UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 8-K/A
AMENDMENT NO. 2 TO CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
Date of Report: March 14, 2001
Date of earliest event reported: February 27, 2001
SONIC SOLUTIONS
(Exact name of registrant as specified in its charter)
California 72870 93-0925818
(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation or organization) Number) Identification No.)
101 Rowland Way, Suite 110, Novato, CA 94945
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 893-8000
Exhibit Index on Page 5.
1
INFORMATION INCLUDED IN THIS REPORT
This Amendment No. 2 hereby amends Item 7 of the Current Report on Form 8-K
filed on March 14, 2001 by Sonic Solutions ("Sonic") relating to the acquisition
of the Daikin Industries, Ltd. ("Daikin") DVD Software Development Business.
The following financial statements required by Item 7 are filed as part of this
report:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Daikin Industries, Ltd. Financial Statements:
Page
----
. Independent Auditors' Report 6
. Balance Sheets as of December 31, 2000 and March 31, 2000 7
. Statements of Operations for the nine month period ended
December 31, 2000 and the fiscal years ended March 31, 2000
and 1999 8
. Statements of Changes in Invested Capital for the nine month
period ended December 31, 2000 and the fiscal years ended
March 31, 2000 and 1999 9
. Statements of Cash Flows for the nine month period ended
December 31, 2000 and the fiscal years ended March 31, 2000
and 1999 10
. Notes to the Financial Statements 11
(b) Pro Forma Financial Information:
Page
----
. Pro forma financial information 16
. Unaudited Pro Forma Combined Balance Sheet as of
December 31, 2000 17
. Unaudited Pro Forma Combined Statement of Operations for
the nine month period ended December 31, 2000 18
. Unaudited Pro Forma Combined Statement of Operations for
the fiscal year ended March 31, 2000 19
. Notes to Unaudited Pro Forma Combined Financial Statements 20
2
(c) EXHIBITS: The following documents are filed as exhibits to this
report:
Exhibit Description
------- ------------------------------------------------------------------------------------
2.1* Asset Purchase Agreement between Registrant and Daikin Industries, Ltd., dated as of
February 27, 2001
3.1* Certificate of Determination of Series D Preferred Stock of Sonic Solutions
10.1* Shareholder Agreement between Registrant and Daikin Industries, Ltd., dated as of
February 27, 2001
10.2* Registration Rights Agreement between Registrant and Daikin Industries, Ltd., dated
as of February 27, 2001
10.3* Consulting Agreement between Registrant and Daikin Industries, Ltd., dated as of
February 27, 2001
10.4* Distribution Agreement between Registrant and Daikin Industries, Ltd., dated as of
February 27, 2001
23.1 Consent of Deloitte & Touche LLP
99.1* Press Release dated February 28, 2001
* Incorporated by reference to exhibits to Current Report on Form 8-K filed
on March 14, 2001.
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Sonic Solutions, has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Novato,
State of California, on the 31st day of August, 2001.
SONIC SOLUTIONS
Signature Date
--------- ----
/s/ Robert J. Doris August 31, 2001
- ----------------------------------------------------------
Robert J. Doris
President and Director (Principal Executive Officer)
/s/ A. Clay Leighton August 31, 2001
- ----------------------------------------------------------
A. Clay Leighton
Senior Vice President of Worldwide Operations
and Finance and Chief Financial Officer (Principal
Financial Accounting Officer)
4
EXHIBIT INDEX
Exhibit Description
------- ------------------------------------------------------------------------------------
2.1* Asset Purchase Agreement between Registrant and Daikin Industries, Ltd., dated as of
February 27, 2001
3.1* Certificate of Determination of Series D Preferred Stock of Sonic Solutions
10.1* Shareholder Agreement between Registrant and Daikin Industries, Ltd., dated as of
February 27, 2001
10.2* Registration Rights Agreement between Registrant and Daikin Industries, Ltd., dated
as of February 27, 2001
10.3* Consulting Agreement between Registrant and Daikin Industries, Ltd., dated as of
February 27, 2001
10.4* Distribution Agreement between Registrant and Daikin Industries, Ltd., dated as of
February 27, 2001
23.1 Consent of Deloitte & Touche LLP
99.1* Press Release dated February 28, 2001
* Incorporated by reference to exhibits to Current Report on Form 8-K filed on
March 14, 2001.
