-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CMilet4MdVTnkrFm/ygQkt49ASPL61DmSseiByIrkfq3H2yOyMBNZZlEob94Hokm J2A+tvRu0+wz3Z4i3f2MEA== /in/edgar/work/20000628/0001032210-00-001289/0001032210-00-001289.txt : 20000920 0001032210-00-001289.hdr.sgml : 20000920 ACCESSION NUMBER: 0001032210-00-001289 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SONIC SOLUTIONS/CA/ CENTRAL INDEX KEY: 0000916235 STANDARD INDUSTRIAL CLASSIFICATION: [7373 ] IRS NUMBER: 930925818 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23190 FILM NUMBER: 663511 BUSINESS ADDRESS: STREET 1: 101 ROWLAND WAY STE 110 CITY: NOVATO STATE: CA ZIP: 94945 BUSINESS PHONE: 4158938000 MAIL ADDRESS: STREET 1: 101 ROWLAND WAY STREET 2: STE 110 CITY: NOVATO STATE: CA ZIP: 94945 10-K 1 0001.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended March 31, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________________ to ____________________ Commission File Number: 72870 SONIC SOLUTIONS (Exact name of registrant as specified in its charter) California 93-0925818 (State or other jurisdiction of incorporation or (I.R.S. Employer organization) Identification No.) 101 Rowland Way, Suite 110, Novato, California 94945 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 893-8000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value (Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ____ The aggregate market value of the voting stock held by non-affiliates of the registrant on May 31, 2000, based upon the closing price of the Common Stock on the NASDAQ National Market for such date, was approximately $ 40,982,589./1/ The number of outstanding shares of the registrant's Common Stock on May 31, 2000 was 12,114,672. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Proxy Statement to be filed with the Securities and Exchange Commission on or prior to July 20, 2000 and to be used in connection with the Annual Meeting of Shareholders expected to be held on or about September 5, 2000 are incorporated by reference in Part III of this Form 10-K. ______________________ /1/ Excludes 1,947,812 shares held by directors, officers and ten percent or greater shareholders on May 31, 2000. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant. 1 PART I Forward Looking Statements To the extent that this report discusses future financial results, information or expectations about products or markets, or otherwise makes statements about future events, such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties include, among others, the timely introduction and acceptance of new products, costs associated with new product introductions, the transition of products to new hardware configurations, and other factors. In addition, such risks and uncertainties also include the matters identified under Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 below. Item 1. BUSINESS Overview We develop software and workstations used to edit and process digital audio and digital video. We market workstations to professional customers. Our workstation products are computer based, and usually include both plug-in hardware and application software installed on a personal computer. Our customers use various kinds of peripheral devices -- for example, disk drives, streaming tape drives, and audio and video tape recorders -- along with our products. Although we do not manufacture or sell the personal computers or peripheral devices used with our products, we typically refer to the complete configuration of personal computer, Sonic hardware, Sonic software, and peripherals as a Sonic workstation. We currently market two workstation product lines: SonicStudio(TM) and DVD Creator. SonicStudio is a line of professional audio workstations that our customers use to prepare audio for release on Digital Audio Compact Discs (CD's), for release with video and film entertainment, and for broadcast on radio. DVD Creator is a line of DVD-Video/Audio production workstations which supports the preparation and assembly of video and audio assets for release on the new DVD-Video disc format and the upcoming DVD-Audio disc format. In September, 1999, we began shipments of DVD Fusion(TM). DVD Fusion, which is a part of our DVD Creator product line provides video producers and editors a comprehensive set of tools for encoding, authoring and proofing DVD-Video titles derived from projects created on non-linear video editing systems such as those provided by Avid Technology and Media 100. In the past year, we have started supplying software products outside of our traditional professional audio/video market. In September 1999 we began shipments of DVDit! DVDit! is a DVD-Video authoring software product which provides simplified DVD authoring capabilities to consumer, "prosumer," and certain professional users. We currently are offering two versions of DVDit! -- DVDit!-SE ("Standard Edition") and DVDit!-LE ("Limited Edition"). We have also announced the upcoming availability of DVDit!-PE ("Professional Edition"). 2 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, decisions even within such organizations to purchase and deploy our products are usually made at the facility level. Most of the time we market our products as Sonic Solutions products, and not as part of another company's products. From time to time we have concluded agreements with other companies in which they incorporate some product of ours into their product line (this is commonly referred to as an "OEM" arrangement). At the present time there is one such relationship which accounts for a significant portion of our professional audio revenues. Please see further discussion about this below under "OEM Customers; Sales Concentration." The Shift to Digital The professional audio and video industry has shifted significantly from analog to digital technology over the past twenty years. Digital technology encodes sound and video as numbers and stores them as a kind of computer data. In contrast, analog technology records sound and video by making a physical representation analogous to the original audio or visual signal. Long-playing records ("LP") and Digital Audio Compact Discs ("CD-A"), are good examples of analog (LP's) and digital (CD-A's) media. In an LP the grooves cut into the vinyl record have a physical shape analogous to the original sound pressure wave. In a CD-A the original sound pressure wave is encoded into numbers that are recorded as tiny pits on the surface of an optical disc. The shift to digital encompasses the tools used to edit, process and prepare audio and video prior to release, as well as audio and video release formats -- the form in which the audio or video actually reaches the intended consumer. Different applications and segments within the professional audio and video industry have shifted to digital technology at different times. Complete conversion to digital technology has not yet occurred. We expect that the shift will continue for the next several years until some point in the first decade of the 21/st/ century when analog technology will effectively cease being used in the professional audio and video industries. There are a number of reasons why digital technology has been attractive to audio and video professionals: 3 . Higher Quality -- Digital technology permits higher quality audio and video to be recorded and replayed under most circumstances. Of course, this assumes that the recordings involved are made at a high resolution. . Perfect Copying -- Digitally recorded audio and video can be perfectly reproduced, over an unlimited number of generations. Every analog recording process involves some amount of signal loss with each successive generation of copying. . Speed and Precision of Manipulation -- Digital technologies permit more rapid and more accurate manipulation of audio and video signals than is possible in analog technology. . Special Capabilities -- Digital technology permits certain kinds of processes that are difficult or practically impossible using analog techniques. One of our own products, a signal processing tool called NoNOISE(R), is a good example of this. NoNOISE permits audio recording engineers to remove various kinds of noise from already recorded sound with a great degree of precision and fidelity. . Declining Costs -- Digital technology is enjoying dramatic cost reductions, driven by the broad scale adoption and growth of computer technology in business, in home use, in communications and on the Internet. In contrast, analog technology for audio and video recording has reached an effective plateau in terms of cost. Of course, digital technologies have presented some drawbacks to adoption over the past 20 years. A few of these are: . Enormous Bandwidth -- Representing audio and video in high resolution consumes 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. . 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. 4 Our company was founded to pursue the opportunities presented by this major transition, and to facilitate the transition by offering professionals compelling alternatives to traditional analog production tools. Professional Workstation Lines We currently offer two professional workstation product lines, oriented toward somewhat different applications within the professional audio and video industry. SonicStudio is a line of professional digital audio workstations. DVD Creator(TM) is a line of DVD-Video/Audio production workstations. Both our SonicStudio and DVD Creator workstations are designed to run on versions of the Macintosh personal computer manufactured by Apple Computer. Current reliance on the Macintosh computer creates risks for our Company. SonicStudio A SonicStudio digital audio workstation consists of: 1. one or more of our audio signal processing cards installed on a Macintosh personal computer; 2. one or more outboard interface boxes (which contain various styles of professional interface connections used to link the workstation to other audio devices in the studio); and, 3. extensive applications software. Applications for SonicStudio Our customers use their SonicStudio systems to manipulate audio, applying a number of processes to digital sound to prepare it for final release. Some of these processes are quite specialized and technical. To give you a sense of the capabilities of our workstations, here are some of the tasks typically performed using SonicStudio workstations: . Editing -- SonicStudio permits very precise and elegant editing of sound. Editing is the process by which pieces of sound are combined to create a single resulting sound in such a way that the existence of the original individual pieces is imperceptible to the listener. Editing is used extensively in professional audio work. For example, movie sound tracks are heavily edited to include sound effects and replacement dialog (virtually none of the sound effects or dialog you hear in the theater was actually recorded when the picture was being shot). Another example: classical music recordings are in most cases the result of intensive editing of multiple performances of the same program (our classical music editing customers tell us that an edit every six seconds on average is not uncommon). . EQ -- SonicStudio can be used to equalize ("EQ") the sound, a process by which certain frequencies are emphasized or de- emphasized. EQ is similar in concept to manipulating 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 5 individual elements or tracks are combined or mixed together to produce the resulting sound used in release. . Noise Reduction -- We offer NoNOISE(R) as an option to SonicStudio. NoNOISE is a suite of software tools which permits users to remove unwanted noise from recordings. NoNOISE has been used extensively by audio professionals, particularly to re-issue older recordings on Compact Disc, and to clean up noisy location sound tracks for film and broadcast video work. In 1997, our company was honored with a technical Emmy(R) award for NoNOISE. Customer Segments for SonicStudio There are three major segments of SonicStudio customers: . Mastering -- customers in this segment use our products to prepare music recordings for release to consumers, primarily on Digital Audio Compact Discs. . Broadcast -- customers in this segment use our products to prepare audio for broadcast on radio. . Sound-for-Picture -- customers in this segment use our products to prepare audio tracks used with film or video programming. SonicStudio Customers We have supplied SonicStudio workstations to many professional audio facilities around the world. As of March 31, 2000, more than 4,000 SonicStudio systems had been shipped to customers since the product was first introduced in 1990. SonicStudio Configurations We offer SonicStudio in a variety of configurations, and with various hardware and software options. A customer could purchase a SonicStudio system configured for basic two channel CD premastering for approximately $5,000. A customer would pay approximately $12,000 for a fully-featured SonicStudio system configured for multi-track editing and mixing. One of our new SonicStudio HD(TM) Systems, configured for multi-track high resolution audio editing, and OneClick(TM) DVD-Audio authoring software would be priced at approximately $50,000. Please remember that we do not include the cost of the personal computer or peripheral devices in our illustrative pricing. Remember also that revenue as we report it on our financial statements is usually based on the net price we receive from dealers, and is thus lower on average per system than indicated by these illustrative prices, which are based on end user list prices. Competition We encounter competition from a number of companies when selling SonicStudio. We compete with companies offering: . traditional analog production tools, . digital audio recording tools, 6 . digital audio processing devices, and . digital audio workstations. The key elements of competition include: . product features, . cost effectiveness, . product quality, . customer support, . market and sales. Many of our competitors have greater financial, technical and marketing resources than we do. Traditional professional audio competitors, such as Japan Victor Corporation (JVC), Otari Corp., Sony Corporation and Studer AG (a division of Harmon Industries), sell analog as well as digital systems. A number of competitors supply digital audio workstations including Digidesign (a division of Avid Technology), Fairlight, Studio Audio and Design, Ltd. (Sadie), WaveFrame, Dalet, Augan and others. Our products compete also with various kinds of single function digital audio processing devices. For example, noise reduction modules from Cambridge Audio Research compete with the NoNOISE option for SonicStudio. New HDSP Platform In late March 1999, we began shipping the latest generation of our SonicStudio workstation line -- SonicStudio HD(TM). SonicStudio HD utilizes a new generation audio signal processing card, the "HDSP" which significantly increases the processing power of SonicStudio. We released newly developed application software to support this new workstation. We believe that SonicStudio HD is important for the future of our audio business, especially in light of the advent of new, higher resolution DVD based audio formats. A number of our existing SonicStudio customers purchased upgrades to the new HDSP platform when we introduced it. We anticipate that HDSP will permit many of our customers to begin their involvement with new high resolution formats such as DVD-Audio. We also believe that HDSP will be a very competitive offering for customers who are shopping for a new digital audio workstation. Strategy Our strategy with SonicStudio is to continue to offer products that enhance professional productivity while meeting the specific needs of each segment of our target markets. We believe that SonicStudio and related peripheral products currently accomplish this strategy for the following reasons: . Focus on the Application - Each segment of the professional audio market has specialized needs. Our SonicStudio product line spans a wide range of performance characteristics, hardware and software options, configurations and price points in order to address the specific needs of professionals in each market segment. 