2001. 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. General
and administrative expenses increased in fiscal 2001 primarily due to an
increase in legal and professional expenses. We expect that general and
administrative expenses may increase as our operations expand.
Other Income and Expense. Other expense on our statement of operations
includes primarily the net amount of interest or other financing charges we have
incurred due to borrowings. For our 1999, 2000 and 2001 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. Other income includes the interest we earned on cash
balances and short term investments.
Provision for Income Taxes. In accordance with Statement of Financial
Accounting Standards No. 109, we made no provision for income taxes for our 1999
and 2001 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 2001 fiscal year we
exhausted our ability to carryback tax losses resulting from operations in the
fiscal year ended March 31, 1997.
Liquidity and Capital Resources. In October, 1999, we renegotiated a
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 were 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
20
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 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 sell up to $20,000,000 worth of our common stock, but not to exceed that
number of shares of common stock which equals 19.9% of our outstanding shares.
When we sell shares to Kingsbridge the price per share is set by a formula at a
discount from the market price of our common stock around the time of the sale
to Kingsbridge. That discount ranges from 8% to 12%. Our ability to sell stock
to Kingsbridge is contingent upon a number of terms and conditions, including
for example, continued listing on NASDAQ, effectiveness of a registration
statement, continued accuracy of representations and warranties made to
Kingsbridge and lack of material adverse changes to our business. The quantity
and timing of sales that we are able to make under the Equity Line Agreement are
also limited by the market price and trading volume of our stock. Because of
these limitations at the time we need cash in the future, the equity line
arrangement with Kingsbridge may be unavailable or insufficient to meet our cash
needs. On July 19, 2000, 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 November 13, 2000 the Statement became effective. During the fiscal
year ended March 31, 2001, we drew $200,000 from the credit line for which we
issued 211,416 shares of common stock. During the first quarter ended June 30,
2001, we drew $700,000 from the credit line for which we issued 683,600 shares
of common stock. Sale of the maximum number of shares under the equity line
agreement would result in a dilution to our shareholders of approximately 8.4%.
We cannot estimate the impact, if any, on the trading price of our common stock
in the event that we sell shares in the future under the equity lines. Future
sales may depress our stock price since stock is sold under the equity lines at
approximately an 8% to 12% discount from the market price.
Our operating activities used cash of $1,054,000 for the first quarter
ended June 30, 2000 and generated cash of $7,000 for the first quarter ended
June 30, 2001. During the quarter ended June 30, 2000, cash used in operations
included a net loss of $1,246,000 including depreciation and amortization of
$610,000 and interest expense amortization of $50,000. Cash used in operations
was affected by changes in assets and liabilities including increases in account
receivables of $1,155,000, inventories of $63,000 and other assets of $18,000,
offset by increases in accounts payable and accrued liabilities of $520,000 and
deferred revenue and deposits of $21,000. Accounts receivable increased for the
first quarter ended June 30, 2000 primarily due to the aging of the receivables
associated with sales to audio professionals. During the quarter ended June 30,
2000, we recorded a charge to bad debt expense of $170,000 which represented a
reserve for sales to the audio professionals and distributors who were
experiencing liquidity difficulties due to a decline in their business.
During the quarter ended June 30, 2001, cash generated from operations
included a net loss of $1,643,000 including depreciation and amortization of
$647,000. Cash generated from operations was primarily generated by the increase
in deferred revenue and increased collection on accounts receivables offset in
part by the operating loss. During the first quarter ended June 30, 2000 and
2001, our current ratio has decreased primarily due to the increase in our
deferred revenue and deposits. In addition to our operations, we utilized cash
during both quarters to purchase new fixed assets, pay down debt obligations and
to develop and purchase software that was added to capitalized software.
We believe that existing cash, cash equivalents and short term investments,
cash generated from operations, plus cash available through the equity based
line of credit with Kingsbridge will be sufficient to meet our cash requirements
at least through the middle of fiscal year 2003.
As of June 30, 2001, we had cash and cash equivalents of $2,003,000 and
working capital of $103,000.
21
THE BUSINESS
Overview
We develop, market and support workstations used by professionals to edit
and process digital audio and digital video information. Our workstation
products always include applications software and often include plug-in hardware
installed on a personal computer. Our customers use various kinds of peripheral
devices -- for example, disk drives, streaming tape drives, audio and video tape
recorders, and CD and DVD 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." Some of our workstation products are intended for use on Apple
Macintosh personal computers, while others are intended for use on personal
computers equipped with the Microsoft Windows operating system.
We currently market the following professional workstation product lines:
. SonicStudio is a line of Macintosh based 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. We have marketed SonicStudio and its predecessor
products for more than 10 years.
. DVD Creator is a line of Macintosh based DVD-Video production
workstations supporting the preparation and assembly of video and audio
assets for release in the DVD-Video format. We introduced DVD Creator in
the spring of 1996.
. DVD Fusion is a line of DVD-Video production workstations intended to
provide video producers and editors a lower priced set of tools for
preparing DVD-Video titles. DVD Fusion is often used in conjunction with
computer based video editing systems such as those supplied by Avid
Technologies, Media 100, and other companies. We introduced DVD Fusion
for the Macintosh in September 1999. We introduced DVD Fusion for
Windows in the spring of 2001.
. Sonic Scenarist is a line of Windows based DVD-Video authoring products
intended to provide high end professional customers with the tools
needed to prepare DVD-Video titles, especially those titles intended for
mass replication. We acquired Scenarist when we acquired the
professional DVD-Video authoring tools business of Daikin Industries,
Ltd. of Japan in February 2001.
. ReelDVD is a Windows based DVD-Video authoring product intended for use
by corporate and "prosumer" users in preparing DVD-Video titles for a
range of applications. ReelDVD was acquired by us from Daikin as part of
our acquisition of Daikin's DVD-Video authoring tools business in
February 2001.
In the past two years, we have started supplying software products outside
our traditional professional audio/video market. In September 1999, we began
shipping DVDit!(TM) a software product which provides simplified DVD authoring
capabilities to consumer, "prosumer," and some professional users. In the fall
of 2000 we introduced a preliminary version of a simplified DVD-Video creation
product called MyDVD,(TM) which is intended for use by consumers. In the summer
of 2001, we introduced a new version of MyDVD with a significantly modified user
interface and a feature set specifically designed for consumer use. We
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believe there will be increasing demand for this product because of a new
generation of low cost DVD recording devices that are being introduced to the
personal computing market during 2001.
Professional Products
Product Lines
We currently offer professional products oriented toward two different
applications within the professional audio and video industry. SonicStudio is a
line of professional digital audio workstations designed to support preparation
of audio for CD, video, film and broadcast productions. DVD Creator, DVD Fusion,
Sonic Scenarist and ReelDVD are intended to support production of DVD-Video and
DVD-Audio discs.
SonicStudio and many of our DVD production products 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.
Please see the discussion under "Platforms; Platform Risk", below.
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 concluded corporate purchasing agreements with
certain customer organizations that have multiple facilities, even within such
organizations decisions to purchase and deploy our products are usually made at
the facility level.
Most of the time we market our professional 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 that
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. Analog technology
records sound and video by making a physical representation analogous to the
original audio or visual signal. In contrast, digital technology encodes sound
and video as numbers and stores them as a kind of computer data. Long-playing
records ("LP") and Digital Audio Compact Discs ("CD-A"), are good examples of
analog (LP's) and digital (CD-A's) media. In an LP the grooves cut into the
vinyl record have a physical shape analogous to the original sound pressure
wave. In a CD-A the
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original sound pressure waves are 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 toward the end of 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.
. Perfect Copying -- Digitally recorded audio and video can be perfectly
reproduced, over an unlimited number of generations. In contrast, 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 to accomplish
using analog techniques. One of our own products, a signal processing
tool called NoNOISE(R) (sold as an option to SonicStudio), 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
digital formats consumes a large amount 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 DVD Production Products: DVD Creator, DVD Fusion, Sonic Scenarist,
and ReelDVD
DVD-Video
Our DVD Creator, DVD Fusion, Sonic Scenarist and ReelDVD products 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 can be 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 can be presented both as 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.
Since its introduction in 1996 (the first DVD-V players were placed on sale
in North America in early 1997) DVD-Video has proven to be a very successful
format. Some industry observers have characterized DVD-Video as the most
rapidly adopted consumer electronics format ever. Based on industry sources,
we estimate that by the end of calendar year 2000 over 75 million DVD-Video
players had been shipped by manufacturers, approximately 67% of those for use on
PCs, and 33% as set-top players.
DVD-Audio
DVD-Audio is a companion format to DVD-Video. DVD-Audio was standardized
in 1999 approximately three years after the introduction of the DVD-Video
format.
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While it contains many elements similar to DVD-Video, the DVD-Audio format
emphasizes audio features, such as high resolution multi-channel sound
reproduction. We support the DVD-Audio format with specialized configurations
of our DVD-Creator line. We introduced these configurations in 1998 and 1999,
and recently have augmented them with technology licensed from Matsushita
Electric Industries Ltd.
At this time the outlook for the DVD-Audio format is unclear. While some
amount of title production is underway, and while a limited number of DVD-Audio
compatible players are available in major market areas, the ultimate success of
the format will depend on its general acceptance by consumers and we are
unlikely to know about this for a few more years.
Professional DVD-Video Products Overview
We offer a range of professional DVD-Video production workstations under
the DVD Creator and DVD Fusion trade names. DVD Creator and DVD Fusion
incorporate subsystems capable of performing all of the steps needed -- video
encoding, audio encoding and format authoring -- to convert audio and video into
a finished DVD title. Generally speaking DVD Creator workstations offer more
extensive capabilities intended to be used by specialized professionals, at
somewhat higher price points, while DVD Fusion workstations are designed for
greater ease of use and are targeted at less specialized video professionals who
purchase at somewhat lower price points. The two product lines share common
technology and can perform most of the same functions. We offer both lines in
many configurations so that customers can specify a workstation suited to their
particular needs and style of operation. DVD Creator and DVD Fusion products
are available for the Macintosh personal computer. We recently (mid-2001)
introduced a version of DVD Fusion for Windows PCs.
Sonic Scenarist and ReelDVD are focused on the authoring step of DVD
production, and are intended to be used with video and audio encoding subsystems
purchased from other companies. Sonic Scenarist offers an extensive range of
authoring capabilities, and is intended for use by very high end professional
facilities particularly those facilities producing DVD-Video titles to be
replicated for mass distribution. ReelDVD is intended for users who are not
expert in the DVD-Video specification, with a simplified user interface
emphasizing ease of use and a short learning process. Both Scenarist and
ReelDVD are designed to work on Windows PCs.
DVD-Video Production Process
There are three basic processes required to prepare audio and video
programming in the DVD-Video format:
. 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.
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DVD Creator and DVD Fusion -- Subsystems & Configurations
DVD Creator and DVD Fusion workstations include three principal subsystems
capable together of performing all the tasks necessary for producing a finished
DVD-Video disc image, which can then be replicated on manufactured DVD discs.