5
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Daikin Industries, Ltd.
We have audited the accompanying combined balance sheets of The DVD Software
Development Business of Daikin Industries, Ltd. as of March 31, 1999 and 2000,
and the related combined statements of operations, changes in invested capital
of Daikin Industries, Ltd. and cash flows for the years then ended. these
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 combined
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, such financial statements present fairly, in all material
respects, the combined financial position of The DVD Software Development
Business of Daikin Industries, Ltd. as of March 31, 1999 and 2000, and the
combined results of its operations and its cash flows for the years then ended
in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses from operations and
dependence upon Daikin Industries, Ltd. for funding raise substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 2. The accompanying combined financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Deloitte & Touche LLP
New York, New York
July 24, 2000
6
The DVD Software Development
Business of Daikin Industries, Ltd.
Combined Balance Sheets
March 31,
------------------------------ December 31,
1999 2000 2000
---------- ---------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 698,285 $1,087,831 $ 102,481
Accounts receivable, net of allowances of $90,000, $110,000 and
$110,000 1,584,804 2,142,656 1,934,735
Accounts receivable - Parent and affiliates (Note 4) 213,136 209,714 289,994
Inventories, net 40,649 16,888 11,583
Prepaid expenses and other current assets 582,201 298,675 30,701
---------- ---------- -----------
Total current assets 3,119,075 3,755,764 2,369,494
CAPITALIZED SOFTWARE COSTS - Net 3,755,600 2,138,622 1,992,029
PROPERTY, PLANT AND EQUIPMENT - Net 1,662,921 1,197,205 912,106
---------- ---------- -----------
TOTAL $8,537,596 $7,091,591 $ 5,273,629
========== ========== ===========
LIABILITIES AND INVESTED CAPITAL OF DAIKIN INDUSTRIES, LTD.
CURRENT LIABILITIES:
Accounts payable - trade $ 23,578 $ 139,953 $ 26,007
Current portion of capital lease obligations 430,854 7,311 ---
Deferred revenue 122,007 178,997 108,302
---------- ---------- -----------
Total current liabilities 576,439 326,261 134,309
CAPITAL LEASE OBLIGATIONS - Less current portion 95,364 --- ---
INVESTED CAPITAL OF DAIKIN INDUSTRIES, LTD. 7,865,793 6,765,330 5,139,320
---------- ---------- -----------
TOTAL $8,537,596 $7,091,591 $ 5,273,629
========== ========== ===========
See notes to combined financial statements.
7
The DVD Software Development
Business of Daikin Industries, Ltd.
Combined Statements of Operations
Years Ended Nine Months
March 31, Ended
-------------------------- December 31,
1999 2000 2000
----------- ----------- -----------
(Unaudited)
SALES - Net (includes $271,305, $351,125 and $58,463 of sales to
related parties - see Note 4) $ 2,738,754 $ 4,319,924 $ 2,893,665
----------- ----------- -----------
OPERATING EXPENSES:
Cost of Sales 48,888 187,186 126,636
Amortization of capitalized software 2,102,717 2,352,637 1,208,085
Research and development expenses 2,837,852 1,746,706 386,086
Sales and marketing expenses 4,041,408 3,422,258 2,013,730
General and administrative expenses 1,228,515 1,434,867 1,113,899
----------- ----------- -----------
Total operating expenses 10,259,380 9,143,654 4,848,436
----------- ----------- -----------
OPERATING LOSS (7,520,626) (4,823,730) (1,954,771)
----------- ----------- -----------
OTHER (EXPENSES) INCOME - Net:
Interest income 24,942 10,984 12,265
Interest expense (26,612) (26,666) (117)
Other - net (65,825) (17,005) 500
----------- ----------- -----------
Other (expenses) income - net (67,495) (32,687) 12,648
----------- ----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (7,588,121) (4,856,417) (1,942,123)
INCOME TAX PROVISION --- --- ---
----------- ----------- -----------
NET LOSS $(7,588,121) $(4,856,417) $(1,942,123)
=========== =========== ===========
See notes to combined financial statements.