7 . Professional Performance - We focus on satisfying demanding professional performance requirements. That is why we implement an architecture utilizing specialized hardware to ensure a fast, professional level of system response, and to avoid processing bottlenecks in handling bulky audio and video files. . Efficiency Features - We designed SonicStudio to increase operator efficiency. For example, every system allows background loading of sound to the hard disks while the audio professional works on other material already loaded on the hard disk. The re- design of our applications software to support the new HDSP involved a year-long effort and a number of customer focus groups where we carefully analyzed actual customer use patterns to improve SonicStudio's user interface. . Modular Software-Based Solutions; Upgrades - We offer a modular set of software applications including digital equalization, filtering, dynamics, processing, mixing, dithering, time compression, pitch shifting, varispeed and reverberation. We package various features into options which can be added by customers as they wish and as their business needs dictate. We have also traditionally offered customers enrolled in our SonicCare(TM) maintenance program relatively low priced hardware upgrades when hardware versions change. This economical upgrade path affords customers a degree of assurance that their investment in a SonicStudio will not be quickly outmoded. DVD Creator DVD-Video Our DVD Creator(TM) workstations support preparation of DVD-Video discs. DVD-Video is a relatively new optical disc format, introduced in 1996, which offers high quality video, surround audio, and interactivity on a Compact Disc-sized disc. The DVD-Video format offers content publishers a wide range of features and options. Video is presented in the MPEG-1 or MPEG-2 compressed digital video format. A number of video streams may be presented in parallel so that, responding to user commands, the player may seamlessly jump from stream to stream. Audio is available in both compressed digital stereo and "surround" formats, as well as uncompressed "PCM" digital audio. Up to eight audio streams may be presented simultaneously (and may also be selected for playback based on real-time user decisions) -- to support different language dialog tracks, or to allow stereo and surround versions of the same audio program. Chapter marks may be specified for random access into the video program. Subpictures (images overlaid on background video or still images) may be included and can be used in a number of ways, for example, to create animated "buttons" to facilitate user interaction, or to display language subtitles. Still pictures may be presented with audio and with subpictures. Extensive navigation capabilities are available to permit users to select from various program branches, to return to previous branch points or menus, etc. DVD-Creator Functions DVD-Creator supports the three basic processes required to prepare audio and video programming in the DVD-Video format. These are: 8 . MPEG-2 Video Encoding -- MPEG-2 and MPEG-1 video are the standards for DVD-Video discs. MPEG is a digital video format that compresses the original digital video stream to reduce bandwidth and storage requirements by 90 to 95% but with little or no loss in perceived quality. . Audio Preparation and Encoding -- DVD-Video supports uncompressed ("PCM") digital audio as well as MPEG-2 and Dolby Digital compressed formats. . Format Authoring -- To support the advanced features of DVD- Video, particularly menu-drive interactivity and multiple video and audio streams, the audio, video, graphic and text elements included in the disc must be organized, linked and then "woven" together. Products DVD Creator includes three principal separable subsystems capable together of performing all the tasks necessary for producing a finished DVD-Video disc image, which can then be replicated on manufactured DVD discs. Those are: . Video Encoding: DVD Studio - The DVD-Video standard specifies MPEG-2 and MPEG-1 compressed digital video as the video formats to be used on DVD-Video discs. While a number of choices within the standard are possible, the typically preferred format is variable bit rate MPEG-2 operating at an average bit rate of approximately four Megabits per second. DVD Creator includes DVD Studio, a system enabling professional users to compress input professional video into the MPEG-2 format. DVD Studio consists of plug in circuit cards for the Macintosh incorporating an MPEG encoding/decoding chipset developed by IBM. We have developed an extensive suite of applications software for DVD Studio to support user control of the encoding process, and facilitate the operation of DVD Studio with standard professional video tape recorders and other typical peripherals. . Audio Encoding: DVD Studio Audio - DVD Creator bundles a standard SonicStudio system, running on the Macintosh, with special software to perform Dolby Digital and MPEG-2 audio compression and audition. . Format Authoring: DVD Producer - DVD Creator's authoring subsystem is DVD-Producer. The authoring step takes individual compressed video, audio, graphics, still picture and subpicture elements and combines and organizes them along with instructions specifying interactivity (i.e., the response DVD players will make based on user manipulation of front panel buttons or remote control buttons). The output of the authoring step is an "asset list," containing each of the individual elements, and a "script" describing how the assets are combined and accessed via user commands. Because of the large number of potential elements in a DVD title and the high level of interactivity possible, DVD- Producer is a complicated software package. In addition to these main subsystems, DVD Creator includes two other subsystems: . Emulation: PrePlay - Because of the complexity of a DVD title, users of DVD Creator require the ability to preview the results of their edits before the time consuming and 9 expensive step of producing a final version. We offer a workstation that allows this previewing. . Formatting and Writing: Format Server and Imager -- We provide a separate formatting engine as a standalone application called Format Server. Format Server takes the output of a DVD-Producer authoring session and combines navigation instructions with audio and video assets to create a finished disc image. The image can then be played from computer hard disk, or converted by another standalone application, called Imager, into a streaming tape based image (the standard way in which images are transmitted to the replication plant) or recorded onto a recordable DVD disc. In September 1999 we introduced a new DVD production system called DVD Fusion. DVD Fusion is similar to DVD Creator, but somewhat more limited in capabilities. We intended DVD Fusion to be used in conjunction with professional video editing systems such as those supplied by Media 100 or Avid. DVD Creator/Fusion (in the discussion which follows, "DVD Creator" should be understood to include DVD Fusion as well) is sold in multiple versions for between $2,999 and $99,999 (again, our prices do not include host computers, disk storage or other peripheral devices). Customers can purchase upgrade options for any version to increase the functionality of the system. Typically, customers will spend between $35,000 and $55,000 for their DVD Creator system. Please remember also that revenue as we report it on our financial statements is usually based on the net price we receive from dealers, and is thus lower on average per system than indicated by these illustrative prices, which are based on end user list prices DVD-Audio Version 1.0 of the DVD-Video specification was published in August of 1996, and players were introduced into various regions of the world during late 1996, 1997 and 1998. At about the same time the DVD-Video specification was being finalized, the DVD Forum (the standards-setting industry association for DVD) formed a working group to develop a DVD-Audio format, intended to be a sister format to DVD-Video, but to emphasize more audio features. The DVD-Audio working group spent more than two years developing the new DVD-Audio specifications in close collaboration with the major record music companies. The DVD Forum released Version 1.0 of the new DVD-Audio specification in April 1999. The first commercially released players compatible with the new format became available in late 1999. We announced support for this new specification in the fall of 1998, and began delivery of the first software packages supporting preliminary and limited DVD-Audio authoring early in 1999. We introduced new releases of DVD-Audio support on a phased release basis during the balance of 1999 working closely with player manufacturers and early DVD- Audio content publishers. Market We divide the DVD-Creator market into 3 segments: . "Hollywood" Segment - This segment includes facilities that prepare film and video material for mass publication on DVD-Video discs. It includes: - film and television studios, - production companies and other content owners, and 10 - top flight independent video post production facilities which provide services to such content holders. Customers in this segment tend to cluster in major film and video product centers including Hollywood/Los Angeles, New York City, Chicago, London, Paris, Tokyo, Taipei, etc. Customers in this segment demand the very highest quality in terms of processing output, strict adherence to standards, and are very concerned with the overall efficiency of production since projects are often produced on tight schedules. We estimate that there are a few thousand facilities and organizations in this segment, worldwide. . "Corporate" Segment - Customers in this segment prepare DVD-Video discs for publishing a variety of kinds of information for sales, training, and other communications purposes. The segment includes: - "in-house" departments of corporate, industrial, non- profit or educational organizations, and - independent facilities who specialize in assisting such organizations in preparing such material. Customers in this segment are typically somewhat more budget constrained than customers in the "Hollywood" segment. In certain instances, however, production values and budgets equal or even exceed those typically encountered in the Hollywood segment. They tend to be geographically more dispersed. While efficiency of production is a key requirement of such customers, compatibility with other, existing recording and post-production equipment is a major concern of customers in this segment. This segment is only now beginning to adopt DVD, though given the spread of DVD-ROM in the personal computer industry, many industry observers predict rapid growth in the use of DVD in this segment. We estimate that there are potentially more than 100,000 facilities and organizations in this segment on a worldwide basis. . "Multimedia" Segment - This segment includes developers of multimedia entertainment and educational titles intended for a mass audience. Many of the organizations in this segment previously were involved in the production of CD-ROM, CD-I and computer based interactive entertainment or educational titles. Customers in this segment tend to use DVD in conjunction with specialized computer software and accordingly their needs are more varied than those in the other segments. While relatively few organizations in this segment have moved to DVD, industry observers report a high level of interest in the DVD format. We estimate that there are approximately 15,000 organizations that might ultimately become involved in DVD-based production in this segment. DVD Creator is sold to professional audio and video facilities, production studios, as well as CD/DVD plants and corporate customers. As of March 31, 2000 we have shipped more than 1,300 DVD Creator systems (including DVD Fusion systems) to customers in various locations around the world. Competition The DVD-Video format has generated significant interest among professional system suppliers. A number of companies currently provide MPEG-2 video encoding capabilities, audio encoding capabilities and 11 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: Astarte (purchased by Apple) Matsushita C-Cube Microsystems Minerva Systems Daikin Industries Mitsubishi Digital Vision Optibase Dolby Laboratories Philips FutureTel Pioneer Innovacom Sony Intec Spruce Technologies Lucent Toshiba A number of these companies have financial or organizational resources significantly greater than ours and/or greater familiarity with certain technologies involved in DVD premastering solutions. Strategy We expect that our DVD related business will account for an increasing portion of our overall business in the future. Our DVD strategy will continue to be based on the following elements: . Focus on Professional Applications -- Our DVD product and service offerings are focused on video and audio professionals whose primary concern is producing the highest quality DVD discs, in complete compliance with worldwide standards, with a high level of efficiency. We will continue to evolve DVD-related premastering tools which are fully compatible with "industry- standard" input formats and typical professional video and audio equipment sets. . High Performance Tools -- Our DVD tools will offer professional users the highest levels of performance, both in terms of power and sophistication of processing, and in terms of maximizing facility efficiency. . Flexible Configurations -- Because DVD premastering is relatively new and still evolving, the balance of capabilities in typical DVD premastering settings, and the typical workflow involved in generating a DVD title are still in flux. We have engineered DVD Creator as a "workgroup" solution incorporating modular audio, video and authoring subsystems to make it easy for facilities to re-arrange DVD workflow quickly, and to comply easily with changing demands in the DVD universe. We plan to continue to implement this philosophy in future DVD product offerings. . Range of Product Offerings -- DVD has a number of potential uses, including applications in corporate and industrial settings, and in "prosumer" and consumer venues, as well as in delivery of mass entertainment such as feature films, videos, and recorded music. We plan to evolve each element of our DVD premastering tool set -- video, audio and authoring -- to specifically address the specialized needs of such emerging segments. Please see the discussion regarding "DVDit!" below. 12 DVDit! In April 1999 we introduced our DVDit! product line. DVDit! is a highly simplified interactive video authoring tool that can output a DVD image, or can output the same program in certain other formats. We announced two versions of DVDit! -- a standard version ("SE") and a more limited version ("LE"). We began shipping DVDit!-LE in September and DVDit!-SE in December, 1999 In April, 2000 we introduced a new addition to the DVDit! product line -- Sonic DVDit! Professional Edition ("PE"). DVDit!-PE increases DVDit!'s reach with professional functionality previously found only on authoring systems costing five to ten times as much. DVDit! PE will carry a suggested retail price of $999. DVDit! PE includes many features important to professional users such as multiple audio streams, a video timeline, and Dolby Digital support. End User Customers DVDit! is intended to address the needs of a broad range of customers who wish to author DVD-Video discs. Among DVDit!'s end user customers are: Consumers -- Individuals who use DVDit! to make DVD-Video discs from home videos and the like for their personal enjoyment. We believe that this group of customers demands software that is easy to learn, and is reasonably priced. "Prosumers" -- The term "prosumer" describes both video enthusiasts who make a significant investment of time and money in producing and preparing amateur videos, and professional and business people who use video in their work, but for whom video production is not a primary business activity. Compared to consumers, this customer group tends to be less price sensitive, and more concerned about a rich feature set, but is unlikely to have deep knowledge of DVD-Video. "Professionals" -- This group of customers resembles very closely the professional customers we described in discussing DVD Creator. Trends Favoring DVDit! We introduced DVDit! to take advantage of the following trends: . Proliferation of MPEG Video -- Due to certain introductions by chip and software makers, relatively high quality MPEG encoding systems are becoming widely available during 2000 at prices ranging down to a few hundred dollars at retail. . Availability of Accessible DVD Recording -- Until recently, DVD recorders were high priced and supported less than a full-sized 4.7 Gigabyte disc. In 2000, we anticipate that more reasonably priced DVD recorders will become available. We believe that DVD recording devices could eventually be as cheap as current day CD-R and CD-R/W devices (which currently are available for under $200 and $300, respectively). Because of the rapid adoption of DVD, we think that consumer level pricing will be reached within a few years rather than the eight or so years required for CD recorders to fall from more than $10,000 to under $500. . Ubiquitous Digital Video -- Relatively high quality digital video camera/recorders based on the DV format were introduced in the past three years aimed at professionals as well as consumers. Prices for consumer DV cameras will begin moving below $1,000 in 2000. Virtually every 13 manufacturer of professional and prosumer video editing systems is intending to release DV compatible systems in 2000 as well. . Rapid Growth in DVD Playback Units -- By the end of 1998, approximately eight million DVD-Video playback units (including both set-top players and DVD-equipped multimedia PCs) had been installed worldwide, according to industry sources. By the end of 1999, this installed base had grown to approximately 30 million and by the end of 2000 is forecast to have grown to as many as 60 million units. Distribution for DVDit! Because DVDit! is aimed at a broader market than our traditional professional products, we are building a distribution capability for it. There are three elements to this effort: 1. We are adding dealers and distributors for DVDit!, some of which already carry some of our professional products, but many of which do not. In the near term we are targeting dealers and distributors specializing in digital video applications. In the longer term we plan to target dealers and distributors who participate in the broader personal computer marketplace. 2. We are entering into "bundling" arrangements with various other companies in which copies of DVDit! are included or "bundled" with shipments of those companies' products. These companies (we refer to them as "OEM Partners") are motivated to include our software as a value added offering for their customers. We are motivated to enter into bundling arrangements because it generates revenue for us as well as creates a large installed base of customers to whom we can sell upgraded or enhanced versions of our products. To facilitate such bundling arrangements we have designed different versions of DVDit!. Currently we are shipping two such versions -DVDit! LE ("Limited Edition") and DVDit! SE ("Standard Edition")- and have announced the future availability of another version - DVDit! PE ("Professional Edition"). 