These subsystems are:
. Video Encoding - 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/Fusion includes an encoding system designed to support user
control of the encoding process, and facilitate the operation of the
encoding system with standard professional video tape recorders and
other typical peripherals.
. Audio Encoding - DVD Creator/Fusion includes the ability to encode audio
into the formats supported by DVD-Video, including MPEG-2 and Dolby
Digital compressed audio. In some configurations of DVD Creator we
include a SonicStudio audio workstation.
. Format Authoring - The authoring subsystem 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, the authoring subsystem is a complicated software package.
In addition to these principal subsystems, DVD Creator/Fusion includes two
other subsystems:
. Emulation -- Because of the complexity of a DVD title, users of DVD
Creator/Fusion require the ability to preview the results of their work
before the time consuming step of producing a final output disc. We
offer a subsystem that permits this previewing or "proofing" step.
. Formatting and Writing -- DVD Creator/Fusion includes a subsystem to
take the output of an authoring session and then to combine the
navigation instructions together with the audio, video, text and graphic
elements in the particular sequence required by the DVD-Video standard.
This process, sometimes referred to as "multiplexing," produces a
finished DVD-Video disc image that can then be recorded to a recordable
DVD disc, or to the particular tape format that can be read by the
mastering systems at the replication plant that actually "cut" the disc
master using high-powered lasers.
DVD Creator/Fusion is sold in many different configurations. Our list
prices range from entry level Fusion systems at $4,000 to $55,000 for a full
Creator configuration (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 their systems. Typically,
customers will spend (including our products, plus typical host computer,
storage and peripherals) around $50,000 for their DVD Creator system and $20,000
for their DVD Fusion system. Please remember that revenue reported in our
financial statements is usually based on the price we receive from dealers net
of dealer commissions, and is thus lower on average than indicated by these
illustrative prices, which are based on end user list prices. As of September
30, 2001 since introduction we had shipped approximately 1,350 units of DVD
Creator and 1,400 units of DVD Fusion.
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Sonic Scenarist and ReelDVD -- Product Line Acquisition
On February 28, 2001 we announced an agreement with Daikin Industries Ltd.
of Japan to acquire their professional DVD authoring tools business. Under the
terms of that agreement we acquired a number of Daikin products including
Scenarist and ReelDVD, as well as the technology underlying those products. A
number of Daikin employees based in North America joined our company in early
March. Since the announcement, engineering for the Daikin products was first
continued by a team of Daikin engineers based in Osaka, Japan. Responsibility
for this engineering has now been transferred to our main development
organization in Novato. We anticipate that at least one of the Daikin
engineers formerly supporting the Daikin DVD products will join our organization
on a permanent basis. Since the announcement of the agreement, a sales and
marketing unit of Daikin, located in Tokyo, Japan, has served as our exclusive
distributor for the former Daikin products in Japan. If you are interested in
learning more about the other terms of this transaction, please see our reports
on Form 8K and Form 8K/A filed with the Securities Exchange Commission, dated
March 14 and May 14, 2001, respectively.
Sonic Scenarist
Sonic Scenarist is a software product for DVD-Video authoring, intended to
be used by "Hollywood" video professionals. Scenarist gives authoring
professionals a great degree of control over the interactivity and feature set
of DVD titles they produce. Scenarist also offers extensive "scripting"
capabilities that can be used by DVD-Video production facilities to automate
much of the work involved in producing multiple versions of the same title. For
example a studio might wish to release a movie on DVD-Video in different parts
of the world with different language (audio and subtitle) tracks. In this case
scripting would be used to automatically replace only those language tracks that
changed from local version to local version.
Initially released in 1996, Scenarist was the first commercially available
DVD-Video authoring tool. It was originally released for use on computers
manufactured by Silicon Graphics running the Irix operating system. The current
version of Scenarist is intended for use on the Windows operating system.
Scenarist enjoys significant acceptance among high end authoring facilities.
In rough terms, Scenarist is targeted at the upper end of the market
targeted by DVD Creator. Since the introduction of the product in 1996,
approximately 1,120 copies of Scenarist have been sold.
We plan to continue to develop and enhance Scenarist as part of our overall
professional DVD strategy, and we plan to include the existing users of
Scenarist among our customers for future offerings.
ReelDVD
ReelDVD is a software product targeted at video professionals who are not
experts in the DVD-Video specification but who need significant flexibility in
utilizing the features of the DVD-Video specification. Roughly speaking,
ReelDVD targets the same video professional customer as DVD Fusion. ReelDVD is
designed for use on the Microsoft Windows Operating System. ReelDVD was
introduced by Daikin in 2000. Since its introduction approximately 2,560 copies
of ReelDVD have been shipped.
We plan to continue to develop and enhance ReelDVD and to integrate sales
and distribution for ReelDVD with our other professional DVD sales efforts.
Professional DVD Market and Strategy
The Market for Professional DVD Production
We divide the professional DVD production market into three segments:
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. "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
- 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
production 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. We estimate that there are potentially more than
500,000 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.
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:
29
Apple Computer Mitsubishi
Digital Vision Optibase
Dolby Laboratories Philips
Intec Pinnacle Systems
Lucent Pioneer
Matsushita (Panasonic) Sony
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 production.
Strategy
We expect that our professional DVD business will account for a significant
portion of our overall business in the future. Our DVD strategy will continue
to be based on the following elements:
. Focus on Professional Applications -- Video and audio professionals have
a primary concern to produce the highest quality DVD discs, in complete
compliance with worldwide standards, with a high level of efficiency. We
will continue to evolve DVD-related production tools that are fully
compatible with "industry-standard" input formats and typical
professional video and audio equipment sets.
. High Performance Tools -- We aim that our DVD tools offer professional
users the highest levels of performance, both in terms of power and
sophistication of processing, and in terms of maximizing production
efficiency.
. Flexible Configurations -- Because we market to a wide range of
professional customers, 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 of their customers.
. Range of Product Offerings -- DVD has a number of potential uses,
including applications in corporate and industrial settings, 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 production
tool set -- video, audio and authoring -- to specifically address the
specialized needs of such emerging segments.
Professional Audio Workstations: SonicStudio
We develop and market a line of professional digital audio workstations
called "SonicStudio." A SonicStudio audio workstation consists of:
. One or more of our audio signal processing cards installed on a
Macintosh personal computer;
. 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,
. Extensive applications software.
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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 editing of sound -- the
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process by which pieces of sound are combined to create a single
resulting sound so that the existence of the original individual
pieces is imperceptible to the listener.
. EQ -- SonicStudio can be used to equalize, or EQ, the sound, a
process by which certain frequencies are emphasized or de-
emphasized. EQ is similar in concept to manipulating the bass and
treble controls on a consumer audio system, but 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. Since introduction of our audio workstation line
in 1987 (originally called the "Sonic System") more than 4,650 SonicStudio
systems have been shipped to customers as of September 30, 2001.
SonicStudio Configurations
We offer SonicStudio in a variety of configurations, and with various
hardware and software options. A customer could purchase a SonicStudio HD (the
current version of SonicStudio) system configured for basic two channel CD
premastering for approximately $9,000. A customer would pay approximately
$22,000 for a
31
fully-featured SonicStudio HD system configured for NoNOISE sound restoration.
Please remember that we do not include the cost of the personal computer or
peripheral devices in our pricing. Remember also that revenue as we report it on
our financial statements is usually based on the net price we receive from
dealers, and is thus lower on average per system than indicated by these
illustrative prices, which are based on end user list prices.
Competition
We encounter competition from a number of companies when selling
SonicStudio. We compete with companies offering traditional analog production
tools, digital 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, and 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, DSP Media, Spectral Design, 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.
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.
Platforms; Platform Risk
Because all of our SonicStudio and DVD Creator workstations and many of our
DVD Fusion workstations are Macintosh based we are subject to certain risks.
Among these are:
. We are dependent on Apple Computer continuing to ship and sell
certain models of the Macintosh, particularly models that can
support use of our plug-in PCI hardware (relevant to the higher
priced models of DVD Creator and DVD Fusion).
. Our Macintosh users generally demand that we maintain compatibility
with the latest models of the Macintosh and the Macintosh OS. In
this regard, in March of 2001 Apple Computer announced that
Macintosh OS X would now be available for use with its Macintosh
computers. Recently, Apple Computer has announced that new models
of the Macintosh will be delivering with OS X, though those
machines will still be able to run the earlier 9.x versions of the
Macintosh OS. Industry observers anticipate that at some point
before the end of 2002, new Macintosh computers will be able only
to run with OS X. While OS X currently offers a "compatibility
mode" which supports OS 9.x compatible applications, we believe
that we will soon have to modify our Macintosh Creator and Fusion
applications to OS X for Creator and Fusion to continue to be able
to run with the latest Macintosh models. Such a modification may be
difficult to accomplish and if it proves to be lengthy our revenues
could be significantly reduced in the interim.
. Apple Computer has acquired DVD authoring technology and has
introduced products that compete with some of our products (please
see discussion under "Competition" at page 34, below).
32
Consumer and Prosumer Products
DVDit!
In April 1999 we introduced DVDit! -- a highly simplified DVD-video
authoring tool. We announced two versions of DVDit! -- a Standard Edition ("SE")
and a Limited Edition ("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.
In April, 2000 we introduced DVDit! Professional Edition ("PE"). DVDit! PE
increases DVDit!'s reach by adding professional functionality previously found
only on authoring systems costing significantly more. DVDit! PE carries a
suggested retail price of $999. Shipments of DVDit! PE began in June 2000.
DVDit! 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.
. "Desktop Professionals" -- This group of customers resembles the
professional customers we described in discussing DVD Creator,
except that they typically do not have frequent or constant use for
DVD-Video authoring tools. Their use of DVD production tools is
interspersed with use of other desktop video, multimedia and
business software.
Trends Favoring DVDit!
We introduced DVDit! to take advantage of the following trends:
. Proliferation of MPEG Video -- Relatively high quality MPEG encoding
chips and systems are becoming widely available at prices ranging down
to a few hundred dollars at retail. Also, increases in PC processing
power and making possible encoding of reasonable quality MPEG video
using software encoder running on standard platforms.
. Availability of Lower Cost DVD Recording -- Until recently, DVD
recorders were relatively high priced. In early 2001, the first of a new
generation of recorders was introduced by Pioneer at "street" prices
under $1,000. We anticipate a number of other manufacturers will
introduce DVD recorders during the rest of 2001, and that prices for the
recorders will decline to $500 and below, eventually becoming as cheap
as current day CD+RW recorders (which currently are available for under
$200).
. Ubiquitous Digital Video -- 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
33
consumer DV cameras began declining below $1,000 during 2000 and this
trend continued during 2001, with some consumer level DV video cameras
carrying list prices below $500. Virtually every manufacturer of
professional and prosumer video editing systems has, or will, release DV
compatible systems in 2001.
. Rapid Growth in DVD Playback Units -- As mentioned above (See above,
page 34), DVD-Video has enjoyed unprecedented growth in the number of
set-top and PC based players shipped since the format's introduction.