8
The DVD Software Development
Business of Daikin Industries, Ltd.
Combined Statements of Changes in
Invested Capital of Daikin Industries, Ltd.
Years Ended Nine Months
March 31, Ended
--------------------------------- December 31,
1999 2000 2000
----------- ----------- -----------
(unaudited)
BALANCE, BEGINNING OF PERIOD $ 4,498,007 $ 7,865,793 $ 6,765,330
Net Loss (7,588,121) (4,856,417) (1,942,123)
Net remittance from Daikin Industries, Ltd. 10,955,907 3,755,954 316,113
----------- ----------- -----------
BALANCE, END OF PERIOD $ 7,865,793 $ 6,765,330 $ 5,139,320
=========== =========== ===========
See notes to combined financial statements.
9
The DVD Software Development
Business of Daikin Industries, Ltd.
Combined Statements of Cash Flows
Nine Months
Years Ended Ended
March 31, December 31,
1999 2000 2000
----------- ----------- -----------
(unaudited)
OPERATING ACTIVITIES:
Net loss $(7,588,121) $(4,856,417) $(1,942,123)
Adjustments to reconcile net loss to net cash used in by
operating activities:
Depreciation and amortization 2,493,431 2,919,559 1,518,117
Provision for returns and doubtful accounts, net of write-offs (80,000) 20,000 ---
Changes in operating assets and liabilities:
Accounts receivable (1,714,888) (574,430) 127,641
Inventories (40,649) 23,761 5,305
Prepaid expenses and other current assets (387,112) 283,526 267,974
Capitalized software costs - net (2,345,804) (735,659) (1,061,492)
Accounts payable - trade (99,966) 116,375 (113,946)
Accounts payable - affiliates (110,979) --- ---
Accrued expenses and other current liabilities 70,827 56,990 (78,006)
----------- ----------- -----------
Net cash used in operating activities (9,803,261) (2,746,295) (1,276,530)
----------- ----------- -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment (163,448) (101,206) (24,933)
----------- ----------- -----------
FINANCING ACTIVITIES:
Decrease in capital lease obligations (543,584) (518,907) ---
Net remittance from Daikin Industries, Ltd. 10,955,907 3,755,954 316,113
----------- ----------- -----------
Net cash provided by financing activities 10,412,323 3,237,047 316,113
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 445,614 389,546 (985,350)
CASH AND CASH EQUIVALENTS, BEGINNING OFYEAR 252,671 698,285 1,087,831
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 698,285 $ 1,087,831 $ 102,481
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 26,612 $ 26,666 $ ---
=========== =========== ===========
See notes to combined financial statements.
10
The DVD Software Development
Business of Daikin Industries, Ltd.
Notes to Combined Financial Statements
1. Basis of Presentation and Description of the Business
The accompanying combined financial statements present the accounts of
Daikin Industries, Ltd. ("DIL" or "Parent") and certain of its affiliates
relating to the development and distribution of software used to author
digital video disks ("DVDs"). DIL's software business (the "Company")
commenced operations in May 1996. Since the Company's inception, DIL has
provided the Company with funding for working capital. Remittances for the
sales of the Company's products are generally received by DIL. The caption
"Invested Capital of Daikin Industries, Ltd." in the accompanying balance
sheets include the cumulative amount of the net funding received from DIL
since inception, as well as the cumulative losses sustained by the Company
since inception.
For all periods presented, certain expenses reflected in the financial
statements include allocations of expenses incurred by DIL and certain of
its affiliates. These allocations take into consideration personnel,
business volume and other appropriate factors and generally include costs
related to marketing, administrative, general management and other services
provided to the Company by DIL and certain of its affiliates. These
allocated expenses totaled $200,000 and $212,000 for the years ended March
31, 1999 and 2000, respectively, and $150,000 for the nine months ended
December 31, 2000. Allocations of expenses are estimates based on
management's best assessment of actual expenses incurred on behalf of the
Company. It is management's opinion that the expenses charged to the
Company are reasonable.