3. We have initiated a web-based retail store for our DVDit! products. Our web store is intended both to meet retail demand for our DVDit! products as well as to service upgrade orders for our products, in particular, the upgrade orders which derive from our bundle shipments by our OEM partners. Building distribution for DVDit! will be a time-consuming and expensive process. Since this is a new kind of product for us, there is significant risk that our efforts, or at least some of them, will not be successful. DVDit! OEM Partners As mentioned above, we have implemented a bundling distribution strategy for DVDit! By the end of fiscal 2000, we concluded several bundling agreements with OEM partners to include copies of DVDit! LE and/or SE with their products. Our current OEM partners include: . Avid Technologies . Dazzle . Margi 14 . Matrox . Media 100 (including its subsidiaries Terran Interactive and Wired) . NEC . Sigma Designs . Sony We may also offer DVDit! through conventional computer industry resale channels. Competition We have encountered only limited competition to DVDit! since its introduction. However, we believe that a number of companies will introduce products that compete directly or in part with DVDit! We believe that Daikin Industries and Spruce Technologies, among others, are developing and will introduce products which compete with all or at least some of the products in the DVDit! product line. In April 2000 Apple Computer announced that they had agreed to purchase the DVD authoring technology and business of Astarte GmbH, who had competed with us in the professional market. Apple could choose to embody the Astarte technology in products which will compete with DVDit! DVDit! for the Macintosh Our current versions of DVD it! run on various versions of the Microsoft Windows operating system. In April 2000 we announced that we plan to develop versions of DVDit! to run on the Macintosh operating system. We can not guarantee that we will be able to successfully complete this development or that, once completed, there will be a market for the Macintosh versions of DVDit!. OEM Customers; Sales Concentration We generally market our products to end users as Sonic Solutions products. However, from time to time we have concluded various "OEM" agreements with other companies (in addition to those listed above for DVDit!), in which those companies included our products as part of the their product offerings. At the present time we have one significant OEM relationship with Discreet Logic ("Discreet"), a division of Autodesk, in which we provide audio subsystems for use with some of their high end video effects and editing workstations. Sales to Discreet amounted to 11% of our total revenues in the fiscal years ended March 31, 1999, and 2000. Although we consider our relations with Discreet to be good, we anticipate that at some point in the next two fiscal years, Discreet may implement changes to its product line replacing or eliminating our subsystems. During the fiscal year ended March 31, 2000, sales to our Japanese distributor, Sanshin Electronics Company ("Sanshin"), amounted to 10% of total revenues. Sanshin is a distributor of all of our products. Apart from sales to Discreet and Sanshin, no other single customer accounted for more than 10% of our total revenue during each of the past three fiscal years. 15 Macintosh Dependence All of our current professional products operate on Macintosh computers marketed by Apple Computer. Our business would be particularly at risk if there was an interruption in the supply of Macintosh computers either because of operational or financial or other business problems at Apple. Our business would also be threatened if Apple made changes to the operating system software or hardware of the Macintosh line that led to compatibility problems with our hardware or software. COMPANY OPERATIONS Marketing, Sales and Distribution Marketing and Product Management Our marketing organization plans and manages development of our products and manages promotion of them in the market. We currently have eight employees in marketing, all based in our headquarters office in Novato, California, including product marketing managers, and marketing communications and design professionals. Field Sales Force We sell our professional workstation products through our field sales force in combination with a network of professional audio/video dealers. We currently employ 19 people in our field sales organization. Sales personnel are based in our headquarters office in Novato, California as well as at our offices in London (covering Europe) and in Tokyo (covering the Pacific Rim). We have other sales personnel based out of home offices in Chicago, Los Angeles, Atlanta, Minneapolis, Milwaukee, Boston, Taipei and New York City. Our field sales force includes sales managers and sales engineers. Most of our field sales personnel operate under compensation arrangements in which a substantial portion of their compensation is contingent upon performance relative to revenue targets. Although all members of our sales organization are familiar with all of our products, some of our sales personnel focus on DVD Creator, some on DVDit!, and some on SonicStudio. Dealers The vast majority of our workstation sales 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 16 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 20 40 5 62 Europe 15 33 2 41 Pacific Rim 4 7 2 11 ------------------------------------------------------------------
*Note: "Total is less than the sum of columns because one dealer organization sometimes carries more than one of our product lines. Employees At March 31, 2000, we employed 92 full-time-equivalent employees, including the following:
--------------------------------------------------------- # Employees Function --------------------------------------------------------- 40 Marketing, Sales and Customer Support 32 Software and Hardware Engineering 9 Manufacturing 11 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 customers the SonicCare maintenance program. Customers purchase annual SonicCare service contracts from us that provide for: . ongoing software upgrades, 17 . telephone support, . "swap" replacement hardware in case of hardware failure, and . preferential access to new products and new versions of software. Customers typically add a SonicCare option to their initial system purchase and a significant portion of customers renew SonicCare yearly. To administer SonicCare, we employ a staff of product support specialists at our Novato headquarters and in our field offices. We provide unlimited telephone support during scheduled support hours to all customers under SonicCare. Customer support calls also provide us with an important means of understanding customer requirements for future product enhancements. We also undertake regular customer calling programs in which customers are contacted by a customer support representative to assess their level of satisfaction and to acquaint them with new product offerings. Research and Development Our research and development staff includes a total of 32 hardware and software engineers and technicians and technical specialists. We tend to hire research and development personnel with backgrounds in digital audio signal processing, digital video image processing, distributed networking and computer systems design. Our development team exhibits a number of technology capabilities including the following that we believe are particularly important in light of our strategy and market position: . Digital Signal Processing - This is the term used to describe the sophisticated mathematical processing by which aural and visual signals are processed in computer based settings. Our engineering team includes individuals experienced at providing sophisticated digital signal processing solutions to meet the quality and performance requirements of audio and video professionals. . Real Time Architectures - Our engineers are experienced in dealing with the requirements of high bandwidth, real time data in computer-based settings. We believe that has helped us to develop products that provide cost effective solutions for professional applications. . Craft Familiarity - Our engineers are experienced in the needs and work patterns of audio, film and video professionals. This helps us develop products which can be adopted more quickly by creative audio and video professionals. Backlog We schedule our production of products based on our projections of customer demand, and we generally ship products within a few days of acceptance of a customer purchase order so at any given time we have little or no order backlog. With few exceptions, customers may cancel or delay orders with little or no penalty. Thus, even to the extent that we have backlog, we do not think that it is a reliable indicator of future revenue levels. 18 Manufacturing and Suppliers How We Manufacture We have typically contracted with various electronics manufacturing and assembly houses to manufacture the hardware components of our products. Most of these contractors are located in the San Francisco Bay Area. Our staff performs final assembly, integration and testing at our Novato, California headquarters. Sole-Sourced Components We utilize a number of components in our products that are available from only a single source. We purchase these sole-source components from time to time, that is, we do not carry significant inventories of these components and we have no guaranteed supply agreements for them. We have experienced shortages of some sole-sourced components in the past. We are likely to experience similar shortages at some point in the future. Such shortages can have a significant negative impact on our business. Outsourcing Over the past three years, we have shifted our hardware manufacturing to an "outsourcing" approach. Under outsourcing we contract with a single partner organization which takes responsibility for procuring parts, and for manufacturing them into complete, tested assemblies which are then released to us according to our instructions. Our current outsourcing arrangement is with Arrow/Bell. We believe that outsourcing provides us with increased flexibility to increase or decrease production, and allows us to operate our business with substantially reduced inventories thereby reducing financing requirements. During the 2000 fiscal year, we produced approximately 85% of our hardware via outsourcing. We plan to continue this outsourcing approach. While we believe that outsourcing is advantageous for Sonic, it makes us very dependent on a single production source. Financial, operational, or supply problems encountered by our outsourcing partner or its sub-contractors could seriously hamper or interrupt our ability to manufacture, sell and ship our products. Proprietary Rights General Approach We rely on a combination of the following to protect our proprietary rights in our products: . patents, . trade secret, . copyright law, . trademark law, . contracts, and . technical measures 19 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 plan to continue to monitor this area and to act prudently to avoid needless litigation and entanglements while continuing to offer our products. Trade Secrets We rely to a great extent on the protection the law gives to trade secrets to protect our proprietary technology. Our policy is to request confidentiality agreements from all of our employees and key consultants, and we regularly enter into confidentiality agreements with other companies with whom we discuss any 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. 20 Geographic Exposure We have for many years realized a significant proportion of our revenues from sales outside the United States. In some fiscal quarters non-U.S. revenue has constituted as much as 52% of our revenues. In the fiscal year ended March 31, 2000, 47% of our revenues came from sales outside the United States. We believe that it is quite likely that at some points in the future an even higher percentage of our sales will be generated outside the United States. Because of our foreign sales, we are exposed to a number of factors that would not be relevant if our sales were largely made within the United States. Currency movements which make the U.S. dollar stronger relative to foreign currencies can effectively raise the price of our products to foreign customers, reducing demand for our products. Import restrictions, tariffs, and foreign product regulations (particularly those dealing with product safety and RF emissions) may also impede our ability to do business in foreign countries. Item 2. PROPERTIES Our principal administrative, sales and marketing, research and development and support facility is located at 101 Rowland Way in Novato, California and consists of approximately 30,000 square feet under a lease which expires in 2001. We also have sales offices located in London and Tokyo. Item 3. LEGAL PROCEEDINGS None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year ended March 31, 2000, we did not submit any matters to a vote of our security holders. 21 Supplemental Item. EXECUTIVE OFFICERS OF THE REGISTRANT Our executive officers and their ages as of March 31, 2000 are as follows:
NAME AGE POSITION - ---------------------- --------- ------------------------------------------------------------- Robert J. Doris 47 President (Chief Executive Officer) and Director Mary C. Sauer 47 Senior Vice President of Business Development and Director A. Clay Leighton 43 Senior Vice President Worldwide Operations, Finance and Chief Financial Officer Christopher A. Kryzan 41 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 Sonic Solutions. ROBERT J. DORIS. Mr. Doris founded Sonic Solutions in 1986 and has served as President and Director of Sonic Solutions since that time. Prior to 1986 he was President of The Droid Works, a subsidiary of Lucasfilm Ltd., which produced computer-based video and digital audio systems for the film and television post- production and music recording industries. Prior to founding The Droid Works, Mr. Doris was a Vice President of Lucasfilm and General Manager of the Lucasfilm Computer Division. Mr. Doris received B.A., J.D. and M.B.A. degrees from Harvard University. Mr. Doris is married to Ms. Sauer. MARY C. SAUER. Ms. Sauer founded Sonic Solutions in 1986 and has served as a Vice President and Director of Sonic Solutions since that time. Ms. Sauer became Senior Vice President of Marketing and Sales in February 1993. Prior to 1986, Ms. Sauer was Vice President of Marketing for The Droid Works and prior to joining The Droid Works, Ms. Sauer was Director of Marketing for the Lucasfilm Computer Division. Ms. Sauer received an M.B.A. in Finance and Marketing from the Wharton School of the University of Pennsylvania and a B.F.A. from Washington University in St. Louis. Ms. Sauer is married to Mr. Doris. A. CLAY LEIGHTON. Mr. Leighton joined Sonic Solutions in February 1993 as Vice President of Finance. In January, 1999, Mr. Leighton was named Senior Vice President of Worldwide Operations and Finance and Chief Financial Officer. Prior to joining Sonic, from January 1990 to July 1992 he was Vice President, Finance and CFO for RESNA Industries Inc., an environmental services firm, and from August 1988 to December 1989 he was Vice President, Finance and CFO for Command Data Systems, a software company specializing in software for the public safety market. Mr. Leighton has also worked as strategy consultant for the Boston Consulting Group. Mr. Leighton received a B.A. from Wesleyan University and an M.B.A. from the Amos Tuck School of Business Administration at Dartmouth College. CHRISTOPHER A. KRYZAN. Mr. Kryzan joined Sonic Solutions in March 1996 as Vice President of Marketing. In January, 1999, Mr. Kryzan was named Senior Vice President of Marketing and Engineering. Prior to joining Sonic, from May 1994 through February 1996, he was an independent consultant specializing in Internet business and marketing strategy development. From July 1990 to April 1994, he was Director of Marketing at SuperMac Technology, a graphics and digital video technology firm, and General Manager of E-Machines, a subsidiary of SuperMac. From January 1986 to July 1990, he was Director of Product Marketing at Wyse Technology, a manufacturer of terminals and personal computers, and National Sales Manager of 22 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. 23 PART II Item 5. MARKET FOR SONIC SOLUTIONS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is listed on the Nasdaq National Market. As of March 31, 2000 there were approximately 175 registered holders of our common stock. We believe, however, that many beneficial holders of our common stock have registered their shares in nominee or street name, and that there are substantially more than 175 beneficial owners. The low price and high price of our common stock during the last eight quarters are as follows:
---------------------------------------------------------------------- Low Price High Price --------- ---------- ---------------------------------------------------------------------- Quarter ended June 30, 1998............. $2.125 $ 5.250 Quarter ended September 30, 1998........ $1.250 $ 3.250 Quarter ended December 31, 1998......... $1.500 $ 7.375 Quarter ended March 31, 1999............ $3.563 $ 8.438 Quarter ended June 30, 1999............. $3.875 $ 7.125 Quarter ended September 30, 1999........ $2.000 $ 5.000 Quarter ended December 31, 1999......... $1.688 $ 5.313 Quarter ended March 31, 2000............ $3.875 $12.500 ----------------------------------------------------------------------
We have not paid any dividends on its Common Stock during the periods set forth above. It is presently the policy of the Board of Directors to retain earnings for use in expanding and developing our business. Accordingly, we do not anticipate paying dividends on the Common Stock in the foreseeable future. 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. 24 Item 6. 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 Form 10-K. The selected financial data presented below under the caption "Statement of Operations data" and "Balance Sheet Data" for, and as of the end of, each of the years in the five-year period ended March 31, 2000 are derived from 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, 2000 and 1999, and for each of the years in the three-year period ended March 31, 2000, and the report thereon, are included elsewhere in this Form 10-K.