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:
. 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 "Bundle Partners") are motivated to include our software as a
value-added offering for their customers. We are motivated to enter
into bundling arrangements because they generate revenue for us as
well as create 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! offering different levels of functionality so that we can
bundle the less functional versions. Currently we are shipping three
such versions - DVDit! LE ("Limited Edition"); DVDit! SE ("Standard
Edition"); and DVDit! PE ("Professional Edition").
Our Bundle Partners for DVDit! include:
Aplix Intervideo NEC
Avid Technologies IO-Data Panasonic
Canopus Margi Pioneer
Compaq Matrox Sigma Designs
Dazzle Media 100 Sony
. 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 bundle shipments by
our Bundle Partners.
. We are adding dealers and distributors for DVDit!, some of whom
already carry some of our professional products, but many of which do
not, targeting dealers and distributors specializing in digital video
applications as well as those who participate in the broader personal
computer marketplace.
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.
Competition
We have encountered some competition to DVDit! since its introduction. We
also believe that a number of companies have or will introduce products that
compete directly or in part with DVDit! in the future. Competitors who have
announced or are delivering products that compete with our products include
34
Apple Computer, MedioStream, MGI, Pinnacle Systems, Roxio, and Ulead. In
addition, other companies with greater financial and technological resources may
be interested in entering the growing consumer business for DVD creation.
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. In
January 2001, Apple announced two new DVD authoring products, which we presume
are based on Astarte's technology. The first product, iDVD, is intended for
consumer users and we believe will compete with MyDVD and DVDit! The second
product, DVD Studio Pro, is intended for desktop professional users, and we
believe will compete with DVDit! PE, DVD Fusion, and ReelDVD. Apple also
announced the availability of aggressively priced DVD recorders with certain
models of the Macintosh personal computer. More recently, Apple has announced
the upcoming availability of iDVD2, which adds new, attractive functionality to
the iDVD product. Also, Apple recently purchased Spruce Technologies, a long-
standing competitor of ours in the professional DVD market. While it is unclear
to us what Apple intends to do with the assets it acquired from Spruce, it is
quite likely that this acquisition will bolster Apple's DVD technology base and
make it more difficult for our products to compete with theirs.
MyDVD
In late 2000 we announced MyDVD, a DVD-video authoring product targeted at
consumer applications and carrying a suggested retail price of $99. Shipments
of MyDVD started in November 2000. The initial version of the product resembled
DVDit! (but with a simplified feature set and user interface).
We introduced a new version of MyDVD in the summer of 2001 with a
significantly modified user interface and a feature set specifically designed
for consumer use. Our belief is that as DVD recorders become widely available
in late 2001 and 2002, consumers will begin to utilize DVD recording for a
number of purposes, such as recording favorite home videos, recording favorite
video broadcasts, creating highly convenient and portable copies of videos
downloaded from the internet, and for copying videos published on VHS cassette
or DVD. We do not advocate violation of copyright laws by our customers. None
of our products contain software designed to circumvent the operation of
encryption or other protection systems (for example the "CSS" encryption system
commonly used by DVD-Video publishers to prevent digital copying of their
published video content.
We are pursuing a distribution and marketing strategy with MyDVD that is
very similar to that described above for DVDit!. We have started concluding
bundling agreements with a number of companies (some of which also bundle DVDit!
with some of their products). MyDVD Bundle Partners include:
ADS Logitex
Adaptec NEC
Dazzle Pioneer
Hewlett Packard Ricoh
Intervideo
We anticipate that MyDVD will become an increasing part of our business
during late 2001 and throughout 2002. We also anticipate that competition for
MyDVD will be severe and that we will confront competitors with expertise and
resources significantly greater than ours.
Technology Licensing Products
In the past two years we have begun to market products that permit other
companies to build software products of their own incorporating our technology.
At the current time we have two such software offerings:
35
"AuthorScript" and "ATL" (ATL was acquired as part of the Daikin acquisition).
In the following discussion, "AuthorScript" should be taken to include both
products.
AuthorScript is designed to make available to software product developers
Sonic's "back-end" engines for producing DVD-Video discs (and related formats
such as Video CD and Super Video CD). In AuthorScript we include the same
processing software that underlies the authoring subsystems we provide in our
professional and consumer products. We package this software with an
Application Programmer's Interface ("API") -- that is, a software "wrapper"
permitting other companies' software engineers to access our processing
technology easily from applications they are designing.
We believe that AuthorScript will be both a revenue source and a point of
strategic leverage for our company. Once a software product is developed using
one back-end technology, it is quite difficult and possibly de-stabilizing for a
customer to switch to another offering. We've consciously packaged AuthorScript
in a way which is attractive to software developers, and we license it to other
companies on terms that we believe are very reasonable. We anticipate that this
will create a stable and growing base of AuthorScript licensees as DVD
recordable technology spreads.
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 bundling arrangements described above for DVDit! and
MyDVD, and licensing arrangement, such as those described above for
AuthorScript), in which those companies included our products as part of their
product offerings. At the present time we have one significant OEM relationship
with Discreet Logic, 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% and 7% of our total revenues in
the fiscal years ended March 31, 2000, and 2001, respectively. 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 years ended March 31, 2000 and 2001, sales to our
Japanese distributor, Sanshin Electronics Company, amounted to 10% and 12%,
respectively, of total revenues. Sanshin is a distributor of almost 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.
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 six 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 twenty-three people in our field sales
36
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 Illinois, California, Utah, Georgia, and Taiwan. 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!, some
on Scenarist and some on SonicStudio.
Dealers
The vast majority of our professional product sales involve one of our
dealers. Dealers play an important role in our sales and support efforts. They
stimulate demand in their regions, they prospect for and qualify potential new
customers, they give product demonstrations, they close sales, and they assist
in post-sale installation, training and support. Dealers very often sell
peripheral equipment along with our 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:
--------------------------------------------------------------------
SonicStudio DVD Creator DVDit! Total
--------------------------------------------------------------------
Americas 19 37 14 42
Europe 40 37 16 44
Pacific Rim 17 24 9 33
--------------------------------------------------------------------
In the above chart, "Total" is less than the sum of columns because one dealer
organization sometimes carries more than one of our product lines.
Employees
At September 30, 2001, we employed 101 full-time-equivalent employees,
including the following:
37
- -------------------------------------------------------------------------------
#
Employees Function
- -------------------------------------------------------------------------------
45 Marketing, Sales and Customer Support
40 Software and Hardware Engineering
7 Manufacturing
9 Administration and Finance
- -------------------------------------------------------------------------------
To a very great degree our success in the future will depend on our ability
to recruit, retain and motivate engineering, technical, sales, marketing and
operations professionals. Recently the U.S. labor market has been quite tight,
and demand for 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 professional 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 customer calling programs in which customers are contacted by a
customer support representative to assess their level of satisfaction and to
acquaint them with new product offerings.
Research and Development
Our research and development staff includes a total of forty 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 incorporates 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.
38
. 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
some 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 four 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 our instructions. Our current outsourcing arrangement is with
Arrow Electronics, Inc. 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 2001 fiscal year, we produced approximately 90% 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.
39
Proprietary Rights
General Approach
We rely on a combination of the following to protect our proprietary rights
in our products:
. patents,
. trade secrets,
. 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.
Our products involve the use of certain technologies in which the overall
patent situation is acknowledged by most industry observers to be very unclear.
For example, patent coverage and license availability for MPEG-2 video encoding
and decoding is currently quite uncertain. While one group of companies has
attempted to create a single licensing entity for this technology (called
"MPEG/LA"), not all relevant patent holding companies have joined this entity.
We have been notified by MPEG/LA that it believes we should enter into a
licensing agreement with them. While we have not entered into a license with
MPEG/LA, we plan to continue to monitor this area and hope to act prudently to
avoid needless litigation and entanglements while continuing to offer our
products.
40
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, 2001, 47% of our revenues came from sales outside the United States. We
believe that it is quite possible 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
2006.
We also have sales offices located in London and Tokyo.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
41
MARKET FOR SONIC SOLUTIONS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Nasdaq National Market. As of September
30, 2001 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 nine quarters are as follows:
- ------------------------------------------------------------------------------------------------
Low Price High Price
-------------- --------------
- ------------------------------------------------------------------------------------------------
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
Quarter ended June 30, 2000................................... $3.250 $ 9.250
Quarter ended September 30, 2000.............................. $1.688 $ 4.469
Quarter ended December 31, 2000............................... $1.000 $ 3.063
Quarter ended March 31, 2001.................................. $1.031 $ 2.625
Quarter ended June 30, 2001................................... $1.050 $ 1.990
Quarter ended September 30, 2001.............................. $1.010 $ 1.900
Quarter ending December 31, 2001(through October 31, 2001).... $1.080 $ 1.310
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 any dividends on the Common Stock in the foreseeable
future.
In February 2001, we issued 700,000 shares of Series D Convertible
Preferred Stock to Daikin Industries in conjunction with the acquisition of the
DVD business and assets of Daikin. Each share of Series D Convertible
Preferred Stock is convertible into one share 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.
42
MANAGEMENT
Our directors and executive officers and their ages as of June 15, 2001 are
as follows:
Name Age Position With The Company
---- --- ------------------------------------------------------------------
Robert J. Doris 48 President and Chief Executive Officer
Mary C. Sauer 48 Senior Vice President of Business Development, Secretary and
Director
Robert M. Greber 63 Director
Peter J. Marguglio 54 Director
R. Warren Langley 58 Director
A. Clay Leighton 44 Senior Vice President Worldwide Operations, Finance and Chief
Financial Officer
Christopher A. Kryzan 42 Senior Vice President of Engineering and Marketing
Mr. Doris is married to Ms. Sauer. There are no other family relationships
between any director or executive officer of the Company.
Robert J. Doris. Mr. Doris founded Sonic Solutions in 1986 and has served
as President, Chief Executive Officer and Director of the Company 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.
Mary C. Sauer. Ms. Sauer founded Sonic Solutions in 1986 and has served as
a Vice President and Director of the Company 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.
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, until January 1996 when he was elected
Chairman and Chief Executive Officer. In December 1999, Mr. Greber retired from
The Pacific Stock Exchange. 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.
43
R. Warren Langley. Mr. Langley was appointed as a member of the Board of
Directors and as a member of the Audit Committee on June 7, 2001. Since January
2000, Mr. Langley has been a consultant and the Managing Principal of the
GuruWizard Fund, LLC. From January 2000 to May 2000, he served as interim CEO
of Brush Dance, a creator of Mind-Body-Spirit products. From September 1996
until March 1999, Mr. Langley served as President and Chief Operating Officer of
the Pacific Exchange in San Francisco. Prior to that from August 1987 to
January 1998, he was a Principal and Chief Operating Officer of Hull Trading in
Chicago, a proprietary derivatives trading firm. Mr. Langley has also worked as
Director of Operations Research and Industrial Engineering at United Airlines
and worked in several capacities in the software, energy, and defense consulting
industries after serving in the United States Air Force for fifteen years. Mr.