The financial statements have been prepared as if the Company operated as a
stand-alone entity since inception. The financial information included
herein may not necessarily reflect the financial position, results of
operations or cash flows of the Company in the future or what the balance
sheets, results of operations or cash flows of the Company would have been
if it had been a separate, stand-alone entity.
The Company's products are used for commercial applications by motion
picture production facilities and DVD replication houses. During the year
ended March 31, 2000, the Company introduced products that are directed
toward the consumer market for DVD authoring. The Company uses
distributors for its products in most markets. The distributors purchase
the software from the Company and resell it. The Company's products are
sold to distributors in eight countries, and most of the Company's sales
are denominated in U.S. dollars. A distributor of the Company's products
in Singapore is an affiliate of DIL. Sales to that distributor were 8% and
10%, respectively, of the Company's sales for the years ended March 31,
1999 and 2000, and 2% for the nine months ended December 31, 2000.
2. Recurring Losses and Funding Received from DIL
The Company has sustained losses each year since inception and is dependent
upon DIL for funding. DIL has not determined whether it will continue to
fund the Company's cash requirements for the year ending March 31, 2001.
Should DIL cease funding the Company's losses, the Company would not be
able to meet its obligations as they come due. DIL is currently assessing
several options relating to the future of the Company, including the
potential sale of the Company. No decision regarding the future of the
Company has been made at this time.
3. Summary of Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
11
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents - In the accompanying balance sheets, all short-term
interest-bearing investments with a maturity of three months or less are
considered to be cash equivalents.
Inventories - Inventories are stated at the lower of average cost or
market.
Software Development Costs and Research and Development Costs - In
accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," purchased software and software product development
costs are capitalized when a product's technological feasibility has been
established and then is amortized over a future period. Amortization
begins when a product is available for general release to customers.
Amortization of capitalized software costs, for both internally developed
and purchased software products is computed on straight-line basis over the
estimated economic life of the product, which is generally three years.
All other research and development expenditures are expensed in the period
incurred.
Property, Plant and Equipment - Property, plant and equipment consist of
leasehold improvements, computer equipment and vehicle, and are recorded at
cost. Equipment under capital leases is stated at the present value of
minimum lease payments at the inception of the leases. Depreciation is
computed by the straight-line method over the estimated useful lives of the
various classes of the related assets. Leasehold improvements are
amortized over the terms of the related leases or the estimated lives of
improvements, if less than the lease term. Equipment held under capital
leases is amortized over the shorter of the lease term or the estimated
useful life of the asset.
The principal service lives used in computing provisions for depreciation
are as follows:
Years
Leasehold improvements 5
Computer equipment 5
Vehicle 5
Revenue Recognition - The Company has adopted Statement of Position ("SOP")
97-2, "Software Revenue Recognition", as amended by SOP 98-9, "Software
Revenue Recognition, with Respect to Certain Arrangements." The Company's
revenue is derived from the sale of the Company's software products and
from the sale of maintenance contracts. The Company's software products
generally are sold to its distributors, and resold by those parties to the
end users. The software is ready to use when sold and generally does not
require any efforts by the Company or the distributor to be installed and
implemented by the end user. Revenue from the sales is recognized at the
time the software is delivered to the distributor and the distributor is
obligated to pay for it. Revenue from sales to distributors may be subject
to agreements allowing limited rights of return and exchange. Accordingly,
the Company provides reserves for estimated future returns and exchanges at
the time of the sales as reduction of revenue.
Revenue from the sale of maintenance contracts is deferred and recognized
ratably over the period of the contract. In instances where maintenance
contracts are sold with software products in a multiple element
arrangement, vendor specific objective evidence is established for the
maintenance contract and the software product based on separate sales of
each element. The relative value of each element is used to allocate the
multiple element sales price, and revenue recognition for each element is
accounted for separately as set forth above.
Cost of revenue includes hardware product costs, third party hardware costs
and third party software royalties.