Years Ended March 31, ------------------------------------------------ 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- (in thousands except share amounts) STATEMENT OF OPERATIONS DATA: Net revenue.................................... $ 13,944 15,911 19,881 21,899 20,827 Cost of revenue................................ 7,344 7,432 10,209 9,547 8,992 -------- -------- -------- -------- -------- Gross profit................................... 6,600 8,479 9,672 12,352 11,835 Operating expenses: Marketing and sales........................... 5,873 6,000 7,257 7,216 8,938 Research and development...................... 2,961 5,737 6,037 5,137 6,155 General and administrative.................... 2,668 1,837 1,603 1,556 2,284 -------- -------- -------- -------- -------- Total operating expenses....................... 11,502 13,574 14,897 13,909 17,377 -------- -------- -------- -------- -------- Operating loss................................. (4,902) (5,095) (5,225) (1,557) (5,542) Other income (expense)......................... 176 (96) (651) (302) (249) Provision (benefit) for income taxes........... (1,169) - - - (97) -------- -------- -------- -------- -------- Net loss....................................... ($3,557) (5,191) (5,876) (1,859) (5,694) ======== ======== ======== ======== ======== Basic loss per share........................... ($0.48) (0.69) (0.76) (0.21) (0.56) Weighted average shares used in computing per share amounts.................................. 7,447 7,542 7,761 8,896 10,460 Diluted loss per share......................... ($0.48) (0.69) (0.76) (0.21) (0.56) Weighted average shares used in computing per share amounts.................................. 7,447 7,542 7,761 8,896 10,460 BALANCE SHEET DATA: Working capital................................ $ 8,384 6,263 1,164 1,167 4,976 Total assets................................... $ 16,107 15,889 12,630 13,765 14,968 Shareholders' equity........................... $ 12,912 8,430 5,418 5,932 8,750
25 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW; CERTAIN FACTORS THAT MAKE FUTURE RESULTS DIFFICULT TO PREDICT; CERTAIN ITEMS TO REMEMBER WHEN READING OUR FINANCIAL STATEMENTS Our quarterly operating results vary significantly depending on the timing of new product introductions and enhancements by ourselves and by our competitors. Our results also depend on the volume and timing of orders which are difficult to forecast. Because our customers generally order on an as-needed basis, and we normally ship products within one week after receipt of an order, we don't have an order backlog which can assist us in forecasting results. For all these reasons, our results of operations for any quarter are a poor indicator of the results to be expected in any future quarter. A large portion of our quarterly revenue is usually generated in the last few weeks of the quarter. Since our ongoing operating expenses are relatively fixed, and we plan our expenditures based primarily on sales forecasts, if revenue generated in the last few weeks of a quarter do not meet our forecast, operating results can be very negatively affected. We capitalize a portion of our software development costs in accordance with Statement of Financial Accounting Standard No. 86. Such capitalized costs are amortized to cost of revenue over the estimated economic life of the product, which is generally three years. See Note 4 of Notes to Financial Statements. 26 RESULTS OF OPERATIONS The following table sets forth certain items from Sonic Solutions' statements of operations as a percentage of net revenue for fiscal years 1998 through 2000:
Years ended March 31, -------------------------------------------------------- 1998 1999 2000 ---------------- ---------------- ---------------- Net revenue 100.0% 100.0% 100.0% Cost of revenue 51.4 43.6 43.2 ------ ----- ------ Gross profit 48.6 56.4 56.8 Operating expenses: Marketing and sales 36.5 33.0 42.8 Research and development 30.4 23.5 29.6 General and administrative 8.0 7.0 11.0 ------ ----- ------ Total operating expenses 74.9 63.5 83.4 ------ ----- ------ Operating loss (26.3) (7.1) (26.6) Other expense (3.3) (1.4) (1.2) Provision (benefit) for income taxes --- --- (0.5) ------ ----- ------ Net loss (29.6)% (8.5)% (27.3)% ====== ===== ======
COMPARISON OF FISCAL YEARS ENDED MARCH 31 Net Revenue. Our net revenue increased from $19,881,000 in fiscal 1998 to $21,899,000 in fiscal 1999 and decreased to $20,827,000 in fiscal 2000, representing an increase of 10.2% from fiscal 1998 to fiscal 1999 and a decrease of 4.9% from fiscal 1999 to fiscal 2000. The increase in fiscal 1999 was primarily due to increased sales of DVD Creator systems. The decrease in fiscal 2000 was primarily due to the decrease in sales of our audio products which was partially offset by increases in sales of our DVD systems, including our two newer products, DVDit! and DVD Fusion. International sales accounted for 52%, 47% and 47% of our net revenue for the 1998, 1999, and 2000 fiscal years, respectively. See Note 10 of Notes to Financial Statements. Our international sales decreased in fiscal 1999 due to the increased sales of DVD Creator systems in the U.S. markets. Our international sales remained consistent in fiscal 2000 primarily due to the continuation of more sales of DVD Creator systems in the U.S. markets. International sales have historically represented around 50% of our total sales, and we expect that they will continue to represent a significant percentage of future revenue. Cost of Revenue. Our cost of revenue decreased from 51.4% of net revenue in fiscal 1998 to 43.6% in fiscal 1999 and decreased to 43.2% in fiscal 2000. The decrease in cost of revenue in fiscal year 1999 and fiscal year 2000 is primarily due to a shift in sales product mix towards higher margin DVD Creator system and DVDit! sales. In general we have been selling less hardware as a percentage of revenue in our professional systems and our new product DVDit! includes no hardware. Marketing and Sales. Our marketing and sales expenses decreased from $7,257,000 in fiscal 1998 to $7,216,000 in fiscal 1999 and increased to $8,938,000 in fiscal 2000. Marketing and sales represented 36.5%, 33.0% and 42.8% of net revenue for fiscal 1998, 1999 and 2000, respectively. Our marketing and sales expenses remained relatively consistent in dollar terms from fiscal 1998 to fiscal 1999. Our marketing and sales expenses increased in fiscal 2000 primarily due to increases in salary expenses as a result of the increase in headcount, and increases in advertising and marketing costs related to our DVDit! and our DVD product lines. Our marketing and sales headcount increased from thirty-seven at March 31, 1999 to forty at 27 March 31, 2000. Included in our marketing and sales expenses are dealer and employee commission expenses, which as a percentage of net revenue decreased from 5.2% in fiscal 1998 to 4.7% in both fiscal 1999 and fiscal 2000. Research and Development. Our research and development expenses decreased from $6,037,000 in fiscal 1998 to $5,137,000 in fiscal 1999 and increased to $6,155,000 in fiscal 2000. Our research and development expense as a percentage of net revenue was 30.4% in fiscal 1998, 23.5% in fiscal 1999, and 29.6% in fiscal 2000. We capitalize a portion of our software development costs in accordance with statement of Financial Accounting Standard No. 86. (This means that a portion of the costs we incur for software development are not recorded as an expense in the period in which they are actually incurred. Instead they are recorded as an asset on our balance sheet. The amount recorded on our balance sheet is then amortized over the estimated life of the products in which the software is included.) Our research and development expenses decreased in fiscal 1999 due to decreases in consulting and prototype expenses associated with new product introductions. Research and development expenses increased in fiscal 2000 primarily due to increased headcount from thirty at March 31, 1999 to thirty-two at March 31, 2000 and due to consulting expenses associated with introductions of new products, including our DVDit! product. Prototype and consulting expenses can fluctuate significantly from period to period depending upon the status of hardware and software development projects and our schedule of new product introductions. General and Administrative. Our general and administrative expenses decreased from $1,603,000 in fiscal 1998 to $1,556,000 in fiscal 1999 and increased to $2,284,000 in fiscal 2000. These expenses represented 8.0% of net revenue in fiscal 1998, 7.0% of net revenue in fiscal 1999 and 11.0% of net revenue in fiscal 2000. Our general and administrative expenses decreased in fiscal 1999 due to reductions in bad debt and other general expenses. Our general and administrative expenses increased in fiscal 2000 primarily due to a charge to bad debt expense of $600,000 which represented an additional reserve for sales to audio professionals and distributors who are experiencing liquidity difficulties due to a decline in their business. We anticipate that general and administrative expenses (exclusive of the bad debt expense) will increase in the future as costs increase and if our operations expand. Other Expense, Net. The "Other Expense" item on our statement of operations includes primarily the net amount of interest or other financing charges we have incurred due to borrowings, reduced by the interest we earn on cash balances and short term investments. For our 1998, 1999 and 2000 fiscal years, we incurred interest and other financing charges related to financing agreements we had with entities associated with Hambrecht & Quist, as well as borrowings under our bank credit line. Provision for Income Taxes. In accordance with Statement of Financial Accounting Standards No. 109, we made no provision for income taxes for our 1998, 1999 fiscal years. For the 2000 fiscal year a benefit was recorded (during the quarter ended June 30, 1999) to reflect the refund due us following the conclusion of an Internal Revenue Service audit. During the 2000 fiscal year we exhausted our ability to carryback tax losses resulting from operations in the fiscal year ended March 31, 1996. Liquidity and Capital Resources. In December, 1996 we entered into a Loan and Security Agreement with Silicon Valley Bank. This Agreement, which we sometimes refer to as our "bank credit line", has been modified or renewed at various times since December 1996. The current bank credit line (renewed in September, 1999) provides for up to $2,500,000 in available borrowings based upon our eligible accounts receivable balances. The current bank credit line will expire on September 28, 2000. This bank credit line provides for a variety of covenants, including among other things, that we maintain certain financial ratios. The bank credit line is collateralized by a security interest in substantially all of our assets. Interest on borrowings under this agreement is payable monthly at a rate of one and one quarter percent in excess of the prime rate. On March 31, 2000 there were no borrowings outstanding under this agreement. In December, 1996, we also obtained a $5,100,000 financing facility with entities associated with Hambrecht & Quist. This 28 facility included subordinated debt as well as equipment lease financing. We received $3,000,000 of subordinated debt from Hambrecht & Quist Transition Capital, LLC and $1,100,000 of subordinated debt from Hambrecht & Quist Guaranty Finance, LLC, pursuant to the above facility. The remaining $1,000,000 of the facility was used to fund a master lease line for financing of future capital asset purchases. The facility with the Hambrecht & Quist entities is secured by an interest in our fixed assets and substantially all of our other assets but is subordinate to our bank credit line. In connection with this financing facility, we issued warrants to purchases 260,200 common shares to entities associated with Hambrecht & Quist. The Hambrecht & Quist entities were entitled to exercise the warrants with respect to 130,100 shares at an exercise price of $10.00 at any time on or before December 24, 2004, and with respect to 130,100 shares at an exercise price of $7.00 at any time on or after December 24, 1997 and before December 24, 2004. In December, 1997 all of the $7.00 warrants were exercised on a "net" basis, and the warrant holder received 40,266 shares of Common Stock. We recorded $549,000 of deferred interest attributable to the value of the warrants, which was amortized using the effective interest rate method to interest expense over the term of the financing facility. The fair value of the warrants was estimated using the Black-Scholes option pricing model and the following assumptions: volatility of .75, risk free interest rate of 6.3% and expected life equal to the contractual terms. In March, 1998, we renegotiated our financing arrangement with Hambrecht & Quist Guaranty Finance. The agreement we reached involved the restructuring of $3,000,000 debt into $1,500,000 of Series C Convertible Preferred Stock (see note 7 of Notes to Financial Statements) and $1,500,000 of debt. The interest rate on such restructured debt was 7.25% and was due in October 1999. We filed a Form S-3 Registration Statement under the Securities Act of 1933 to register the resale of the 461,538 shares of the Company's Common Stock which underlie the Series C Convertible Preferred Stock issued to Hambrecht & Quist Guaranty Finance. In connection with the agreement, the exercise price of 90,000 of the $10.00 warrants issued with the original arrangement reached in December 1996 was lowered to the fair value of common stock of $3.25. We accounted for this transaction by revaluing the new warrants, using comparable assumptions as the original warrant grant, and the resultant value of $90,000 was amortized over the new loan period. In June, 1998, 90,000 of the $3.25 warrants were exercised on a "net exercise" basis, and the warrant holder received 29,691 shares of common stock. During the fiscal years ended March 31, 1999 and March 31, 2000, 167,500 and 292,000 shares of the Preferred Stock were converted into common stock pursuant to this financing arrangement. In October, 1999, we renegotiated our financing arrangement with Hambrecht & Quist Guaranty Finance. The agreement we reached involved the restructuring of $1,500,000 debt into 153,846 shares of Series C Convertible Preferred Stock and $1,000,000 of debt. The interest rate on the restructured debt is 7.25% and the debt and interest are payable in monthly installments through April 30, 2001. In connection with this agreement, we issued warrants to purchase 120,000 common shares at an exercise price of $2.50. These warrants expire on April 30, 2006. We also enhanced the conversion rate of Hambrecht and Quist's existing Series C Convertible Preferred Stock so that each share of Series C Convertible Preferred Stock is convertible into 1.625 shares of Common Stock.. The beneficial conversion feature, warrants and new debt were recorded at their relative fair values. We recorded $345,000 of deferred financing costs attributable to this finance restructuring with Hambrecht & Quist Guaranty. This amount is being amortized using the effective interest rate method to interest expense over the term of the financing facility (18 months). The fair value of the warrants was estimated using the Black-Scholes option pricing model and the following assumptions: volatility of .50, risk free interest rate of 6% and expected life equal to the contractual terms. We filed a Form S-3 Registration Statement under the Securities Act of 1933 to register the shares of the common stock which underlie the Series C Convertible Preferred Stock and the 120,000 shares of our common stock which underlie the warrants issued to Hambrecht & Quist Guaranty Finance. In December, 1997, we secured a $7,000,000 equity-based line of credit. Under this arrangement, we had the right to draw up to a total of $7,000,000 in cash in exchange for common stock. Pricing of the common stock issued was based on the market price of our common stock at the time of a draw subject to a 29 14% discount and a 4% commission payable in common stock. The availability of the credit line, and the amounts and timing of draws under the line were subject to a number of conditions. In January, 1998, we filed a Form S-3 Registration Statement under the Securities Act of 1933 to register the resale of shares issued under this credit line. During the fiscal year ended March 31, 1998, we drew $1,450,000 from this credit line for which we issued 618,130 shares of common stock. During the fiscal year ended March 31, 1999, we drew an additional $2,358,000 from this credit line for which we issued 903,870 shares of common stock. This facility is no longer available to us. On May 20, 1999, we secured a new equity-based line of credit by entering into a new stock purchase agreement with Kingsbridge. Under this arrangement, we were able to draw up to $12,000,000 in cash in exchange for common stock. Pricing of the common stock issued under this arrangement was based on the market price of our common stock at the time of a draw, discounted by 10% or 12%, depending upon the price of our common stock. The availability of the credit line, and the amounts and timing of draws under the line were subject to a number of conditions. On May 27, 1999, we filed a Registration Statement on Form S-1 to register for resale the shares we may issue to Kingsbridge under this credit line and on August 12, 1999 the Statement became effective. During the fiscal year ended March 31, 2000, we drew $7,408,000 from the credit line for which we issued 1,800,000 shares of common stock. Because of limitations on the total number of shares that could be issued under this line of credit, this facility is no longer available to us and was terminated on March 14, 2000. On May 4, 2000, we secured a new equity-based line of credit by entering into a new stock purchase agreement with Kingsbridge. Under the new agreement, we may draw up to $20,000,000 in cash in exchange for common stock. Pricing of the common stock issued under this agreement is based on the market price of our common stock at the time of a draw subject to discounts ranging from 8% to 12%. We will file a Registration Statement on Form S-1 to register for resale the shares we may issue to Kingsbridge under this credit line. The availability of the credit line, and the amounts and timing of draws under the lines are subject to a number of conditions, including the effectiveness of the S-1 Registration Statement. While we anticipate that the Registration will become effective in the near future, and that conditions will be such that this line will be available to us, we cannot be sure of this. Our operating activities have used cash of $1,412,000 in fiscal year 1998, $124,000 in fiscal year 1999 and $2,628,000 in fiscal year 2000. During those fiscal years cash required by operating activities was not as great as our operating losses due to various factors, including improvements in receivables collection and inventory turnover, and the receipt of income tax refunds in certain fiscal years. In addition to our operating losses, we utilized cash during the 1998, 1999, and 2000 fiscal years to purchase new fixed assets, pay down debt obligations and to develop and purchase software that was added to capitalized software. During fiscal 1998 we augmented cash on hand via borrowings from our bank credit line described above, as well as draws on the equity credit line described above. During the 1999 and 2000 fiscal years we augmented cash on hand primarily by drawing on the equity credit lines described above. We believe that existing cash, cash equivalents and short term investments, available credit and cash generated from operations, plus cash available through the new equity based line of credit with Kingsbridge (when and if it becomes available-see discussion above) will be sufficient to meet our cash requirements at least through the end of fiscal year 2001. As of March 31, 2000, we had cash and cash equivalents of $5,179,000 and working capital of $4,976,000. 