Langley holds degrees from the United States Air Force Academy Massachusetts
Institute of Technology, and Georgia Institute of Technology.
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 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.
44
EXECUTIVE COMPENSATION
The following table sets forth the total compensation for the fiscal years
ended March 31, 2001, 2000 and 1999 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 $100,000 or more. None of the named executive officers earned any
bonuses or compensation for these fiscal years other than as set forth in the
table or received any restricted stock awards, stock appreciation rights or
long-term incentive plan payouts.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM
FISCAL YEAR --------------------- COMPENSATION
NAME AND PRINCIPAL POSITION ENDED MARCH 31, SALARY ($) BONUS ($) OPTIONS (#)
- ------------------------------------ -------------- ---------- --------- ------------
Robert J. Doris 2001 $225,000 $ 0 85,000
President (Chief Executive Officer) 2000 $221,250 $ 0 85,000
and Director 1999 $138,750 $ 0 85,000
Mary C. Sauer 2001 $127,875 $ 0 40,000
Senior Vice President, 2000 $112,675 $ 0 40,000
Business Development, 1999 $111,000 $ 0 40,000
Secretary and Director
Christopher A. Kryzan 2001 $187,000 $38,917 48,000
Senior Vice President, 2000 $185,500 $45,031 25,000
Engineering and Marketing 1999 $175,000 $32,300 40,000
A. Clay Leighton 2001 $180,000 $15,000 50,000
Senior Vice President Worldwide Operations 2000 $176,250 $15,000 65,000
Finance and Chief Financial Officer 1999 $112,920 $15,000 25,000
The following table sets forth certain information regarding grants of
stock options made during the fiscal year ended March 31, 2001 to the executive
officers named in the Summary Compensation Table. Since inception, Sonic
Solutions has not granted any stock appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
---------------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE AT
NUMBER OF TOTAL OPTIONS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OR OPTION TERM
OPTIONS FISCAL BASE PRICE EXPIRATION ------------------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5% 10%
- ---------------------- ------------------ --------------- ------------- -------------- ------------------------------
Robert J. Doris 85,000 8% $3.0000 9/5/10 $12,750 $25,000
Mary C. Sauer 40,000 4% $3.0000 9/5/10 $ 6,000 $12,000
Christopher A. Kryzan 48,000 5% $1.5630 4/1/10 $ 3,751 $ 7,502
A. Clay Leighton 50,000 5% $1.5630 9/1/10 $ 3,907 $ 7,815
______________________
The exercise price of the options in the above table is equal to the fair
market value of Sonic Solutions' Common Stock on the date of grant, as
determined by reference to the closing price of Sonic Solutions'
45
Common Stock on the Nasdaq National Market. The options are subject to earlier
expiration in the event of the officer's termination of employment with Sonic
Solutions. Potential realizable value is based on an assumption that the fair
market value of the stock on the date of grant appreciates at the stated rate,
compounded annually, from the date of grant until the end of the option term.
These values are calculated based on requirements promulgated by the Securities
and Exchange Commission and do not reflect Sonic Solutions' estimate of future
stock price appreciation. All of the options in the above table were granted
under Sonic Solutions' Stock Option Plan, and vest over a period of one year at
a rate of 8.3333 percent per month.
46
The following table sets forth information regarding the number and value
of options exercised during the fiscal year ended March 31, 2001 and of
unexercised options held by the named executive officers on March 31, 2001.
Value is considered to be the difference between exercise price and the closing
price of $1.313 per share of the Common Stock as quoted on the Nasdaq National
Market on March 31, 2001.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTION AT VALUE OF IN-THE-MONEY
SHARES ACQUIRED ON AGGREGATE FISCAL YEAR END AT FISCAL YEAR END
EXERCISE VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE(1)
Robert J. Doris 0 0 387,500/42,500 $0/0
Mary C. Sauer 0 0 197,000/35,000 $0/0
Christopher A. Kryzan 0 0 190,083/22,917 $0/0
A. Clay Leighton 33,000 $68,357 216,771/28,229 $0/0
___________
(1) These values have not been, and may not be, realized, and are based on the
positive spread between the respective exercise prices of the outstanding
stock options and the closing price of Sonic Solutions' Common Stock at
March 31, 2001 ($1.313).
Sonic Solutions did not make any awards during the fiscal year ended March
31, 2001 to any of the executive officers named in the Summary Compensation
Table under any long-term incentive plan providing compensation intended to
serve as incentive for performance to occur over a period longer than one fiscal
year, excluding the stock options set forth above.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of October 15, 2001 (i) by each person who is
known by Sonic Solutions to own beneficially more than five percent of the
Common Stock, (ii) by each of Sonic Solutions' directors, (iii) by each of Sonic
Solutions' executive officers named in the Summary Compensation Table under the
caption "Executive Compensation" and (iv) by all directors and executive
officers as a group. Unless otherwise indicated, the address of each person
below is: c/o Sonic Solutions, 101 Rowland Way, Suite 110, Novato, CA 94945.
47
NUMBER PERCENTAGE
OF SHARES BENEFICIALLY OF SHARES BENEFICIALLY
NAME AND ADDRESS OWNED(1) OWNED(1)
- ---------------------------------------------------------- ------------------------ ------------------------
Kingsbridge Capital Ltd. 233,856 2%
Dawson Building
Main Street
Road Town
Tortola, BVI
Robert J. Doris (2) (3) 1,737,889 12.1%
Mary C. Sauer (2) (4) 883,162 6.1%
Peter J. Marguglio (2) (5) 229,443 1.6%
Robert M. Greber (2) (6) 13,000 *
R. Warren Langley (2) (7) 1,500 *
Christopher A. Kryzan (2) (8) 208,883 1.5%
A. Clay Leighton (2) (9) 341,000 2.4%
All directors and executive officers as a group (12 persons) 3,903,261 27.1%
- --------
*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 14,393,916 shares of Common Stock outstanding as of
October 15, 2001, 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) The address of the persons set forth is the address of our Company
appearing elsewhere in this prospectus.
(3) Includes 1,227,889 shares owned by Mr. Doris, and 510,000 shares issuable
upon exercise of options which will be exercisable within 60 days of
October 15, 2001.
(4) Includes 593,662 shares owned by Ms. Sauer, and 289,500 shares issuable upon
exercise of options which will be exercisable within 60 days of October 15,
2001.
(5) Includes 208,443 shares owned by Mr. Marguglio, and 21,000 shares issuable
upon exercise of options which will be exercisable within 60 days of October
15, 2000.
(6) Consists of shares issuable upon exercise of options which will be
exercisable within 60 days of October 15, 2001.
(7) Consists of shares issuable upon exercise of options which will be
exercisable within 60 days of October 15, 2001.
(8) Consists of shares issuable upon exercise of options which will be
exercisable within 60 days of October 15, 2001.
(9) Includes 38,500 shares owned by Mr. Leighton and 302,500 shares issuable
upon exercise of options which will be exercisable within 60 days of October
15, 2001.
Board Meetings and Committees
48
The Board held a total of four meetings during the fiscal year ended March
31, 2001. No incumbent director participated in fewer than 75% of the total
number of meetings of the Board and all meetings of the committees, if any, upon
which such director served.
During the fiscal year ended March 31, 2001, the audit committee of the
Board consisted of Mr. Marguglio and Mr. Greber. Mr. R. Warren Langley was
appointed as a member of the Audit Committee on June 7, 2001. All of the audit
committee members are independent directors as defined in the National
Association of Securities Dealers listing standards. The principal functions of
the audit committee are to recommend engagement of the Company's independent
auditors, to consult with the Company's auditors concerning the scope of the
audit and to review with them the results of their examination, to review and
approve any material accounting policy changes affecting the Company's operating
results and to review the Company's financial control procedures and personnel.
The audit committee held four meetings during the fiscal year ended March 31,
2001.
The Board does not have a nominating committee or a compensation committee.
Audit Committee Report
The Audit Committee has reviewed and discussed the audited consolidated
financial statements for the year ended March 31, 2001 with the Company's
management and has discussed the matters required to be discussed pursuant to
Statement on Auditing Standards No. 61 (Communications with Audit Committees)
with the representatives of KPMG LLP, the independent auditors of the Company.
The independent auditors have provided a written disclosure to the Audit
Committee in compliance with Independence Standards Board No. 1 (Independence
Discussions with Audit Committees). The Audit Committee has discussed the
auditors' independence with KPMG LLP. Based on the review of the audited
consolidated financial statements for the year ended March 31, 2001 and the
discussions between the Audit Committee, the Company's management and the
independent auditors, the Audit Committee has recommended to the Board of
Directors that the audited consolidated financial statements for the year ended
March 31, 2001 be included in the Company's Annual Report to Stockholders and in
the Company's Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission.
The Audit Committee acts under a written charter that was first adopted and
approved by the Company's Board of Directors on June 1, 2000. In performing its
functions, the Committee acts only in an oversight capacity and necessarily
relies on the work and assurances of the Company's management, which has the
primary responsibility for financial statements and reports, and of the
independent auditor, who, in its report, expresses on opinion on the conformity
of the Company's annual financial statements to generally accepted accounting
principles.
Newly Appointed Board and Committee Member
On June 7, 2001, Mr. R. Warren Langley was appointed as a member of the
Board of Directors and as a member of the Audit Committee.
Compensation Committee Interlocks and Insider Participation
The Board does not have a Compensation Committee. Accordingly, the entire
Board determines executive compensation. Robert J. Doris and Mary C. Sauer are
directors and are the founders and principal executive officers of the Company.
Stock Option Plans
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
49
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, 2001, at prices of $2.6560, $2.5625 and $1.6880 per
share, of which 10,669 were exercisable. 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.
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.
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.
In July, 2000, the Board of Directors adopted the Sonic Solutions 2000
Stock Option Plan and the shareholder's approved the 2000 Stock Option Plan in
September, 2000. The 2000 Stock Option Plan covers 3,000,000 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.
DESCRIPTION OF CAPITAL STOCK
As of the date of this prospectus, our authorized capital stock consists of
30,000,000 shares of common stock, no par value, and 10,000,000 shares of
preferred stock, no par value.
Common Stock
As of October 15, 2001, there were 14,393,916 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 company, holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any outstanding preferred stock. Holders of common stock have no
preemptive rights and have no rights to convert their common stock into any
other securities. The outstanding shares of common stock are fully paid and
nonassessable.
50
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.
These provisions could also affect the market price of our common stock.
As of the date of this prospectus, 850,000 shares of preferred stock have
been designated as Series D preferred stock, 700,000 of which are outstanding.
The terms of the Series D preferred stock are summarized below.
CONVERSION:
Each share of Series D preferred stock is convertible, at the election of
the holder, into that number of shares of our common stock equal to the
liquidation preference, as adjusted for stock splits, reorganizations and the
like, which is currently $5.00 per share, divided by the conversion price. The
conversion price is initially $5.00 per share but is subject to modification and
adjustment. For example, the conversion price will be adjusted in connection
with stock splits, distributions and reclassifications.