Income Taxes - The Company utilizes the liability method of accounting for
income taxes. Under the liability method, deferred income taxes are
recognized for the tax consequences of temporary differences by applying
applicable statutory tax rates to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The Company accounts for income taxes on a stand-alone basis,
in which no consideration is given to the ability of DIL or its affiliates
to utilize the tax deductions generated by the Company. The valuation of
deferred tax assets is based upon the likelihood of realization by the
Company of a tax benefit in future years. At March 31, 1999 and 2000, and
at December 31, 2000, valuation allowances equal to the amount of the net
deferred tax assets were established due to the uncertainty regarding the
realization of the deferred tax assets.
12
Comprehensive Income - In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income is defined in Concepts Statement No. 6 as "the change
in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting from investments
by owners and distributions to owners." As there are no changes in equity
from nonowner sources other than from net income, there is no difference
between net income for the year ended March 31, 1999 and 2000 reported on
the statements of operations.
Reclassifications - Certain reclassifications have been made in prior
years' financial statements to conform to classifications used in the
current period.
4. Related Party Transactions
The Company had the following transactions and balances with the Parent and
affiliates:
Years Ended Nine Months
March 31, Ended
------------------------------ December 31,
1999 2000 2000
----------- ----------- -----------
(unaudited)
Sales to affiliate $271,305 $351,125 $ 58,463
Due from parent and affiliate 213,136 209,714 289,994
5. Software Development Costs
Years Ended Nine Months
March 31, Ended
------------------------------ December 31,
1999 2000 2000
----------- ----------- -----------
(unaudited)
Net amount capitalized, beginning of the
period $ 3,512,513 $ 3,755,600 $ 2,138,622
Amounts capitalized during the period 2,345,804 735,659 1,061,492
Amortization expense (2,102,717) (2,352,637) (1,208,085)
----------- ----------- -----------
Net amount capitalized, end of the period $ 3,755,600 $ 2,138,622 $ 1,992,029
=========== =========== ===========
13
6. Property, Plant and Equipment
Property, plant, and equipment consist of the following:
Years Ended Nine Months
March 31, Ended
------------------------------- December 31,
1999 2000 2000
----------- ----------- -----------
(unaudited)
Leasehold improvements $ 62,116 $ 62,116 $ 62,116
Computer equipment 2,918,902 3,012,011 3,036,944
Vehicle --- 8,096 8,096
----------- ----------- -----------
2,981,018 3,082,223 3,107,156
Less accumulated depreciation and amortization (1,318,097) (1,885,018) (2,195,050)
----------- ----------- -----------
Property, plant and equipment - net $ 1,662,921 $ 1,197,205 $ 912,106
=========== =========== ===========
7. Income Taxes
There was no tax benefit recognized for the losses incurred during the
years ended March 31, 1999 and 2000, and the nine months ended December 31,
2000, as valuation allowances were provided for in amounts equal to the
deferred income tax benefits due to uncertainty recognizing the
realization of the related deferred tax assets. The effective tax benefit
on pretax losses differed from the US federal statutory rate for the
following reasons:
Years Ended Nine Months
March 31, Ended
--------------- December 31,
1999 2000 2000
---- ---- ------------
(Unaudited)
US federal statutory rate 35% 35% 35%
State and local income taxes, net of federal
tax benefit 8% 8% 8%
Valuation allowance (43%) (43%) (43%)
----- ----- -----
--- --- ---
===== ===== =====
The components of the Company's deferred income taxes and corresponding
valuation allowances are as follows:
Years Ended Nine Months
March 31, Ended
-------------------------------- December 31,
1999 2000 2000
----------- ----------- -----------
(unaudited)
Accounts receivable reserves $ 75,200 $ 132,000 $ 132,000
Computer software amortization (1,502,240) (855,449) (796,812)
Net operating loss carryforwards 8,267,685 9,497,582 10,208,986
----------- ----------- -----------
6,840,645 8,774,133 9,544,174
Less valuation allowance: (6,840,645) (8,774,133) (9,544,174)
----------- ----------- -----------
Deferred income taxes - net $ --- $ --- $ ---
=========== =========== ===========
14
8. Capital Lease Obligations
The Company leases certain equipment and office premises under capital and
noncancellable operating leases. At March 31, 2000, the minimum rental
commitments under these leases were as follows:
Year Ending Capital Operating
March 31, Lease Lease
- ----------- ----------------- ----------------
2001 $7,424 $176,858
Less portion representing interest 113 ---
----------------- ----------------
Obligations under capital lease $7,311 $176,858
================= ================
Rent expense amounted to $185,281 and $183,750 for the years ended March
31, 1999 and 2000, respectively.