30 Impact of Year 2000 Issue. We have not experienced any major system failures or disruptions as a result of the Year 2000 issue. In addition, we did not incur significant incremental costs to become Year 2000 compliant. 31 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Report of Independent Auditors, Financial Statements and Notes to Financial Statements follow on pages 33 through 51. 32 INDEPENDENT AUDITORS' REPORT The Board of Directors Sonic Solutions: We have audited the accompanying balance sheets of Sonic Solutions as of March 31, 1999 and 2000, and the related statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended March 31, 2000 and the related financial statement schedule. These financial statements and financial statement schedule are the responsibility of Sonic Solutions' management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sonic Solutions as of March 31, 1999 and 2000 and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2000, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP San Francisco, California April 28, 2000, except as to note 11 which is as of May 4, 2000 33 FINANCIAL STATEMENTS SONIC SOLUTIONS BALANCE SHEETS (in thousands, except share and per share amounts)
March 31 -------------------------- 1999 2000 ---------- ---------- Assets Current assets: Cash and cash equivalents....................................................... $ 2,414 5,179 Accounts receivable, net of allowance for returns and doubtful accounts of $599 and $930 at March 31, 1999 and 2000, respectively...................... 5,403 4,635 Inventory....................................................................... 807 945 Prepaid expenses and other current assets....................................... 287 425 -------- ------- Total current assets............................................................ 8,911 11,184 Fixed assets, net.................................................................... 2,313 1,515 Purchased and internally developed software costs, net............................... 2,385 1,876 Other assets......................................................................... 156 393 -------- ------- Total assets.................................................................... $ 13,765 14,968 ======== ======= Liabilities And Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities........................................ $ 4,359 4,306 Bank note payable............................................................... 500 --- Deferred revenue and deposits................................................... 1,318 1,224 Subordinated debt, current portion.............................................. 1,419 600 Current portion of obligations under capital leases............................. 148 78 -------- ------- Total current liabilities....................................................... 7,744 6,208 Obligations under capital leases, net of current portion............................. 89 10 -------- ------- Total liabilities............................................................... 7,833 6,218 Commitments and contingencies Shareholders' Equity Convertible preferred stock, no par value, 10,000,000 shares authorized: 294,038 and 155,544 shares issued and outstanding at March 31, 1999, and 2000, respectively............................................................. 956 506 Common stock, no par value, 30,000,000 shares authorized; 9,468,123 and 12,050,214 shares issued and outstanding at March 31, 1999 and 2000, respectively................................................................... 18,121 27,083 Accumulated deficit............................................................. (13,145) (18,839) -------- ------- Total shareholders' equity...................................................... $ 5,932 8,750 -------- ------- Total liabilities and shareholders' equity...................................... $ 13,765 14,968 ======== =======
See accompanying notes to financial statements 34 SONIC SOLUTIONS STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Years Ended March 31, ------------------------------------- 1998 1999 2000 ---------- ---------- ---------- Net revenue................................................................. $19,881 21,899 20,827 Cost of revenue............................................................. 10,209 9,547 8,992 ---------- ---------- ---------- Gross profit................................................................ 9,672 12,352 11,835 ---------- ---------- ---------- Operating expenses: Marketing and sales.................................................... 7,257 7,216 8,938 Research and development............................................... 6,037 5,137 6,155 General and administrative............................................. 1,603 1,556 2,284 ---------- ---------- ---------- Total operating expenses............................................... 14,897 13,909 17,377 ---------- ---------- ---------- Operating loss......................................................... (5,225) (1,557) (5,542) Other expense, net.......................................................... (651) (302) (249) ---------- ---------- ---------- Loss before income taxes............................................... (5,876) (1,859) (5,791) Provision (benefit) for income taxes........................................ --- --- (97) ---------- ---------- ---------- Net loss............................................................. (5,876) (1,859) (5,694) Beneficial conversion feature given to preferred shareholders........ --- --- 110 Dividends paid to preferred shareholders............................. --- 53 49 ---------- ---------- ---------- Net loss applicable to common shareholders............................. $(5,876) (1,912) (5,853) ========== ========== ========== Basic and diluted loss per share applicable to common shareholders..... $ (0.76) (0.21) (0.56) ========== ========== ========== Weighted average shares used in computing per share amounts............ 7,761 8,896 10,460 ========== ========== ==========
See accompanying notes to financial statements 35 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, 1997...................... --- $ --- 7,596 13,840 (5,410) 8,430 Exercise of common stock options............... --- --- 50 84 --- 84 Issuance of preferred stock.................... 462 1,500 --- --- --- 1,500 Equity line of credit issuances, net of issuance costs of $197....................... --- --- 618 1,253 -- 1,253 Exercise of warrants........................... --- --- 38 --- --- --- Issuance of warrants........................... --- --- --- 27 --- 27 Net loss....................................... --- --- --- --- (5,876) (5,876) -------- -------- -------- ------- ------- -------- Balances at March 31, 1998...................... 462 1,500 8,302 15,204 (11,286) 5,418 Exercise of common stock options............... --- --- 64 143 --- 143 Equity line of credit issuances, net of issuance costs of $75........................ --- --- 904 2,283 -- 2,283 Conversion of preferred stock.................. (168) (544) 168 544 --- --- Preferred stock dividends...................... --- --- --- (53) --- (53) Exercise of warrants........................... --- --- 30 --- --- --- Net loss....................................... --- --- --- --- (1,859) (1,859) -------- -------- -------- ------- ------- -------- Balances at March 31, 1999...................... 294 956 9,468 18,121 (13,145) 5,932 Exercise of common stock options............... --- --- 298 773 --- 773 Equity line of credit issuances, net of issuance costs of $363....................... --- --- 1,800 7,053 --- 7,053 Issuance of preferred stock.................... 154 500 --- --- --- 500 Conversion of preferred stock.................. (292) (950) 464 950 --- --- Preferred stock dividends...................... --- --- --- (49) --- (49) Return to preferred stock shareholders as a result of beneficial conversion feature...... --- --- --- (110) --- (110) Preferred stock beneficial conversion feature.. --- --- --- 110 --- 110 Issuance of warrants........................... --- --- --- 235 --- 235 Exercise of warrants........................... --- --- 20 --- --- --- Net loss....................................... --- --- --- --- (5,694) (5,694) -------- -------- -------- ------- ------- -------- Balances at March 31, 2000...................... 156 $ 506 12,050 27,083 (18,839) 8,750 ======== ======== ======== ======= ======= ========
See accompanying notes to financial statements 36 SONIC SOLUTIONS STATEMENTS OF CASH FLOWS (in thousands)
Years Ended March 31, -------------------------------------------- 1998 1999 2000 ---------- ---------- ---------- Cash flows from operating activities: Net loss $(5,876) (1,859) (5,694) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,255 2,621 2,958 Provision for returns and doubtful accounts, net of write-offs 29 (18) 331 Interest expense amortization 482 60 --- Changes in operating assets and liabilities: Accounts receivable (122) (2,187) 437 Inventory 641 (173) (138) Refundable income taxes 450 148 --- Prepaid expenses and other current assets 254 30 (138) Other assets (200) (72) (237) Accounts payable and accrued liabilities 344 1,044 (53) Deferred revenue and deposits 331 282 (94) -------- ------- ------- Net cash used in operating activities (1,412) (124) (2,628) -------- ------- ------- Cash flows from investing activities: Purchase of fixed assets (787) (913) (850) Additions to purchased and internally developed software (1,849) (696) (801) -------- ------- ------- Net cash used in investing activities (2,636) (1,609) (1,651) -------- ------- ------- Cash flows from financing activities: Proceeds from exercise of common stock options 84 143 773 Repayments of subordinated debt (55) (568) (84) Proceeds from equity line financing 1,253 2,283 7,053 Borrowings on line of credit 500 420 422 Repayments of line of credit --- (420) (922) Principal payments on capital leases (88) (137) (149) Payment of dividends --- (53) (49) Issuance of warrants 27 --- --- -------- ------- ------- Net cash provided by financing activities 1,721 1,668 7,044 -------- ------- ------- Net increase (decrease) in cash and cash equivalents (2,327) (65) 2,765 Cash and cash equivalents, beginning of year 4,806 2,479 2,414 -------- ------- ------- Cash and cash equivalents, end of year $ 2,479 2,414 5,179 ======== ======= ======= Supplemental disclosure of cash flow information: Interest paid during year $ 265 71 109 ======== ======= ======= Income taxes paid during year $ 13 9 4 ======== ======= ======= Noncash financing and investing activities: Assets acquired through capital lease $ 221 --- --- ======== ======= ======= Conversion of preferred stock to common stock --- 544 956 ======== ======= ======= Conversion of subordinated debt to preferred stock $ 1,500 --- 500 ======== ======= ======= Issuance of warrants associated with conversion of subordinated debt --- --- 235 ======== ======= ======= Beneficial conversion feature given to preferred shareholders --- --- 110 ======== ======= =======
See accompanying notes to financial statements 37 SONIC SOLUTIONS NOTES TO FINANCIAL STATEMENTS March 31, 1998, 1999 and 2000 (1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (a) Operations We develop workstations used by professionals to edit and process digital audio and digital video. Our products are computer based, and usually include both plug-in hardware and applications software installed on a personal computer. Our customers use various kinds of peripheral devices -- for example, disk drives, streaming tape drives, and audio and video tape recorders -- along with our products. Although we do not manufacture or sell the personal computer or peripheral devices used with our products, we typically talk about the complete configuration of personal computer, Sonic hardware, Sonic software, and peripherals as a Sonic workstation. We currently market two workstation product lines: SonicStudio(TM) and DVD Creator(TM). SonicStudio is a line of professional audio workstations that our customers use to prepare audio for release on digital audio compact discs, for release with video and film entertainment, and for broadcast on radio. DVD Creator is a line of DVD-Video/Audio production workstations which supports the preparation and assembly of video and audio assets for release on the new DVD- Video disc format and the upcoming DVD-Audio disc format. During the fiscal year ended March 31, 2000, we introduced and began shipments of two new products: DVDit!(TM) and DVD Fusion(TM). DVD it! is an authoring application which provides simplified DVD authoring capabilities to consumer, "prosumer," and some professional users. DVD Fusion, which is a part of our DVD Creator product line, provides video producers and editors a comprehensive set of tools for encoding, authoring and proofing DVD-Video titles derived from projects created on non-linear video editing systems. Our products generally include application software and specialized hardware installed on a personal computer. Our products are designed to improve the productivity and effectiveness of media professionals, enabling them to process and manipulate more material in a given amount of time and to achieve results which would have been impossible using traditional linear analog or digital technology. (b) Use of Estimates and Certain Concentrations The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. We are dependent on sole-source suppliers for certain key components used in our products. We purchase these sole-source components pursuant to purchase orders placed from time to time. We do not carry significant inventories of these components, and have no guaranteed supply agreements. Any extended future interruption or limitation in the supply of any of the components obtained from a single source could have a material adverse effect on our results of operations. 38 (c) Revenue Recognition Revenue is derived from product sales and maintenance contracts. Revenue from product sales is recognized upon shipment of the products. Revenue from software maintenance, including maintenance sold with the product, is recognized on a straight-line basis over the term of the agreement, generally one year. We recognize revenue in accordance with Statement of Position (SOP) 97-2, "Software Revenue Recognition". The statement provides specific industry guidance and stipulates that revenue recognized from software arrangements is to be allocated to each element of the arrangement based on the relative fair values of the elements, based on objective evidence which is specific to the vendor. Our adoption of SOP 97-2 on April 1, 1998 did not have a material impact on revenue recognition. Revenue from sales to distributors and dealers may be subject to agreements allowing limited rights of return and exchange. Accordingly, we provide reserves for estimated future returns and exchanges at the time of the sale as a reduction of revenue. Cost of revenue includes hardware product costs, third party hardware costs, amortization of capitalized software and third party software royalties. (d) Cash Equivalents Cash equivalents consist of short-term, highly-liquid investments with original maturities of ninety days or less. Cash equivalents are generally invested in money market funds. (e) Inventory Inventory is valued at the lower of cost, determined on a first-in, first- out basis, or market. Inventory consists of raw materials, work in process and original equipment manufacturer's goods. (f) Fixed Assets Fixed assets consist of furniture and equipment and are recorded at cost. Equipment under capital leases is stated at the present value of minimum lease payments at the inception of the lease. Depreciation of furniture and equipment is provided using the straight-line method over the estimated useful lives of the respective assets which are generally three to five years. Equipment held under capital leases is amortized over the shorter of the lease term or the estimated useful life of the asset. (g) Purchased and Internally Developed Software Costs In accordance with Statement of Financial Accounting Standards (SFAS) No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," purchased software and software product development costs are capitalized when a product's technological feasibility has been established and then is amortized over a future period. Amortization begins when a product is available for general release to customers. Amortization of capitalized software costs, for both internally developed and purchased software products, is computed on a straight- line basis over the estimated economic life of the product, which is generally three years, or on a basis using the ratio of current revenue to the total of current and anticipated 39 future revenue, whichever is greater. All other research and development expenditures are charged to research and development expense in the period incurred. (h) Income Taxes We account for income taxes under the asset and liability method of accounting. Under the asset and liability method, deferred tax assets and liabilities are recognized based on the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. (i) Basic and diluted loss per share SFAS No. 128 "Earnings Per Share" requires the presentation of basic net income per share, and for companies with complex capital structures, diluted net income per share. The following table sets forth the computations of shares and net loss per share, applicable to common shareholders used in the calculation of basic and diluted net loss per share for the years ended March 31, 1998, 1999 and 2000 (in thousands, except per share data):