The Series D preferred stock has a liquidation preference equal to $5.00
per share, as adjusted for stock splits, reorganizations and the like, plus
accrued and unpaid dividends, and are senior to any other preferred stock in
respect of the right to receive dividend payments and liquidation preferences.
REDEMPTION: The Series D preferred stock is subject to redemption, under
certain circumstances, at any time after the issuance of the Series D preferred
stock.
DIVIDEND RIGHTS: Holders of Series D preferred stock are entitled to
cumulative dividends, when and as declared by the Board, at the annual rate of
$0.20 per share, until such time as the Series D preferred stock have been
converted into common stock or redeemed. Dividends on Series D preferred stock
may be paid in cash or in shares of Series D preferred at a price equal to the
then applicable conversion price, at the election of the Company. The dividends
are cumulative and payable quarterly in arrears for each quarter of each fiscal
year.
VOTING RIGHTS: Each holder of Series D preferred stock is entitled to the
number of votes equal to the number of shares of common stock into which such
shares of Series D preferred Stock could be converted. The holders of Series D
preferred stock have the same voting rights and powers as the holders of common
stock. In addition, an affirmative vote of a majority of the outstanding Series
D preferred stock is required to:
. alter or amend the rights, preferences and privileges of the Series D
preferred stock;
. authorize the issuance of additional Series D preferred stock; and
. for us to authorize or issue additional or other capital stock that is senior
or equal to the Series D preferred stock in respect of the preferences in
connection with the distributions and payments upon the liquidation and
winding up of Sonic Solutions.
51
Warrants
On October 15, 1999, in connection with a renegotiation of financing terms
with Hambrecht & Quist, we issued warrants to purchase 120,000 shares of common
stock at an exercise price of $2.50. As of the date of this prospectus, there
remain outstanding warrants to purchase a total of 96,283 shares of our common
stock.
Transfer Agent and Registrar
The transfer agent and registrar of our common stock is Mellon Investor
Services.
LEGAL MATTERS
The legality of the issuance of the securities being offered hereby was
passed upon for Sonic Solutions by Heller Ehrman White & McAuliffe LLP, Menlo
Park, California.
EXPERTS
The financial statements and schedules of Sonic Solutions as of March 31,
2001 and March 31, 2000 and for each of the years in the three-year period ended
March 31, 2001, have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
52
INDEX TO FINANCIAL STATEMENTS
Independent auditors' report......................................... F-2
Balance Sheets....................................................... F-3
Statements of Operations............................................. F-4
Statements of Shareholders' Equity................................... F-5
Statements of Cash Flows............................................. F-6
Notes to Financial Statements........................................ F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Sonic Solutions:
We have audited the accompanying balance sheets of Sonic Solutions as of
March 31, 2000 and 2001, and the related statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended March
31, 2001 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, 2000 and 2001 and the results of its operations and its cash flows for each
of the years in the three-year period ended March 31, 2001, 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
May 3, 2001 except as to note 6,
which is as of June 18, 2001
F-2
SONIC SOLUTIONS
BALANCE SHEETS
(in thousands, except share and per share amounts)
March 31 June 30
------------------------- -----------------
2000 2001 2001
--------- --------- -----------------
Assets (unaudited)
Current assets:
Cash and cash equivalents............................................... $ 5,179 1,616 2,003
Accounts receivable, net of allowance for returns and doubtful accounts
of $930 and $1,005 at March 31, 2000 and 2001 and $979 at June 30,
2001, respectively..................................................... 4,635 4,185 3,948
Inventory.............................................................. 945 492 490
Prepaid expenses and other current assets.............................. 425 448 331
-------- ------- -------
Total current assets................................................... 11,184 6,741 6,772
Fixed assets, net........................................................ 1,515 1,333 1,165
Purchased and internally developed software costs, net................... 1,876 3,094 2,850
Other assets............................................................. 393 570 582
-------- ------- -------
Total assets........................................................... $ 14,968 11,738 11,369
======== ======= =======
Liabilities And Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities............................... $ 4,306 4,621 4,584
Deferred revenue and deposits.......................................... 1,224 1,595 2,289
Subordinated debt...................................................... 600 57 --
Current portion of obligations under capital leases.................... 78 10 2
-------- ------- -------
Total current liabilities.............................................. 6,208 6,283
Obligations under capital leases, net of current portion................. 10 -- --
-------- ------- -------
Total liabilities...................................................... 6,218 6,283 6,875
Commitments and contingencies
Shareholders' Equity
Convertible preferred stock, no par value, 10,000,000 shares
authorized: 155,544, 700,000 and 709,514 shares issued and outstanding
at March 31, 2000, 2001 and June 30, 2001, respectively............... 506 1,750 1,774
Common stock, no par value, 30,000,000 shares authorized; 12,050,214,
13,056,646 and 13,740,246 shares issued and outstanding at March 31,
2000, 2001 and June 30, 2001, respectively............................. 27,083 28,399 29,081
Accumulated deficit..................................................... (18,839) (24,694) (26,361)
-------- ------- -------
Total shareholders' equity............................................ 8,750 5,455 4,494
-------- ------- -------
Total liabilities and shareholders' equity............................ $ 14,968 11,738 11,369
======== ======= =======
See accompanying notes to financial statements
F-3
SONIC SOLUTIONS
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years Ended March 31, Quarters Ended June 30,
-------------------------- -------------------------
1999 2000 2001 2000 2001
---------- -------- ------ ----------- -----------
(unaudited) (unaudited)
Net revenue....................................... $ 21,899 20,827 16,519 5,001 4,204
Cost of revenue................................... 9,547 8,992 5,892 1,734 1,389
-------- ------- ------- ------ ------
Gross profit...................................... 12,352 11,835 10,627 3,267 2,815
Operating expenses:
Marketing and sales.............................. 7,216 8,938 8,710 2,347 2,176
Research and development......................... 5,137 6,155 5,148 1,351 1,448
General and administrative....................... 1,556 2,284 2,514 773 450
Business integration............................. --- --- --- --- 383
-------- ------- ------- ------ ------
Total operating expenses......................... 13,909 17,377 16,372 4,471 4,457
-------- ------- ------- ------ ------
Operating loss................................... (1,557) (5,542) (5,745) (1,204) (1,642)
Other expense, net................................ (302) (249) (110) (42) (1)
-------- ------- ------- ------ ------
Loss before income taxes......................... (1,859) (5,791) (5,855) (1,246) (1,643)
Benefit for income taxes.......................... --- (97) --- --- ---
-------- ------- ------- ------ ------
Net loss......................................... ($1,859) (5,694) (5,855) (1,246) (1,643)
Beneficial conversion feature given to preferred
shareholders.................................... --- 110 --- --- ---
Dividends paid to preferred shareholders......... 53 49 20 8 12
-------- ------- ------- ------ ------
Net loss applicable to common shareholders...... ($1,912) (5,853) (5,875) (1,254) (1,655)
======== ======= ======= ====== ======
Basic and diluted loss per share applicable to
common shareholders............................. ($0.21) (0.56) (0.47) (0.10) (0.12)
======== ======= ======= ====== ======
Weighted average shares used in computing per
share amounts................................... 8,896 10,460 12,402 12,201 13,399
======== ======= ======= ====== ======
See accompanying notes to financial statements
F-4
SONIC SOLUTIONS
STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Preferred stock Common stock
----------------- --------------- Total
Accumulated Shareholders'
Shares Amount Shares Amount deficit Equity
------ ------ ------ ------ ------------ -------------
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
Exercise of common stock options............. --- --- 43 73 --- 73
Equity line of credit issuances, net of
issuance costs of $136..................... --- --- 211 58 --- 58
Issuance of common stock..................... --- --- 495 699 --- 699
Issuance of preferred stock.................. 700 1,750 --- --- --- 1,750
Conversion of preferred stock................ (156) (506) 257 506 --- ---
Preferred stock dividends.................... --- --- --- (20) --- (20)
Net loss..................................... --- --- --- --- (5,855) (5,855)
---- ------ ------ ------- ------- ------
Balances at March 31, 2001..................... 700 1,750 13,056 28,399 (24,694) 5,455
Equity line of credit issuances, net of
issuance costs of $12 (unaudited).......... --- --- 684 682 --- 682
Issuance of preferred stock (unaudited)...... 10 24 --- --- --- 24
Preferred stock dividends (unaudited)........ --- --- --- --- (24) (24)
Net loss (unaudited)......................... --- --- --- --- (1,643) (1,643)
---- ------ ------ ------- ------- ------
Balances at June 30, 2001(unaudited)........... 710 $1,774 13,740 $29,081 (26,361) 4,494
==== ====== ====== ======= ======= ======
See accompanying notes to financial statements
F-5
SONIC SOLUTIONS
STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended March 31, Quarters Ended June 30,
-------------------------- -------------------------
1999 2000 2001 2000 2001
------- -------- -------- ----------- -----------
Cash flows from operating activities: (unaudited) (unaudited)
Net loss $(1,859) (5,694) (5,855) (1,246) (1,643)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,621 2,958 2,025 610 647
Provision for returns and doubtful accounts, net of (18) 331 75 133 (26)
write-offs
Interest expense amortization 60 --- 132 50 2
Changes in operating assets and liabilities, net of effects
from purchase of Daikin DVD business:
Accounts receivable (2,187) 437 2,310 (1,155) 263
Inventory (173) (138) 465 (63) 2
Refundable income taxes 148 --- --- --- ---
Prepaid expenses and other current assets 30 (138) 8 94 117
Other assets (72) (237) (177) (18) (12)
Accounts payable and accrued liabilities 1,044 (53) (50) 520 (37)
Deferred revenue and deposits 282 (94) 219 21 694
------- ------ ------ ------ ------
Net cash used in operating activities (124) (2,628) (848) (1,054) 7
------- ------ ------ ------ ------
Cash flows from investing activities:
Purchase of fixed assets (913) (850) (417) (120) (107)
Additions to purchased and internally developed
software (696) (801) (1,656) (177) (128)
------- ------ ------ ------ ------
Net cash used in investing activities (1,609) (1,651) (2,073) (297) (235)
------- ------ ------ ------ ------
Cash flows from financing activities:
Proceeds from exercise of common stock options 143 773 73 82 ---
Repayments of subordinated debt (568) (84) (675) (165) (59)
Proceeds from equity line financing 2,283 7,053 58 (56) 682
Borrowings on line of credit 420 422 500 --- ---
Repayments of line of credit (420) (922) (500) --- ---
Principal payments on capital leases (137) (149) (78) (24) (8)
Payment of dividends (53) (49) (20) (8) --
------- ------ ------ ------ ------
Net cash provided by financing activities 1,668 7,044 (642) (171) 615
------- ------ ------ ------ ------
Net increase (decrease) in cash and cash equivalents (65) 2,765 (3,563) (1,522) 387
Cash and cash equivalents, beginning of year 2,479 2,414 5,179 5,179 1,616
------- ------ ------ ------ ------
Cash and cash equivalents, end of year $ 2,414 5,179 1,616 3,657 2,003
======= ====== ====== ====== ======
Supplemental disclosure of cash flow information:
Interest paid during year $ 71 109 44 15 2
======= ====== ====== ====== ======
Income taxes paid during year $ 9 4 --- 2 ---
======= ====== ====== ====== ======
Noncash financing and investing activities:
Issuance of preferred stock dividend --- --- --- --- 24
======= ====== ====== ====== ======
Conversion of preferred stock to common stock $ 544 956 506 506 ---
======= ====== ====== ====== ======
Conversion of subordinated debt to preferred stock --- 500 --- --- ---
======= ====== ====== ====== ======
Issuance of preferred stock to finance acquisition --- --- 1,750 --- ---
======= ====== ====== ====== ======
Issuance of common stock to finance acquisition --- --- 699 --- ---
======= ====== ====== ====== ======
Issuance of warrants associated with conversion of
subordinated debt --- 235 --- --- ---
======= ====== ====== ====== ======
Beneficial conversion feature given to preferred
shareholders --- 110 --- --- ---
======= ====== ====== ====== ======
See accompanying notes to financial statements
F-6
SONIC SOLUTIONS
NOTES TO FINANCIAL STATEMENTS
March 31, 1999, 2000 and 2001
(Information as of June 30, 2001 and for the three-month periods ended June 30,
2000 and 2001 is unaudited)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT
ACCOUNTING POLICIES
(a) Operations
We primarily 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 refer to the complete
configuration of personal computer, Sonic hardware, Sonic software, and
peripherals as a Sonic workstation.