9. Retirement Plan
Certain employees of the business participate in a 401(k) savings plan as
defined under the applicable provisions of the Internal Revenue Code that
is maintained by an affiliate of DIL. Employee contribution range from 1%
to 15%, and the matching contribution is 50% of the employee's contribution
to a maximum of 6%. Contribution to the plan was $39,487 for the year
ended March 31, 2000.
10. Segment Reporting
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which was adopted by the Company in
1999. SFAS NO. 131 requires companies to report financial and descriptive
information about its reportable operating segments, including segment
profit or loss, certain specific revenue and expense items and segment
assets, as well as information about the revenues derived from the Company
products and services, the countries in which the Company earns revenue and
holds assets, and major customers.
The Company is a supplier of a complete range of authoring and premastering
tools for DVD Video and DVD-ROM software production. Sales, gross profit,
and operating losses are not allocated or specific to individual
departments within the organization. Accordingly, the Company has a single
reportable segment. As such, the Company is required to disclose the
following geographic sales information:
Years Ended Nine Months
March 31, Ended
----------------------------- December 31,
1999 2000 2000
---------- ---------- ----------
(Unaudited)
North America and others $2,154,234 $2,489,855 $ 801,942
Japan 584,520 1,830,069 2,091,723
---------- ---------- ----------
Total net sales $2,738,754 $4,319,924 $2,893,665
========== ========== ==========
11. Subsequent Event (Unaudited)
On February 27, 2001 DIL signed an agreement with Sonic Solutions ("Sonic")
in which Sonic will purchase certain assets of the Company from DIL in
return for 395,000 shares of Sonic's Common Stock and 700,000 shares of
Sonic's Preferred Stock, convertible to shares of Sonic's Common Stock
under certain circumstances.
15
SONIC SOLUTIONS
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On February 27, 2001, Sonic Solutions, a California corporation ("Sonic")
entered into an Asset Purchase Agreement with Daikin Industries, Ltd., a
Japanese corporation ("Daikin") whereby on that date Sonic acquired The DVD
Software Development Business of Daikin Industries, Ltd. ("Daikin DVD"). In
return for the assets purchased, Sonic issued 395,000 shares of Common Stock
valued at approximately $593,000 and 700,000 shares of Preferred Stock to Daikin
valued at approximately $1,750,000. The acquisition was recorded using the
purchase method of accounting. The unaudited pro forma combined financial
statements are based on the respective historical audited and unaudited
financial statements and related notes of Sonic and Daikin DVD.
The unaudited pro forma combined balance sheet as of December 31, 2000
presents the financial position of Sonic assuming the acquisition had occurred
on December 31, 2000. All material adjustments to reflect the acquisition are
set forth in the column "Pro Forma Adjustments." The unaudited pro forma
combined statements of operations for the nine months ended December 31, 2000
and the year ended March 31, 2000 present the results of operations of Sonic
Solutions assuming the acquisition had occurred on April 1, 1999 and include all
material pro forma adjustments necessary for this purpose. The pro forma
adjustments are preliminary and based on management's estimates of the value of
the tangible and intangible assets acquired. The actual adjustments will differ
materially from those presented in these pro forma financial statements.
The following unaudited pro forma combined financial statements are
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 Sonic and Daikin DVD been a combined company during the specified
periods. The unaudited pro forma combined financial statements should be read in
conjunction with the historical consolidated financial statements of Sonic,
including the notes thereto.