Years Ended March 31, ------------------------------------------ 1998 1999 2000 -------- -------- -------- Net loss......................................................... $(5,876) (1,859) (5,694) Beneficial conversion feature given to preferred shareholders.... -- -- 110 Dividends paid to preferred shareholders......................... -- 53 49 ------- ------- ------- Net loss applicable to common shareholders....................... (5,876) (1,912) (5,853) ======= ======= ======= Weighted average number of common shares outstanding............ 7,761 8,896 10,460 ======= ======= ======= Basic and diluted net loss per share applicable to common shareholders.................................................... $ (0.76) (0.21) (0.56) ======= ======= =======
As of March 31, 1998, 1999 and 2000 potentially dilutive shares totaling 2,060,166; 1,834,502; and 1,253,947, respectively, for convertible preferred stock and options with exercise prices less than the average market price that could dilute basic earnings per share in the future, were not included in earnings per share as their effect was anti-dilutive for those periods. (j) Concentrations of Credit Risk Financial instruments which potentially subject our company to concentrations of credit risk are trade receivables. We manufacture and sell our products to customers who are primarily audio and video and graphic arts professionals who prepare sound, video and graphics for use in the music recording, video, film and broadcast and printing industries or for corporate in-house use and to dealers who support such customers. Management believes that any risk of credit loss is significantly reduced due to the diversity of its end users and their dispersion across many geographic sales areas. We maintain an allowance for doubtful accounts to provide against potential credit losses. 40 (k) Stock-Based Compensation Our company has various stock-based compensation plans, as discussed in Note 7. We have accounted for the effect of our stock based compensation plans under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees". We have elected to adopt only the disclosure based requirements of SFAS No. 123 "Accounting for Stock-Based Compensation" and as such have disclosed the pro forma effects on net income (loss) and net income (loss) per share data as if we had elected to use the fair value approach to account for all our employee stock-based compensation plans. (l) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of We account for long-lived assets, including intangibles, at amortized cost. As part of our ongoing review of the valuation and amortization of long-lived assets, we assess the carrying value of such assets if the facts and circumstances suggest that they may be impaired. As a result, we have determined that our long-lived assets are not impaired as of March 31, 2000 and 1999. (m) Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative instruments and hedging activities". We are required to adopt SFAS No. 133 in the first quarter of fiscal year 2002. We do not anticipate that SFAS No. 133 will have a material impact on our financial statements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements", as amended by SAB 101A, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. We do not expect the adoption of SAB 101 to have a material effect on our financial position or results of operations. In March 2000, the Emerging Issues Task Force (EITF) Issue No. 00-2, "Accounting for Web Site Development Costs", which outlines the accounting criteria for costs related to the development of web sites. We will be required to adopt EITF Issue No. 00-2 in fiscal quarters beginning after June 30, 2000. We are in the process of assessing any impact that the adoption of EITF Issue No. 00-2 will have on our financial position or results of operations. In March 2000, the EITF published their consensus on EITF Issue No. 00-3, "Application of AICPA Statement of Position 97-2, Software Revenue Recognition to Arrangements that Include the Right to Use Software Stored on Another Entity's Hardware". EITF Issue No. 00-3 outlines the accounting criteria for hosting arrangements. We do not expect the adoption of EITF Issue No. 00-3 to have a material effect on our financial position or results of operations. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, "Accounting For Certain Transactions involving Stock Compensation". FASB Interpretation No. 44 clarifies the application of APB Opinion No. 25 for certain issues. The FASB Interpretation No. 44 is effective July 1, 2000. We are in the process of assessing any impact that the adoption of FASB Interpretation No. 44 will have on our financial statements. 41 (n) Comprehensive Income SFAS No. 130 establishes standards for the reporting and disclosure of comprehensive income and its components which will be presented in association with our company's financial statements. Comprehensive income is defined as the change in a business enterprise's equity during a period arising from transactions, events or circumstances relating to nonowner sources, such as foreign currency translation adjustments and unrealized gains or losses on available-for-sale securities. It includes all changes in equity during a period except those resulting from investments by or distributions to owners. For the fiscal years ended March 31, 1998, 1999 and 2000, net income and comprehensive income were equivalent. Accordingly, the adoption of SFAS No. 130 had no impact on our financial reporting. (2) INVENTORY The components of inventory consist of (in thousands):
March 31, --------------------- 1999 2000 ------ ------ Finished Goods $ 603 387 Work-in-process 187 75 Raw materials 17 483 ----- ---- $ 807 945 ===== ====
(3) FIXED ASSETS Fixed assets consist of (in thousands):
March 31, ---------------------- 1999 2000 -------- -------- Equipment, furniture and fixtures $ 4,781 5,382 Demonstration equipment 1,733 1,888 Parts used in service, not held for sale 1,401 1,495 ------- ------ 7,915 8,765 Less accumulated depreciation (5,602) (7,250) ------- ------ $ 2,313 1,515 ======= ======
Depreciation expense was $1,397,000, $1,365,000 and $1,648,000 for the years ended March 31, 1998, 1999, and 2000, respectively. As of March 31, 2000, fixed assets held under capital lease totaled $315,000 and accumulated depreciation on those assets totaled $253,000. 42 (4) PURCHASED AND INTERNALLY DEVELOPED SOFTWARE COSTS Capitalized software costs consist of (in thousands):
March 31, ---------------------- 1999 2000 -------- -------- Purchased software $ 365 409 Internally developed software 5,278 6,035 ------- ------ 5,643 6,444 Accumulated amortization (3,258) (4,568) ------- ------ $ 2,385 1,876 ======= ======
Amortization of capitalized software costs was $859,000, $1,255,000 and $1,310,000 for the years ended March 31, 1998, 1999 and 2000, respectively. (5) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of (in thousands):
March 31, ---------------------- 1999 2000 -------- -------- Accounts payable $1,988 1,089 Commissions payable 428 653 Accrued compensation and benefits 555 903 Accrued expenses 1,388 1,661 ------ ----- $4,359 4,306 ====== =====
(6) CREDIT FACILITIES AND DEBT RESTRUCTURING In December, 1996, we entered into a Loan and Security Agreement with Silicon Valley Bank. This Agreement, which we sometimes refer to as our "bank credit line", has been modified or renewed at various times since December 1996. The current bank credit line (renewed in September, 1999) provides for up to $2,500,000 in available borrowings based upon our eligible accounts receivable balances. The current bank credit line will expire on September 28, 2000. This bank credit line provides for a variety of covenants, including among other things, that we maintain certain financial ratios. The bank credit line is collateralized by a security interest in substantially all of our assets. Interest on borrowings under this agreement is payable monthly at a rate of one and one quarter percent in excess of the prime rate. On March 31, 2000, there were no borrowings outstanding under this agreement. Since December 1996, we have entered into a couple of different financing arrangements with Hambrecht & Quist Guaranty Finance, including a $5,100,000 financing facility and a $7,000,000 equity-based line of credit. In March 1998, $3,000,000 of the $5,100,000 financing facility was restructured into 43 $1,500,000 of debt. The debt had an interest rate of 7.25% and was due in October 1999. During the year ended march 31, 2000, 292,000 shares of the convertible preferred stock were converted to common stock. In October, 1999, we renegotiated our financing arrangement with Hambrecht & Quist Guaranty Finance. The agreement we reached involved the restructuring of $1,500,000 debt into 153,846 shares of Series C Convertible Preferred Stock and $1,000,000 of debt. The interest rate on the restructured debt is 7.25% and the debt and interest are payable in monthly installments through April 30, 2001. In connection with this agreement, we issued warrants to purchase 120,000 common shares at an exercise price of $2.50. These warrants expire on April 30, 2006. We also enhanced the conversion rate of Hambrecht & Quist's existing Series C Convertible Preferred Stock so that each share of Series C Convertible Preferred Stock is convertible into 1.625 shares of Common Stock. The beneficial conversion feature, warrants and new debt were recorded at their relative fair values. We recorded $345,000 of deferred financing costs attributable to this finance restructuring with Hambrecht & Quist Guaranty. This amount is being amortized using the effective interest rate method to interest expense over the term of the financing facility (18 months). The value of the warrants was estimated using the Black-Scholes option pricing model and the following assumptions: volatility of .50, risk free interest rate of 6% and expected life equal to the contractual terms. We filed a Form S-3 Registration Statement under the Securities Act of 1933 to register the shares of the common stock which underlie the Series C Convertible Preferred Stock and the 120,000 shares of our common stock which underlie the warrants issued to Hambrecht & Quist Guaranty Finance. In December, 1997, we secured a $7,000,000 equity-based line of credit. Under this arrangement, we had the right to draw up to a total of $7,000,000 in cash in exchange for common stock. Pricing of the common stock issued was based on the market price of our common stock at the time of a draw subject to a 14% discount and a 4% commission payable in common stock. The availability of the credit line, and the amounts and timing of draws under the line were subject to a number of conditions. In January, 1998, we filed a Form S-3 Registration Statement under the Securities Act of 1933 to register the resale of shares issued under this credit line. Under this equity-based line of credit, we drew a total of $3,808,000 and issued 1,522,000 shares of our common stock during fiscal years 1998 and 1999. This facility is no longer available to us. On May 20, 1999, we secured a new equity-based line of credit by entering into a new stock purchase agreement with Kingsbridge. Under the new arrangement, we were able to draw up to $12,000,000 in cash in exchange for common stock; provided, however, that in any event we can not sell more than a total of 1,800,000 shares to Kingsbridge under this arrangement, unless we obtain shareholder approval. Pricing of the common stock issued under this arrangement is 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 can be issued under this line of credit, this facility is no longer available to us and was terminated on March 14, 2000. (7) SHAREHOLDERS' EQUITY Convertible Preferred Stock In October, 1999, we issued 153,846 shares of Series C Convertible Preferred Stock to Hambrecht & Quist Guaranty Finance in conjunction with our renegotiated financing arrangement with them. Also, in 44 conjunction with the new financing arrangement we changed the conversion rate of all of our outstanding Series C Convertible Preferred Stock so that each share of Series C Convertible Preferred Stock is convertible into 1.625 shares of Common Stock. Stock Options Under our September 1989 Stock Option Plan (the Plan), options to purchase up to an aggregate of 2,090,000 shares of common stock may be granted to key employees, directors and consultants. Grants of options to the directors of Sonic Solutions may not exceed 140,000 shares. The Plan provides for issuing both incentive stock options, which must be granted at fair market value at the date of grant, and nonqualified stock options, which must be granted at not less than 85% of fair market value of the stock. All options to date have been granted as incentive stock options. Options under the Plan generally vest over four years from the date of grant. The options generally expire ten years from the date of grant and are canceled three months after termination of employment. Our Board of Directors and Chief Executive Officer administer the Plan. During 1995, we adopted the 1994 NonEmployee Directors Stock Option Plan which provides for the grant of stock options to Sonic Solutions' nonemployee directors. Under this plan, stock options are granted annually at the fair market value of Sonic Solutions' common stock on the date of grant. The number of options so granted annually is fixed by the plan. Such options generally vest over four years from the grant date. The total number of shares to be issued under this plan may not exceed 100,000 shares. There were 22,000 options outstanding at March 31, 2000, at prices of $2.6560, $2.5625 and $1.6880 per share, of which 8,020 were exercisable. In March 1998, the Board of Directors approved the repricing of options at an exercise price equal to fair market value on March 3, 1998 of $2.5625 per share. There were no changes made to the vesting schedules in relation to the repricing. In July, 1998, the Board of Directors adopted the Sonic Solutions 1998 Stock Option Plan and the shareholder's approved the 1998 Stock Option Plan in September, 1998. The 1998 Stock Option Plan covers 1,000,000 shares of Common Stock, with an annual increase in the number of shares available for issuance under the Stock Option Plan on the last day of each fiscal year; provided that the total number of shares issuable under the plan shall not exceed 2,000,000. 45 A summary of Sonic Solutions' option plans is presented below:
1998 1999 2000 ---------------------------- ---------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ----------- ----------- ----------- ----------- ----------- ----------- Outstanding at beginning of year 829,699 $5.53 1,660,178 2.89 2,026,333 2.80 Granted 1,925,150 3.76 670,250 3.08 782,300 2.73 Exercised (50,062) 1.70 (64,225) 2.22 (298,208) 2.58 Forfeited (1,044,609) 6.66 (239,870) 4.32 (159,386) 4.94 ---------- ----- --------- ---- --------- ---- Outstanding at end of year 1,660,178 $2.89 2,026,333 2.80 2,351,039 2.67 ========== ========= ========= Options exercisable at year end 640,809 $2.82 1,179,191 2.65 902,506 2.54 Fair value of options granted during the year $2.22 2.06 1.93
Had compensation cost for our plans been determined consistent with the fair value approach enumerated in SFAS No. 123, our net loss and net loss per share for the years ended March 31, 1998, 1999 and 2000 would have been increased as indicated below (in thousands, except per share data):
Years Ended March 31, ---------------------------------- 1998 1999 2000 --------- --------- --------- Net loss As Reported $5,876 1,859 5,694 Pro Forma $6,572 3,640 7,532 Net loss per share As Reported $ 0.76 0.21 0.56 Pro Forma $ 0.85 0.41 0.72
The fair value of options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1999 and 2000; risk-free interest rate of 5.97%, 4.65% and 6.04%, respectively; expected life of 4 years; 91%, 91% and 97% expected volatility, respectively; and no dividends. The effect of applying SFAS No. 123 for disclosing compensation costs may not be representative of the effects on reported net income (loss) for future years because pro forma net income (loss) reflects compensation costs only for stock options granted in fiscal 1996 through 2000 and does not consider compensation costs for stock options granted prior to April 1, 1995. 46 The following table summarizes information about stock options outstanding at March 31, 2000.