We currently market two professional 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 DVD-Video and 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). DVDit! 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.
On February 27, 2001, we entered into an Asset Purchase Agreement with
Daikin Industries, Ltd., a Japanese corporation whereby on that date we acquired
The DVD Software Development Business of Daikin, also called "Daikin DVD". In
return for the assets acquired, we issued 395,000 shares of common stock valued
at $593,000 and 700,000 shares of preferred stock valued at $1,750,000. The
acquisition was recorded using the purchase method of accounting.
Our products generally include application software and specialized
hardware installed on a personal computer. Our products are designed to improve
the productivity and effectiveness of media professionals, enabling them to
process and manipulate more material in a given amount of time and to achieve
results which would have been impossible using traditional linear analog or
digital technology.
The quarterly unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
However, in the opinion of management, the condensed financial statements
include all adjustments (consisting of only normal, recurring adjustments)
necessary for their fair presentation. The interim results are not necessarily
indicative of results expected for a full year.
F-7
(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.
(c) Revenue Recognition
We have adopted Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9, Software Revenue Recognition, with Respect
to Certain Arrangements. SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements such as software products, hardware,
upgrades, enhancements, maintenance and support, installation and training to be
allocated to each element based on the relative fair values of the elements.
The fair value of an element must be based on vendor-specific objective
evidence.
We have derived our revenue primarily from licenses of our software
products (including hardware components) and maintenance and support. Revenue
recognized from multiple-element software arrangements are allocated to each
element of the arrangement based on the fair values of elements, such as
software products and maintenance and support. The determination of fair value
is based on objective evidence specific to us. SOP 98-9 requires recognition of
revenue using the "residual method" in a multiple element arrangement when fair
value does not exist for one or more of the delivered elements in the
arrangement. Under the "residual method", the total fair value of the
undelivered element is deferred and subsequently recognized in accordance with
SOP 97-2. The difference between the total software arrangement fee and the
amount deferred for the undelivered elements is recognized as revenue related to
the delivered elements.
Revenue from license fees is recognized when persuasive evidence of an
arrangement exists, delivery of the product (including hardware) has occurred,
no significant obligations with regard to implementation remain, the fee is
fixed and determinable, and collectibility is probable. In addition, royalty
revenue from certain distributors that do not meet our credit standards and
revenues from our distributor agreement with Daikin are recognized upon sell-
through to the end-customer. We consider all arrangements with payment terms
longer than one year not to be fixed and determinable. If the fee is not fixed
or determinable, revenue is recognized as payments become due from the customer.
Deferred revenue includes amounts billed to customers for which revenues
have not been recognized which generally results from the following: (1)
deferred maintenance and support; and (2) amounts billed to certain distributors
for our products not yet sold through to the end-user customers.
(d) Cash Equivalents
Cash equivalents consist of short-term, highly-liquid investments with
original maturities of three months or less and are stated at cost which
approximates market value. Cash equivalents consist of money market funds.
F-8
(e) Inventory
Inventory is valued at the lower of cost, determined on a first-in, first-
out basis, or market. Our finished goods inventory is manufactured to our
specifications by a third party.
(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
Purchased software and software product development costs are capitalized
when a product's technological feasibility has been established and then is
amortized over a future period. Amortization begins when a product is available
for general release to customers. Amortization of capitalized software costs,
for both internally developed and purchased software products, is computed on a
straight-line basis over the estimated economic life of the product, which is
generally three years, or on a basis using the ratio of current revenue to the
total of current and anticipated future revenue, whichever is greater. All
other research and development expenditures are charged to research and
development expense in the period incurred.
(h) Income Taxes
We account for income taxes under the asset and liability method of
accounting. Under the asset and liability method, deferred tax assets and
liabilities are recognized based on the future tax consequences attributable to
differences between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases.
(i) Basic and diluted loss per share
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, 1999, 2000 and 2001 and
the quarters ended June 30, 2000 and 2001 (in thousands, except per share data):
Years Ended March 31, Quarters Ended June 30,
-------------------------- -------------------------
1999 2000 2001 2000 2001
-------- ------- ------- ------------- ----------
Net loss.......................................... $(1,859) (5,694) (5,855) (1,246) (1,643)
Beneficial conversion feature given to preferred
shareholders..................................... -- 110 -- -- --
Dividends paid to preferred shareholders.......... 53 49 20 8 12
------- ------ ------ ------ ------
Net loss applicable to common shareholders........ $(1,912) (5,853) (5,875) (1,254) (1,655)
======= ====== ====== ====== ======
Weighted average number of common shares
outstanding...................................... 8,896 10,460 12,402 12,201 13,399
======= ====== ====== ====== ======
Basic and diluted net loss per share applicable
to common shareholders........................... $ (0.21) (0.56) (0.47) (0.10) (0.12)
======= ====== ====== ====== ======
F-9
As of March 31, 1999, 2000 and 2001 and June 30, 2000 and 2001 potentially
dilutive shares totaling 1,834,502; 1,253,947; 1,537,493; 845,010; and 721,791,
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 loss 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) Liquidity
Historically, we have incurred significant losses and negative cash flows
from operations. As of June 30, 2001, we have an accumulated deficit of
$26,361,000 and negative working capital of $103,000. We have primarily funded
operations through private equity financing with Kingsbridge (see note 6). We
intend to continue using the equity financing to fund negative cash flows. To
the extent that this equity line of credit or other sources of financing are not
available to us, we will reduce planned capital expenditures and reduce other
variable costs as necessary to maintain sufficient working capital to operate
our business through March 2002.
(l) 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 Statement of Financial Accounting Standards (SFAS) No. 123
"Accounting for Stock-Based Compensation" and as such have disclosed the pro
forma effects on net loss and net 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.
(m) Impairment of Long-Lived Assets
We evaluate our long-lived assets for impairment, including other
intangibles, whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Recoverability of assets
to be held and used is measured by comparison of the carrying amount of the
asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
(n) Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
as amended by SFAS No. 137 and SFAS No. 138, "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.
F-10
(o) Comprehensive Loss
We have no significant components of other comprehensive loss and
accordingly, comprehensive loss equals net loss.
(2) INVENTORY
The components of inventory consist of (in thousands):
March 31, June 30,
------------------- -------
2000 2001 2001
---- ---- ----
Finished Goods $387 182 194
Work-in-process 75 48 46
Raw materials 483 262 250
---- --- ---
$945 492 490
==== === ===
(3) FIXED ASSETS
Fixed assets consist of (in thousands):
March 31, June 30,
---------------------- -------
2000 2001 2001
-------- ------ -------
Equipment, furniture and fixtures $ 5,382 6,089 6,185
Demonstration equipment 1,888 1,909 1,916
Parts used in service, not held for sale 1,495 1,515 1,518
------- ------ ------
8,765 9,513 9,619
Less accumulated depreciation and amortization (7,250) (8,180) (8,454)
------- ------ ------
$ 1,515 1,333 1,165
======= ====== ======
As of March 31, 2001 and June 30, 2001, fixed assets held under capital
lease totaled $315,000 and accumulated amortization on those assets totaled
$315,000.
F-11
(4) PURCHASED AND INTERNALLY DEVELOPED SOFTWARE COSTS
Capitalized software costs consist of (in thousands):
March 31, June 30,
------------------------ -------
2000 2001 2001
------ ------ -------
Purchased software $ 409 455 458
Internally developed software 6,035 8,302 8,427
------- ------ ------
6,444 8,757 8,885
Accumulated amortization (4,568) (5,663) (6,035)
------- ------ ------
$ 1,876 3,094 2,850
======= ====== ======
Amortization of capitalized software costs was $1,225,000, $1,310,000 and
$1,095,000 for the years ended March 31, 1999, 2000 and 2001, respectively.
(5) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of (in thousands):
March 31, June 30,
----------------------- -------
2000 2001 2001
------- ------ -------
Accounts payable $1,089 872 1,170
Commissions payable 653 428 412
Accrued compensation and benefits 903 984 944
Accrued expenses 1,470 1,495 1,360
Accrued acquisition costs --- 356 427
Accrued marketing expenses 191 486 271
------ ----- -----
$4,306 4,621 4,584
====== ===== =====
(6) CREDIT FACILITIES AND DEBT RESTRUCTURING
On May 4, 2000, we entered into a new Private Equity Line Agreement (the
"Agreement") with Kingsbridge Capital. Under this Agreement, we may receive
("draw") cash from Kingsbridge in exchange for our common stock. The total of
all draws under the Agreement may not exceed $20,000,000 in cash nor involve
issuance of more than 19.9% of our outstanding common stock. Pricing of each
draw is based on the market price of our common stock around the time of a draw
discounted by amounts ranging from 8% to 12% of market price. Our ability to
utilize this equity line is subject to the effectiveness of a registration
statement on Form S-1 registering any shares received by Kingsbridge from us for
resale to the public. On July 19, 2000, we filed a registration statement on
Form S-1 to register for resale the shares we may issue to Kingsbridge under the
Agreement and on November 13, 2000 the Registration Statement became effective.
Utilization of the equity line by us is subject to a number of restrictions and
conditions that are described more fully in the Registration Statement. During
the fourth quarter of fiscal year March 31, 2001, we drew $200,000 from the
equity line for which we issued 211,416 shares of common stock.
F-12
During the first quarter ended June 30, 2001, we drew down $700,000 from
the equity line for which we issued 683,600 shares of common stock.
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
years ended March 31, 2000, and March 31, 2001, 292,000 and 156,000 shares of
the convertible preferred stock were converted to common stock.