16
SONIC SOLUTIONS
PRO FORMA COMBINED BALANCE SHEET
December 31, 2000
(in thousands)
(UNAUDITED)
Sonic Daikin Pro Forma
Solutions DVD Adjustments Pro Forma
--------- ------ ----------- ---------
Assets
Current assets:
Cash and cash equivalents $ 2,336 $ 102 $ (102) (b) $ 2,336
Accounts receivable, net 3,553 2,225 (290) (b) 5,488
Inventory, net 663 12 --- 675
Prepaid expenses and other current
assets 316 31 --- 347
-------- ------ ------- --------
Total current assets 6,868 2,370 (392) 8,846
Fixed assets, net 1,428 912 (582) (a) 1,758
Purchased and internally developed
software costs 1,001 1,992 (1,334) (a) 1,659
Other assets 460 --- --- 460
-------- ------ ------- --------
Total assets $ 9,757 $5,274 $(2,308) $ 12,723
======== ====== ======= ========
Liabilities And Shareholders' Equity
Current liabilities:
Accounts payable and accrued
liabilities $ 4,451 $ 27 $ 338 (a),(b) $ 4,816
Deferred revenue and deposits 1,054 108 --- 1,162
Subordinated debt, current
portion 215 --- --- 215
Current portion of obligations
under capital leases 27 --- --- 27
-------- ------ ------- --------
Total current liabilities 5,747 135 338 6,220
Commitments and contingencies
Shareholders' Equity
Convertible preferred stock --- --- 1,750 (a) 1,750
Common stock 27,539 --- 743 (a) 28,282
Invested capital of affiliate --- 5,139 (5,139) (a) ---
Accumulated deficit (23,529) --- --- (23,529)
-------- ------ ------- --------
Total shareholders' equity $ 4,010 $5,139 $(2,646) $ 6,503
-------- ------ ------- --------
Total liabilities and shareholders'
equity $ 9,757 $5,274 $(2,308) $ 12,723
======== ====== ======= ========
See accompanying notes to unaudited pro forma combined financial statements.
17
SONIC SOLUTIONS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
Nine Months Ended December 31, 2000
(in thousands, except share and per share amounts)
(UNAUDITED)
Sonic Daikin Pro Forma Pro
Solutions DVD Adjustments Forma
--------- ------- ----------- -------
Net revenue $ 12,468 $ 2,894 $ --- $15,362
Cost of revenue 4,580 --- 373 (c),(d) 4,953
-------- ------- ------- -------
Gross profit 7,888 2,894 (373) 10,409
-------- ------- ------- -------
Operating expenses:
Cost of sales --- 126 (126) (c) ---
Amortization of capitalized software --- 1,208 (1,208) (c) ---
Marketing and sales 6,667 2,014 --- 8,681
Research and development 3,960 386 --- 4,346
General and administrative 1,850 1,114 --- 2,964
-------- ------- ------- -------
Total operating expenses 12,477 4,848 (1,334) 15,991
-------- ------- ------- -------
Operating loss (4,589) (1,954) 961 (5,582)
-------- ------- ------- -------
Other income (expense), net (101) 12 --- (89)
-------- ------- ------- -------
Loss before income taxes (4,690) (1,942) 961 (5,671)
-------- ------- ------- -------
Provision (benefit) for income taxes --- --- --- ---
-------- ------- ------- -------
Net loss $(4,690) $(1,942) $ 961 $(5,671)
Beneficial conversion feature given
to preferred shareholders --- --- --- ---
Dividends paid to preferred
shareholders 8 --- 105 (e) 113
-------- ------- ------- -------
Net loss applicable to common
shareholders $(4,698) $(1,942) $ 856 $(5,784)
======== ======= ======= =======
Basic and diluted loss per share
applicable to common shareholders $(0.38) $ (0.45)
======== =======
Weighted average shares used in
computing per share amounts 12,301 495 (f) 12,796
======== ======= =======
See accompanying notes to unaudited pro forma combined financial statements.