In October 1999, the $1,500,000 of debt due to Hambrecht and Quist Guaranty
Finance was restructured into 153,846 shares of Series C Convertible preferred
stock and $1,000,000 of debt. The unpaid balance at March 31, 2000 and 2001 was
$600,000 and $57,000, respectively. During the year ended March 31, 2001, all
of the shares of Series C convertible preferred stock were converted to common
stock. In connection with the debt restructuring, we issued warrants to
purchase 120,000 common shares at an exercise price of $2.50. These warrants
expire on April 30, 2006 and are immediately exercisable. At June 30, 2001,
96,283 warrants remain unexercised.
(7) SHAREHOLDERS' EQUITY
Convertible Preferred Stock
In February, 2001, we issued 700,000 shares of Series D Convertible
Preferred Stock (the Preferred Stock) to Daikin Industries in conjunction with
our purchase of Daikin DVD valued at $1,750,000 or $2.50 per share. The rights,
preferences, and privileges of the holders of the Preferred Stock are as
follows:
. Dividends are cumulative and are payable only upon declaration by the
Company's Board of Directors at an annual rate of $0.20 per share, until
such shares have been converted into common stock. Such distributions
shall be payable quarterly in arrears for each calendar quarter of each
fiscal year.
. Holders have a liquidation preference of $5.00 per share plus all
accrued but unpaid dividends, in the event of any liquidation,
dissolution or winding up of the corporation, either voluntary or
involuntary.
. Each share has voting rights equal to the number of shares of common
stock into which such shares could be converted.
. Each share is convertible at any time into one share of common stock
subject to certain antidilution provisions.
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
F-13
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, 2001, at prices of $2.6560, $2.5625 and
$1.6880 per share, of which 10,669 were exercisable. 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.
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.
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.
In July, 2000, the Board of Directors adopted the Sonic Solutions 2000
Stock Option Plan and the shareholder's approved the 2000 Stock Option Plan in
September, 2000. The 2000 Stock Option Plan covers 3,000,000 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.
F-14
A summary of Sonic Solutions' option plans is presented below:
1999 2000 2001
---------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ---------- --------- ---------- --------- --------
Outstanding at beginning
of year 1,660,178 $2.89 2,026,333 2.80 2,351,039 2.67
Granted 670,250 3.08 782,300 2.73 1,029,500 1.69
Exercised (64,225) 2.22 (298,208) 2.58 (43,000) 1.84
Forfeited (239,870) 4.32 (159,386) 4.94 (224,351) 3.29
--------- ----- --------- ---- --------- ----
Outstanding at end of year. 2,026,333 $2.80 2,351,039 2.67 3,113,188 2.31
========= ========= =========
Options exercisable at
year end 1,179,191 $2.65 902,506 2.54 1,880,229 2.44
Fair value of options granted
during the year $2.06 1.93 1.28
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, 1999, 2000 and 2001 would have been
increased as indicated below (in thousands, except per share data):
Years Ended
March 31,
----------------------------------
1999 2000 2001
------ ------ ------
Net loss As Reported $1,859 5,694 5,855
Pro Forma $3,640 7,532 7,412
Net loss per share As Reported $ 0.21 0.56 0.47
Pro Forma $ 0.41 0.72 0.60
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 1999, 2000 and 2001; risk-free interest rate of
4.65%, 6.04% and 5.17%, respectively; expected life of 4 years; 91%, 97% and
110% 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 2001 and does not consider
compensation costs for stock options granted prior to April 1, 1995.
F-15
The following table summarizes information about stock options outstanding
at March 31, 2001.
Options Outstanding Options Exercisable
---------------------------------- -------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Outstanding at Average
Exercise Price March 31, 2001 Contractual Life Exercise Price March 31, 2001 Exercise Price
- ------------------------- -------------- ---------------- -------------- -------------- --------------
From $1.25 to $1.75 1,127,188 9.12 $1.52 490,466 $1.60
From $2.00 to $2.91 1,632,375 7.12 2.56 1,223,083 2.57
From $3.44 to $3.94 296,375 8.71 3.37 123,315 3.42
From $4.18 to $6.00 57,250 7.16 5.31 43,365 5.41
--------- ---- ----- --------- -----
From $1.25 to $6.00 3,113,188 8.00 $2.31 1,880,229 $2.44
========= ==== ===== ========= =====
(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):
Years Ended March 31,
-------------------------------------------
1999 2000 2001
------ ------ ------
Computed tax at statutory rate $(630) (1,969) (1,991)
Tax credits utilized 105 137 136
State taxes, net of federal benefit 5 4 4
Tax exempt interest income (19) -- --
Current year net operating losses, temporary
differences and credits for which no benefit was
recognized 520 1,804 1,834
IRS tax refund -- (99) --
Other 19 26 17
----- ------ ------
$ -- (97) --
===== ====== ======
F-16
The components of deferred taxes are as follows (in thousands):
March 31,
---------------------------------------------
1999 2000 2001
------- ------ ------
Deferred tax assets:
Accounts receivable $ 179 585 581
Accrued salaries -- -- 42
Inventories 123 49 82
Tax credit carryforwards 2,086 2,440 3,038
Net operating losses 4,732 6,109 7,969
Accrued vacation pay 55 101 120
Commissions 1 1 50
State income taxes 52 62 1
Warranty and other 51 37 79
------- ------ -------
Gross deferred tax assets 7,279 9,384 11,962
------- ------ -------
Valuation allowance (6,309) (8,651) (10,919)
------- ------ -------
Total deferred tax assets, net of valuation allowance 970 733 1,043
Deferred tax liabilities:
Fixed assets (130) (127) 65
Internally developed software (840) (606) (1,108)
------- ------ -------
Total deferred tax liability (970) (733) (1,043)
------- ------ -------
Net deferred taxes $ - - -
======= ====== =======
The net change in the valuation allowance for the year ended March 31,
1999, 2000 and 2001 was an increase of approximately $966,000, $2,343,000 and
$2,268,000, 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, 2001, we have cumulative federal and California net
operating losses of approximately $22,050,000 and $9,954,000, 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 2021. The
California tax loss carryforwards will expire beginning in the year 2001 through
2011.
As of March 31, 2001, we have cumulative unused research and development
tax credits of approximately $2,160,000 and $1,126,000 which can be used to
reduce future federal and California income taxes, respectively. Federal credit
carryforwards expire from 2009 through 2021; California credits will
carryforward indefinitely.
As of March 31, 2001, 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
Years Ended March 31,
-----------------------------
Capital Operating
Leases Leases
--------- -----------
2002 $ 10 983
2003 - 1,073
2004 - 1,116
2005 - 1,161
2006 1,207
Thereafter - 203
---- -----
Total minimum lease payments 10 5,743
=====
Less current portion of obligations under capital lease (10)
----
Long-term obligations under capital lease $ 0
====
Rent expense under operating leases for the years ended March 31, 1999,
2000 and 2001 was approximately $954,000, $953,000 and $1,011,000, 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 us.
(c) Inventory Purchase Commitments
Under the terms of an agreement with an outside supplier, we have a
commitment which requires us to purchase finished goods inventory from them
subject to certain terms. At March 31, 2001 the amount was not significant.
(d) 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 and results of
operations.
(10) SIGNIFICANT CUSTOMER INFORMATION AND SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" 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
Revenues by Product Line:
Years Ended March 31, Quarters Ended June 30,
------------------------------------- -------------------------
1999 2000 2001 2000 2001
-------- -------- -------- -------- --------
Revenues
Consumer DVD $ - 1,805 2,429 534 1,166
Pro Audio/Video 21,899 19,022 14,090 4,467 3,038
------- ------ ------ ----- -----
Total net revenue $21,899 20,827 16,519 5,001 4,204
======= ====== ====== ===== =====
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:
Years Ended March 31, Quarters Ended June 30,
---------------------------------------- -------------------------
1999 2000 2001 2000 2001
--------- -------- --------- --------- --------
North America $11,702 11,027 8,714 2,663 1,952
Export:
Europe 5,707 5,489 4,666 1,335 1,088
Pacific Rim 4,218 4,034 3,095 977 1,146
Other international 272 277 44 26 18
------- ------ ------ ----- -----
Total net revenue $21,899 20,827 16,519 5,001 4,204
======= ====== ====== ===== =====
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:
Percent of Total
Accounts Receivable
Years Ended March 31, March 31,
------------------------------------------ ----------------------
1999 2000 2001 2001
--------- -------- -------- --------
Customer A 11% 11% 7% 1%
Customer B - 10% 12% 6%
Percent of Total Percent of Total
Accounts Receivable Accounts Receivable
Quarters Ended June 30, June 30, June 30,
------------------------------ ------------------- -------------------
2000 2001 2000 2001
----------- --------- --------- ---------
Customer A 11% 6% 9% 4%
F-19
Percent of Total Percent of Total
Accounts Receivable Accounts Receivable
Quarters Ended June 30, June 30, June 30,
------------------------------ ------------------- -------------------
2000 2001 2000 2001
----------- --------- --------- ---------
Customer B 12% 13% 11% 9%
(11) ACQUISITION
On February 27, 2001, we entered into an Asset Purchase Agreement with
Daikin Industries, Ltd., a Japanese corporation whereby on that date we acquired
Daikin DVD. In return for the assets acquired, we issued 395,000 shares of
common stock valued at approximately $593,000 and 700,000 shares of preferred
stock valued at approximately $1,750,000.
The value of the common stock was determined based on the closing market
price of our common stock on February 27, 2001. The estimated value of the
preferred stock was determined based on the following considerations relative to
preferred stock: (1) the common stock conversion feature; (2) the dividend rate;
and (3) the stated liquidation preference associated with the preferred stock.
The acquisition was recorded using the purchase method of accounting and
accordingly, the operating results have been included in our results of
operations from the date of acquisition.
A finder's fee was paid of 100,000 shares of our common stock, valued at
$150,000, in connection with the acquisition.
As a consequence of the acquisition, we acquired all the Daikin DVD related
products and intellectual property rights which is included in purchased and
internally developed software costs. Additionally, we acquired tangible assets
such as furniture, computers and other electronic assets, some of which will
continue to be used specifically in the acquired DVD software development
business while others will be used in our general DVD authoring tool business.
The costs of the acquisition have been allocated on the bases of the estimated
fair market values of the assets and liabilities assumed.
We estimated fair value of the individual net tangible and intangible
assets acquired exceeded the purchase price. As a result, the carrying values
of the fixed assets and purchased software costs acquired were reduced by this
excess. The amount and components of the purchase price along with the
allocation of the purchase price are as follows (in thousands):
Common stock issued $ 743
Preferred stock issued 1,750
Estimated transaction costs 365
------
Total purchase price $2,858
======
Accounts receivable $1,935
Prepaid expenses 31
Inventory 12
Fixed assets 330
Purchased software costs 658
F-20
Deferred revenue (108)
------
Net assets acquired $2,858
======
In connection with the Asset Purchase Agreement, we and Daikin entered into
a fourteen month Distribution Agreement whereby we appointed Daikin as our
exclusive distributor in Japan. During the terms of the Distribution Agreement,
Daikin committed to placing minimum purchase orders of 260,000,000 yen of Daikin
acquired products. During the year ended March 31, 2001, Daikin paid us
$595,210 relating to the distribution agreement. As of March 31, 2001 and
assuming the conversion rate at March 31, 2001, Daikin has approximately
$1,583,000 to be paid to us under the Distribution Agreement.
The following unaudited pro forma results of operations for fiscal year
2000 are as if the acquisition occurred on April 1, 1999. The pro forma
information has been presented for illustrative purposes only and are not
necessarily indicative of the combined financial position or results of
operations for future periods or the results of operations or financial position
that actually would have been realized had we been a combined company during the
specified periods.
(in thousands, except per share amounts) Years Ended March 31,
-----------------------------
2000 2001
--------- --------
Net sales $25,147 19,413
======= =======
Net loss $(8,526) $(7,650)
======= =======
Basic and diluted loss per share applicable to common shareholders $ (0.81) $ (0.60)
======= =======
F-21
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.
Securities and Exchange Commission Registration Fee $ 0
Accounting Fees 7,500
Legal Fees and Disbursements 5,000
Miscellaneous 2,500
-------
Total: $15,000
=======
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
$3,808,000. 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.
(d) On May 20, 1999, we entered into an equity-based line of credit with
Kingsbridge
II-1
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. As of October 31, 2001, we have issued 1,548,686 shares of our
common stock to Kingsbridge.
Item 16. Exhibits and Financial Statement Schedule.
A. Exhibits
Exhibit Description
2.1 (9) Asset Purchase Agreement between Registrant and Daikin Industries,
Ltd., dated as of February 27, 2001
3.1 (1) Restated Articles of Incorporation
3.2 (1) Amended and Restated By-Laws
3.3 (9) Certificate of Determination of Series D Preferred Stock of Sonic
Solutions
4.1 (1) Specimen Common Stock Certificate
5 * Opinion of Heller Ehrman White & McAuliffe
10.1 (1) Amended and Restated Stock Option Plan (compensatory plan)
10.2 (1) Lease Agreement dated December 16, 1991 between Phoenix Leasing
Incorporated and the Company
10.3 (1) Loan Agreement dated November 28, 1993 between Bank of America and
the Company
10.4 (1) Agreement dated September 28, 1993 between JL Cooper Electronics
and the Company
10.5 (1) Form of Indemnity Agreement
10.6 (2) Lease Agreement dated January 26, 1995 between Golden Gate Plaza
and the Company
10.7 (3) Private Line of Credit Agreement dated December 31, 1997 between
Kingsbridge Capital Limited and the Company
10.8 (4) Private Securities Subscription Agreement dated March 31, 1998
between Hambrecht & Quist Guaranty Finance, LLC and the Company
10.9 (5) Stock purchase agreement dated May 20, 1999 between Sonic Solutions
and Kingsbridge Capital Limited
10.10 (5) Registration Rights Agreement dated May 20, 1999 between Sonic
Solutions and Kingsbridge Capital Limited
10.11 (6) Private Securities Subscription Agreement dated October 15, 1999
between Hambrecht & Quist Guaranty Finance, LLC and the Company
10.12 (7) 1998 Stock Option Plan (compensatory plan)
II-2
10.13 (8) Stock purchase agreement dated May 4, 2000 between Sonic Solutions
and Kingsbridge Capital Limited
10.14 (8) Registration Rights Agreement dated May 4, 2000 between Sonic
Solutions and Kingsbridge Capital Limited
10.15 Amendment to Lease Agreement between Golden Gate Plaza and the
Company
10.16 (9) Registration Rights Agreement between Registrant and Daikin
Industries, Ltd., dated as of February 27, 2001
10.17 (9) Shareholder Agreement between Registrant and Daikin Industries,
Ltd., dated as of February 27, 2001
10.18 (9) Consulting Agreement between Registrant and Daikin Industries,
Ltd., dated as of February 27, 2001
10.19 (9) Distribution Agreement between Registrant and Daikin Industries,
Ltd., dated as of February 27, 2001
23.1 Consent of Heller, Ehrman White & McAuliffe (included in Exhibit 5)
23.2 Consent of KPMG LLP
- ---------------
* Previously filed.
(1) Incorporated by reference to exhibits to Registration Statement on Form S-1
(No. 33-72870) effective February 10, 1994.
(2) Incorporated by reference to exhibits to Annual Report on Form 10-K for the
Fiscal Year Ended March 31, 1996 (No. 33-72870).
(3) Incorporated by reference to exhibits to Registration Statement on Form S-3
(No. 333-44347) effective January 30, 1998.
(4) Incorporated by reference to exhibits to Registration Statement on Form S-3
(No. 333-50697) effective April 29, 1998.
(5) Incorporated by reference to exhibits to Registration Statement on Form S-1
filed on May 27, 1999.
(6) Incorporated by reference to exhibits to Registration Statement on Form S-3
filed on March 17, 2000.
(7) Incorporated by reference to Appendix A to the Registrant's Definitive
Proxy Statement filed on July 21, 1998.
(8) Incorporated by reference to exhibits to Registration Statement on Form S-1
filed with the Commission on May 21, 2001.
(9) Incorporated by reference to exhibits of Form 8-K filed with the Commission
on March 14, 2001.
II-3
B. Financial Statement Schedule.
Valuation and Qualifying Accounts
FINANCIAL STATEMENT SCHEDULE
SONIC SOLUTIONS
VALUATION AND QUALIFYING ACCOUNTS
Years Ended March 31, 1999, 2000 and 2001
(in thousands)
Balance at Charged to Charged Balance
beginning costs and to other at end of
of period expenses accounts Deductions period
----------- ---------- ---------- ------------ ----------
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
==== === == ==== =====
Year ended March 31, 2001
Allowance for doubtful accounts............. $471 170 --- (95) 546
Allowance for returns....................... 459 --- --- --- 459
---- --- -- ---- -----
$930 170 --- (95) 1,005
==== === == ==== =====
II-4
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.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the
registrant has duly caused this Post-effective Amendment No. 1 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in Novato, State of California, on the 7th day of November, 2001.
Sonic Solutions
By: /s/ Robert J. Doris
----------------------------
Robert J. Doris, President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 1 to Registration Statement on Form S-1/A has been
signed below by the following persons in the capacities and on the dates
indicated.
November 7, 2001 /s/ Robert J.Doris
---------------------------------------------------
President and Director
Robert J. Doris
November 7, 2001 /s/ Mary C. Sauer *
---------------------------------------------------
Senior Vice President of Business Development and
Director Mary C. Sauer
November 7, 2001 /s/ Robert M. Greber *
---------------------------------------------------
Director
Robert M. Greber
November 7, 2001 /s/ R. Warren Langley *
---------------------------------------------------
Director
R. Warren Langley
November 7, 2001 /s/ Peter J. Marguglio *
---------------------------------------------------
Director
Peter J. Marguglio
November 7, 2001 /s/ A. Clay Leighton
---------------------------------------------------
Senior Vice President of Worldwide Operations and
Finance and Chief Financial Officer (Principal
Financial Accounting Officer)
A. Clay Leighton
* By: /s/ Robert J. Doris
--------------------
Robert J. Doris
Attorney-in-fact
II-6
SONIC SOLUTIONS
EXHIBIT INDEX
Exhibit Description
2.1 (9) Asset Purchase Agreement between Registrant and Daikin Industries,
Ltd., dated as of February 27, 2001
3.1 (1) Restated Articles of Incorporation
3.2 (1) Amended and Restated By-Laws
3.3 (9) Certificate of Determination of Series D Preferred Stock of Sonic
Solutions
4.1 (1) Specimen Common Stock Certificate
5 * Opinion of Heller Ehrman White & McAuliffe
10.1 (1) Amended and Restated Stock Option Plan (compensatory plan)
10.2 (1) Lease Agreement dated December 16, 1991 between Phoenix Leasing
Incorporated and the Company
10.3 (1) Loan Agreement dated November 28, 1993 between Bank of America and
the Company
10.4 (1) Agreement dated September 28, 1993 between JL Cooper Electronics
and the Company
10.5 (1) Form of Indemnity Agreement
10.6 (2) Lease Agreement dated January 26, 1995 between Golden Gate Plaza
and the Company
10.7 (3) Private Line of Credit Agreement dated December 31, 1997 between
Kingsbridge Capital Limited and the Company
10.8 (4) Private Securities Subscription Agreement dated March 31, 1998
between Hambrecht & Quist Guaranty Finance, LLC and the Company
10.9 (5) Stock purchase agreement dated May 20, 1999 between Sonic Solutions
and Kingsbridge Capital Limited
10.10 (5) Registration Rights Agreement dated May 20, 1999 between Sonic
Solutions and Kingsbridge Capital Limited
10.11 (6) Private Securities Subscription Agreement dated October 15, 1999
between Hambrecht & Quist Guaranty Finance, LLC and the Company
10.12 (7) 1998 Stock Option Plan (compensatory plan)
10.13 (8) Stock purchase agreement dated May 4, 2000 between Sonic Solutions
and Kingsbridge Capital Limited
10.14 (8) Registration Rights Agreement dated May 4, 2000 between Sonic
Solutions and Kingsbridge Capital Limited
10.15 * Amendment to Lease Agreement between Golden Gate Plaza and the
Company
II-7
10.16 (9) Registration Rights Agreement between Registrant and Daikin
Industries, Ltd., dated as of February 27, 2001
10.17 (9) Shareholder Agreement between Registrant and Daikin Industries,
Ltd., dated as of February 27, 2001
10.18 (9) Consulting Agreement between Registrant and Daikin Industries,
Ltd., dated as of February 27, 2001
10.19 (9) Distribution Agreement between Registrant and Daikin Industries,
Ltd., dated as of February 27, 2001
23.1 Consent of Heller, Ehrman White & McAuliffe (included in Exhibit 5)
23.2 Consent of KPMG LLP
- ---------------
* Previously filed.
(1) Incorporated by reference to exhibits to Registration Statement on Form S-1
(No. 33-72870) effective February 10, 1994.
(2) Incorporated by reference to exhibits to Annual Report on Form 10-K for the
Fiscal Year Ended March 31, 1996 (No. 33-72870).
(3) Incorporated by reference to exhibits to Registration Statement on Form S-3
(No. 333-44347) effective January 30, 1998.
(4) Incorporated by reference to exhibits to Registration Statement on Form S-3
(No. 333-50697) effective April 29, 1998.
(5) Incorporated by reference to exhibits to Registration Statement on Form S-1
filed on May 27, 1999.
(6) Incorporated by reference to exhibits to Registration Statement on Form S-3
filed on March 17, 2000.
(7) Incorporated by reference to Appendix A to the Registrant's Definitive
Proxy Statement filed on July 21, 1998.
(8) Incorporated by reference to exhibits to Registration Statement on Form S-1
filed with the Commission on May 21, 2001.
(9) Incorporated by reference to exhibits of Form 8-K filed with the Commission
on March 14, 2001.
II-8