18
SONIC SOLUTIONS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year Ended March 31, 2000
(in thousands, except share and per share amounts)
(UNAUDITED)
Sonic Daikin Pro Forma
Solutions DVD Adjustments Pro Forma
--------- ------ ----------- ---------
Net revenue $20,827 $ 4,320 $ --- $25,147
Cost of revenue 8,992 --- 516 (c),(d) 9,508
------- ------- ------- -------
Gross profit 11,835 4,320 (516) 15,639
------- ------- ------- -------
Operating expenses:
Cost of sales --- 187 (187) (c) ---
Amortization of capitalized software --- 2,353 (2,353) (c) ---
Marketing and sales 8,938 3,422 --- 12,360
Research and development 6,155 1,747 --- 7,902
General and administrative 2,284 1,435 --- 3,719
------- ------- ------- -------
Total operating expenses 17,377 9,144 (2,540) 23,981
------- ------- ------- -------
Operating loss (5,542) (4,824) 2,024 (8,342)
------- ------- ------- -------
Other income (expense), net (249) (32) --- (281)
------- ------- ------- -------
Loss before income taxes (5,791) (4,856) 2,024 (8,623)
------- ------- ------- -------
Provision (benefit) for income taxes (97) --- --- (97)
------- ------- ------- -------
Net loss $(5,694) $(4,856) $ 2,024 $(8,526)
Beneficial conversion feature given
to preferred shareholders 110 --- --- 110
Dividends paid to preferred
shareholders 49 --- 140 (e) 189
------- ------- ------- -------
Net loss applicable to common
shareholders $(5,853) $(4,856) $ 1,884 $(8,825)
======= ======= ======= =======
Basic and diluted loss per share
applicable to common shareholders $ (0.56) $ (0.81)
======= =======
Weighted average shares used in
computing per share amounts 10,460 495 (f) 10,955
======= ======= =======
See accompanying notes to unaudited pro forma combined financial statements.
19
SONIC SOLUTIONS
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
On February 27, 2001, Sonic completed the acquisition of The DVD Software
Development Business of Daikin Industries. Pursuant to the Asset Purchase
Agreement and related agreements (the "Agreements"), Sonic issued to Daikin
395,000 shares of Common Stock valued at $593,000 and 700,000 shares of
Preferred Stock valued at $1,750,000. An additional 100,000 shares of Common
Stock valued at $150,000 were issued as a finder's fee. Sonic estimates
transaction costs will be $365,000 for a total purchase price of approximately
$2,858,000. The transaction will be accounted for as a purchase.
Also, in connection with the Asset Purchase Agreement, Sonic and Daikin
entered into a Distribution Agreement whereby Daikin was appointed as Sonic's
exclusive distributor in Japan. Additionally, Daikin committed to placing
minimum purchase orders of 260,000,000 yen of the DVD products over the next
twelve (12) months.
NOTE 2. UNAUDITED PRO FORMA COMBINED BALANCE SHEET
The unaudited pro forma combined balance sheet as of December 31, 2000
give effect to the acquisition as if it had occurred on December 31, 2000.
The following adjustments have been reflected in the unaudited pro forma
combined balance sheet:
(a) To record common stock and preferred stock issued by Sonic and record
applicable purchase accounting entries. Under purchase accounting,
the purchase price will be allocated to assets and liabilities
assumed based on their relative fair values. 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
Deferred revenue (108)
------
Net assets acquired $2,858
======
The actual allocation of the purchase price will depend on the composition
of Daikin DVD's net assets on the closing date. Consequently, the actual
allocation of the purchase price will differ from that presented above.
20
(b) To exclude assets and liabilities that were not acquired pursuant to
the Agreements.
NOTE 3. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The unaudited pro forma combined statements of operations give effect to
the acquisition as if it had occurred on April 1, 1999.
The following adjustments have been reflected in the unaudited pro forma
combined statements of operations:
(c) To reflect certain expenses within cost of revenue and amortization
to conform with Sonic's presentation.
(d) Adjustment to record a decrease in amortization of capitalized
software expense due to the reduction in the historical carrying
value of acquired software development costs. These costs are being
amortized on a straight-line basis over two (2) years.
(e) To reflect dividends on preferred stock of $0.20 per share per annum
on the 700,000 outstanding preferred shares.
(f) Adjustment to reflect the issuance of 495,000 shares of Sonic's
Common Stock in connection with the Acquisition.
21