Options Outstanding Options Exercisable Weighted Number Average Weighted Number Weighted Range of Outstanding at Remaining Average Outstanding at Average Exercise Price March 31, 2000 Contractual Life Exercise Price March 31, 2000 Exercise Price - ------------------- --------------- ---------------- -------------- --------------- -------------- From $1.43 to $1.75 359,527 7.87 $1.66 164,932 $1.64 From $2.00 to $2.91 1,662,678 8.11 2.56 659,346 2.56 From $3.44 to $3.94 219,084 8.85 3.73 51,304 3.69 From $4.18 to $4.75 27,250 8.89 4.64 10,037 4.63 From $5.25 to $5.75 48,500 8.14 5.52 16,887 5.69 From $6.00 to $6.88 34,000 7.00 6.17 - - --------- ---- ----- ------- ----- 2,351.039 8.14 $2.67 902,506 $2.54 ========= ==== ===== ======= =====
(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, ------------------------------------------------------- 1998 1999 2000 -------------- -------------- -------------- Computed tax at statutory rate $(1,998) (630) (1,969) Tax credits utilized 131 105 137 State taxes, net of federal benefit 3 5 4 Tax exempt interest income (36) (19) -- Current year net operating losses, temporary differences and credits for which no benefit was recognized 1,880 520 1,804 IRS tax refund -- -- (99) Other 20 19 26 ------- ---- ------ $ -- -- (97) ======= ==== ======
47 The components of deferred taxes are as follows (in thousands):
March 31, ------------------------------------------------------- 1998 1999 2000 -------------- -------------- -------------- Deferred tax assets: Accounts receivable $ 254 179 585 Inventories 542 123 49 Tax credit carryforwards 1,550 2,086 2,440 Net operating losses 4,103 4,732 6,109 Accrued vacation pay 62 55 101 Commissions 40 1 1 State income taxes 1 52 62 Warranty and other 42 51 37 ------- ------ ------ Gross deferred tax assets 6,594 7,279 9,384 ------- ------ ------ Valuation allowance (5,343) (6,309) (8,651) ------- ------ ------ Total deferred tax assets, net of valuation allowance 1,251 970 733 Deferred tax liabilities: Fixed assets (174) (130) (127) Internally developed software (1,077) (840) (606) ------- ------ ------ Total deferred tax liability (1,251) (970) (733) ------- ------ ------ Net deferred taxes $ - - - ======= ====== ======
The net change in the valuation allowance for the year ended March 31, 1999 and 2000 was an increase of approximately $966,000 and $2,343,000, respectively. Management believes that sufficient uncertainty exists regarding the future realization of certain deferred tax assets and, that a valuation allowance is required. As of March 31, 2000, we have cumulative federal and California net operating losses of approximately $16,483,000 and $7,263,000, respectively, which can be used to offset future income subject to taxes. The federal tax loss carryforwards will expire beginning in the year 2012 through 2020. The California tax loss carryforwards will expire beginning in the year 2001 through 2005. As of March 31, 2000, we have cumulative unused research and development tax credits of approximately $1,747,000 and $858,000 which can be used to reduce future federal and California income taxes, respectively. Federal credit carryforwards expire from 2009 through 2020; California credits will carryforward indefinitely. As of March 31, 2000, we have federal minimum tax credit carryforwards of approximately $135,000 which will carry forward indefinitely until utilized. (9) COMMITMENTS AND CONTINGENCIES (a) Leases In December, 1996, we entered into a leasing agreement to finance the purchase of up to $1,000,000 in equipment, as discussed in Note 6. Lease terms under the agreement are for 42 months and are secured by the leased equipment. We also lease certain facilities and equipment under noncancelable operating leases. 48 Future payments under capital and operating leases that have initial remaining noncancelable lease terms in excess of one year are as follows (in thousands):
Years Ended March 31, ---------------------------------------------- Capital Operating Leases Leases -------------------- -------------------- 2001 $120 705 2002 20 705 2003 - 117 2004 - - 2005 - - Thereafter - - ---- ----- Total minimum lease payments 140 1,527 ===== Less amount representing interest (52) Less current portion of obligations under capital lease (78) ---- Long-term obligations under capital lease $ 10 ====
Rent expense under operating leases for the years ended March 31, 1998, 1999 and 2000 was approximately $847,000, $954,000 and $953,000, respectively. (b) Benefit Plan We sponsor a 401(k) savings plan covering most salaried employees. To date, no contributions have been made to this plan by the Company. (c) Other We from time to time are subject to routine claims and litigation incidental to our business. We believe that the results of these matters will not have a material adverse effect on our financial condition. (10) SIGNIFICANT CUSTOMER INFORMATION AND SEGMENT REPORTING In 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which was adopted by us in 1998. SFAS No. 131 requires companies to report financial and descriptive information about its reportable operating segments, including segment profit or loss, certain specific revenue and expense items and segment assets, as well as information about the revenues derived from our products and services, the countries in which we earn revenue and hold assets, and major customers. The method for determining what information to report is based on the way that management organized the operating segments within our company for making operating decisions and assessing financial performance. Our chief operating decision maker is considered to be our Chief Executive Officer ("CEO"). The CEO reviews financial information presented on a consolidated basis accompanied by desegregated information about revenue by product line and revenue by geographic region for purposes of making operating decisions and assessing financial performance. The consolidated financial information reviewed by the CEO is identical to the information presented in the accompanying statement of operations. Therefore, we operate in, and measure our results in a single operating segment. As such, we are required to disclose the following revenue by product line, revenue by geographic and significant customer information: 49 Revenues by Product Line:
Years Ended March 31, ------------------------------------------------------------- 1998 1999 2000 ---------------- ---------------- ---------------- Revenues Consumer DVD $ - - 1,805 Pro Audio/Video 19,881 21,899 19,022 ------- ------ ------ Total net revenue $19,881 21,899 20,827 ======= ====== ======
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, ------------------------------------------------------------- 1998 1999 2000 ---------------- ---------------- ---------------- North America $ 9,612 11,702 11,027 Export: Europe 4,949 5,707 5,489 Pacific Rim 4,009 4,218 4,034 Other international 1,311 272 277 ------- ------ ------ Total net revenue $19,881 21,899 20,827 ======= ====== ======
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 Years Ended March 31, Receivable March 31, ----------------------------------------------------- ---------------------------- 1998 1999 2000 2000 ------------ ------------ ---------------- ---------------------------- Customer A 10% 11% 11% 6% Customer B - - 10% 8%
50 (11) SUBSEQUENT EVENTS On May 4, 2000, we secured a new equity-based line of credit by entering into a new Private Equity Line Agreement with Kingsbridge. Under the new agreement, we may draw up to $20,000,000 in cash in exchange for up to 19.9% of our common stock. Pricing of the common stock issued under this agreement is based on the market price of our common stock at the time of a draw subject to discounts ranging from 8% to 12%. Borrowings from this credit facility are subject to the completion of a Registration Statement on Form S-1 to register for resale the shares we may issue to Kingsbridge under this equity-based line of credit. 51 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 52 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item with respect to executive officers is set forth in Part I of this Report and the information with respect to directors is incorporated herein by reference to the information set forth under the caption "Election of Directors" in the Proxy Statement for the year 2000 Annual Meeting of Shareholders. Item 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the information set forth under the caption "Executive Compensation" in the Proxy Statement for the year 2000 Annual Meeting of Shareholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement for the year 2000 Annual Meeting of Shareholders. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the information set forth under the caption "Certain Relationships and Related Transactions" in the Proxy Statement for the year 2000 Annual Meeting of Shareholders. 53 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)1. Financial Statements. Included in Part II of this report: Report of Independent Auditors (page 33 of this Report). Balance Sheets as of March 31, 1999 and March 31, 2000. Statements of Operations for each of the three years in the period ended March 31, 2000. Statements of Shareholders' Equity for each of the three years in the period ended March 31, 2000. Statements of Cash Flows for each of the three years in the period ended March 31, 2000. Notes to Financial Statements (pages 38 through 51 of this Report). (a)2. Financial Statements Schedule. Included in Part IV of this report: Schedule II Valuation and Qualifying Accounts All other schedules are omitted because they are not required, or are not applicable, or the information is included in the financial statements. (a)3. Exhibits: 3.1 (1) Restated Articles of Incorporation 3.2 (1) Amended and Restated By-Laws 4.1 (1) Specimen Common Stock Certificate 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 54 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 Stock purchase agreement dated May 4, 2000 between Sonic Solutions and Kingsbridge Capital Limited 10.14 Registration Rights Agreement dated May 4, 2000 between Sonic Solutions and Kingsbridge Capital Limited 23.1 Consent of KPMG LLP 24.1 Power of Attorney (see page 58) 27 Financial Data Schedule _______________ (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. (b) Reports on Form 8-K: None. 55 FINANCIAL STATEMENT SCHEDULE SONIC SOLUTIONS VALUATION AND QUALIFYING ACCOUNTS Years Ended March 31, 1998, 1999 and 2000 (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, 1998 Allowance for doubtful accounts............. $221 44 -- (42) 223 Allowance for returns....................... 367 -- 190 (163) 394 ---- --- --- ---- --- $588 44 190 (205) 617 ==== === === ==== === Year ended March 31, 1999 Allowance for doubtful accounts............. $223 50 -- (133) 140 Allowance for returns....................... 394 -- 85 (20) 459 ---- --- --- ---- --- $617 50 85 (153) 599 ==== === === ==== === Year ended March 31, 2000 Allowance for doubtful accounts............. $140 650 -- (319) 471 Allowance for returns....................... 459 -- -- -- 459 ---- --- --- ---- --- $599 650 -- (319) 930 ==== === === ==== ===
56 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Sonic Solutions certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 10-K and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Novato, State of California, on the 26th day of June, 1999. Sonic Solutions By: /s/ Robert J. Doris ------------------------------------ Robert J. Doris, President POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert J. Doris, Mary C. Sauer, and A. Clay Leighton, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in- fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. June 26, 2000 /s/ Robert J. Doris --------------------------------------------------------- President and Director (Principal Executive Officer) Robert J. Doris June 26, 2000 /s/ Mary C. Sauer --------------------------------------------------------- Senior Vice President of Business Development and Director Mary C. Sauer June 26, 2000 /s/ Robert M. Greber --------------------------------------------------------- Director Robert M. Greber June 26, 2000 /s/ Peter J. Marguglio --------------------------------------------------------- Director Peter J. Marguglio June 26, 2000 /s/ A. Clay Leighton --------------------------------------------------------- Senior Vice President of Worldwide Operations and Finance and Chief Financial Officer (Principal Financial Accounting Officer) A. Clay Leighton 58 EX-10.13 2 0002.txt PRIVATE EQUITY LINE AGREEMENT EXHIBIT 10.13 PRIVATE EQUITY LINE AGREEMENT by and between KINGSBRIDGE CAPITAL LIMITED and SONIC SOLUTIONS dated as of May 4, 2000 This PRIVATE EQUITY LINE AGREEMENT is entered into as of the 4th day of May, 2000 (this "Agreement"), by and between Kingsbridge Capital Limited (the "Investor"), an entity organized and existing under the laws of the British Virgin Islands and Sonic Solutions, a corporation organized and existing under the laws of the State of California (the "Company"). WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Investor, from time to time as provided herein, and the Investor shall purchase from the Company, up to $20,000,000 of the Common Stock (as defined below); and WHEREAS, such investments will be made in reliance upon the provisions of Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of the United States Securities Act of 1933, as amended and the regulations promulgated thereunder (the "Securities Act"), and/or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the investments in Common Stock to be made hereunder. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I Certain Definitions Section 1.1 "Adjustment Period" See Section .2.4(b). ----------------- Section 1.2 "Bid Price" shall mean the closing bid price (as reported by --------- Bloomberg L.P.) of the Common Stock on the Principal Market. Section 1.3 "Capital Shares" shall mean the Common Stock and any shares of -------------- any other class of common stock whether now or hereafter authorized, having the right to participate in the distribution of earnings and assets of the Company. Section 1.4 "Closing" shall mean one of the closings of a purchase and ------- sale of the Common Stock pursuant to Section 2.1. Section 1.5 "Closing Date" shall mean, with respect to a Closing, the ------------ third Trading Day following the Put Date related to such Closing, provided all conditions to such Closing have been satisfied on or before such Trading Day. Section 1.6 "Commitment Period" shall mean the period commencing on the ----------------- earlier to occur of (i) the Effective Date or (ii) such earlier date as the Company and the Investor may mutually agree in writing, and expiring on the earliest to occur of (x) the date on which the Investor shall have purchased Put Shares pursuant to this Agreement for an aggregate Investment Amount of $20,000,000, (y) the date this Agreement is terminated pursuant to Section 2.5(b), or (z) the date occurring twenty-four (24) months from the date of commencement of the Commitment Period. Section 1.7 "Common Stock" shall mean the Company's common stock, no par ------------ value per share. Section 1.8 "Common Stock Equivalents" shall mean any securities that are ------------------------ convertible into or exchangeable for Common Stock or any warrants, options or other rights to subscribe for or purchase Common Stock or any such convertible or exchangeable securities. Section 1.9 "Condition Satisfaction Date" See Section 7.2. --------------------------- Section 1.10 "Damages" shall mean any loss, claim, damage, liability, ------- costs and expenses (including, without limitation, reasonable attorneys' fees and disbursements and costs and expenses of expert witnesses and investigation). Section 1.11 "Effective Date" shall mean the date on which the SEC first -------------- declares effective a Registration Statement registering resale of the Registrable Securities as set forth in Section 7.2(a). Section 1.12 "Exchange Act" shall mean the Securities Exchange Act of ------------ 1934, as amended and the regulations promulgated thereunder. Section 1.13 "Investment Amount" shall mean the dollar amount specified in ----------------- a Put Notice to be paid by the Investor to purchase Put Shares in accordance with Section 2.2 hereof. Section 1.14 "Legend" See Section 8.1. ------ Section 1.15 "Market Price" on any given date shall mean the average of ------------ the lowest intra-day prices of the Common Stock over the Valuation Period. "Lowest intra-day price" shall mean the lowest trade price of the Common Stock (as reported by Bloomberg L.P.) during any Trading Day; provided, however, that -------- ------- in the event that the volume of Common Stock traded on any such Trading Day is less than five thousand (5000) shares at the actual lowest intra-day price, then "lowest intra-day price" for such Trading Day shall mean the next lowest intra- day price, regardless of the volume of Common Stock traded at such next lowest intra-day price. Section 1.16 "Material Adverse Effect" shall mean any effect on the ----------------------- business, operations, properties, prospects, or financial condition of the Company that is material and adverse to the Company or to the Company and such other entities controlling or controlled by the Company, taken as a whole, and/or any condition, circumstance, or situation that would prohibit or otherwise interfere with the ability of the Company to enter into and perform its obligations under any of (a) this Agreement and (b) the Registration Rights Agreement. Section 1.17 "Maximum Commitment Amount" shall mean $20,000,000. ------------------------- Section 1.18 "Maximum Put Amount" shall mean with respect to each Put, ------------------ subject to the provisions of Section 2.4 hereof, (i) $500,000 if the average daily volume of shares of Common Stock traded during the preceding ten (10) Trading Days (the "Average Trading Volume") is 40,000 shares or less; (ii) $750,000 if the Average Trading Volume greater than 40,000 shares and less than 60,000 shares; and (iii) $1,000,000 if the Average Trading Volume equal to or greater than 60,000 shares. Notwithstanding the foregoing, (i) in the event that the Market Price is less than three dollars ($3.00) in connection with any Put, the Maximum Put Amount shall be $150,000 and (ii) in the event that the Market Price is less than one dollar ($1.00) in connection with any Put, the Maximum Put Amount shall be $50,000. 2 Section 1.19 "NASD" shall mean the National Association of Securities ---- Dealers, Inc. Section 1.20 "Outstanding" when used with reference to Common Shares or ----------- Capital Shares (collectively the "Shares"), shall mean, at any date as of which the number of such Shares is to be determined, all issued and outstanding Shares, and shall include all such Shares issuable in respect of outstanding scrip or any certificates representing fractional interests in such Shares; provided, however, that "Outstanding" shall not mean any such Shares then - -------- ------- directly or indirectly owned or held by or for the account of the Company. Section 1.21 "Person" shall mean an individual, a corporation, a ------ partnership, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. Section 1.22 "Principal Market" shall mean the Nasdaq National Market, the ---------------- Nasdaq Small-Cap Market, the American Stock Exchange or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock. Section 1.23 "Purchase Price" shall mean (i) in the event that the Market -------------- Price is equal to or less than five dollars ($5.00), eighty-eight percent (88%) of the Market Price of the Common Stock in respect of any Put Notice, or (ii) in the event that the Market Price is greater than five dollars ($5.00) but less than nine dollars ($9.00), ninety percent (90%) of the Market Price of the Common Stock in respect of any Put Notice, or (iii) in the event that the Market Price is equal to or greater than nine dollars ($9.00) but less than thirteen dollars ($13.00), ninety-one percent (91%) of the Market Price of the Common Stock in respect of any Put Notice, or (iv) in the event that the Market Price is equal to or greater than thirteen dollars ($13.00), ninety-two percent (92%) of the Market Price of the Common Stock in respect of any Put Notice. Section 1.24 "Put" shall mean each occasion on which the Company elects to --- tender Put Notice requiring the Investor to purchase a specified discretionary amount of the Company's Common Stock, subject to the terms of this Agreement. Section 1.25 "Put Date" shall mean the Trading Day during the Commitment -------- Period that a Put Notice is deemed delivered to the Investor pursuant to Section 2.2(b) hereof. Section 1.26 "Put Notice" shall mean a written notice to the Investor ---------- setting forth the Investment Amount. Section 1.27 "Put Shares" shall mean all shares of Common Stock issued or ---------- issuable pursuant to a Put that has occurred or may occur in accordance with the terms and conditions of this Agreement. Section 1.28 "Registrable Securities" shall mean the Put Shares until (i) ---------------------- the Registration Statement has been declared effective by the SEC and all Put Shares have been disposed of pursuant to the Registration Statement, (ii) all Put Shares have been sold under circumstances under which all of the applicable conditions of Rule 144 (or any similar provision then in force) under the Securities Act ("Rule 144") are met, (iii) all Put Shares have been otherwise transferred to holders who may trade such shares without restriction under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend or (iv) such time as, in the opinion of counsel to the Company, which counsel shall be reasonably acceptable to the Investor, all Put Shares may be sold without any time, volume or manner limitations pursuant to Rule 144(k) (or any similar provision then in effect) under the Securities Act. 3 Section 1.29 "Registration Rights Agreement" shall mean the agreement ----------------------------- regarding the filing of the Registration Statement for the resale of the Registrable Securities, entered into between the Company and the Investor as of the Subscription Date. Section 1.30 "Registration Statement" shall mean a registration statement ---------------------- on Form S-3 (if use of such form is then available to the Company pursuant to the rules of the SEC and, if not, on such other form promulgated by the SEC for which the Company then qualifies and which counsel for the Company shall deem appropriate and which form shall be available for the resale of the Registrable Securities to be registered thereunder in accordance with the provisions of this Agreement and the Registration Rights Agreement, and in accordance with the intended method of distribution of such securities), for the registration of the resale by the Investor of the Registrable Securities under the Securities Act. Section 1.31 "Regulation D" shall have the meaning set forth in the ------------ recitals of this Agreement. Section 1.32 "SEC" shall mean the Securities and Exchange Commission. --- Section 1.33 "Section 4(2)" shall have the meaning set forth in the ------------ recitals of this Agreement. Section 1.34 "Securities Act" shall have the definition ascribed to it in -------------- the recitals of this Agreement. Section 1.35 "SEC Documents" shall mean the Company's latest Form 10-K as ------------- of the time in question, all Forms 10-Q and 8-K filed thereafter, and the Proxy Statement for its latest fiscal year as of the time in question until such time the Company no longer has an obligation to maintain the effectiveness of a Registration Statement as set forth in the Registration Rights Agreement. Section 1.36 "Subscription Date" shall mean the date on which this ----------------- Agreement is executed and delivered by the parties hereto. Section 1.37 "Trading Cushion" shall mean, at any time (subject to the --------------- provisions of Section 2.4 hereof), (i) the mandatory fifteen (15) Trading Days between Put Dates if at such time the immediately preceding Put was consummated for an Investment Amount of $650,000 or less and (ii) the mandatory twenty (20) Trading Days between Put Dates if at such time the immediately preceding Put was consummated for an Investment Amount of more than $650,000. Section 1.38 "Trading Day" shall mean any day during which the New York ----------- Stock Exchange shall be open for business. Section 1.39 Reserved Section 1.40 "Valuation Event" shall mean an event in which the Company at --------------- any time during a Valuation Period takes any of the following actions: (a) subdivides or combines its Common Stock; (b) pays a dividend in its Capital Stock or makes any other distribution of its Capital Shares; (c) issues any additional Capital Shares ("Additional Capital Shares"), otherwise than as provided in the foregoing Subsections (a) and (b) above, at a price per share less, or for other consideration lower, than the Bid Price in effect immediately prior to such issuance, or without consideration; 4 (d) issues any warrants, options or other rights to subscribe for or purchase any Additional Capital Shares and the price per share for which Additional Capital Shares may at any time thereafter be issuable pursuant to such warrants, options or other rights shall be less than the Bid Price in effect immediately prior to such issuance; (e) issues any securities convertible into or exchangeable for Capital Shares and the consideration per share for which Additional Capital Shares may at any time thereafter be issuable pursuant to the terms of such convertible or exchangeable securities shall be less than the Bid Price in effect immediately prior to such issuance; (f) makes a distribution of its assets or evidences of indebtedness to the holders of its Capital Shares as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Company's assets (other than under the circumstances provided for in the foregoing subsections (a) through (e); or (g) takes any action affecting the number of Outstanding Capital Shares, other than an action described in any of the foregoing Subsections (a) through (f) hereof, inclusive, which in the opinion of the Company's Board of Directors, determined in good faith, would have a materially adverse effect upon the rights of the Investor at the time of a Put. Section 1.41 "Valuation Period" shall mean the period of five Trading Days ---------------- during which the Purchase Price of the Common Stock is valued, which period shall be with respect to the Purchase Price on any Put Date, the two Trading Days preceding and the two Trading Days following the Trading Day on which a Put Notice is deemed to be delivered, as well as the Trading Day on which such notice is deemed to be delivered; provided, however, that if a Valuation Event -------- ------- occurs during any Valuation Period, a new Valuation Period shall begin on the Trading Day immediately after the occurrence of such Valuation Event and end on the fifth Trading Day thereafter. ARTICLE II Purchase and Sale of Common Stock Section 2.1 Investments. ----------- (a) Puts. Upon the terms and conditions set forth herein (including, without limitation, the provisions of Article VII hereof), on any Put Date the Company may deliver a Put Notice. The number of Put Shares that the Investor shall receive pursuant to such Put shall be determined by dividing the Investment Amount specified in the Put Notice by the Purchase Price on such Put Date. (b) Intentionally Omitted. (c) Maximum Amount of Put Shares. Unless the Company obtains the requisite approval of its shareholders in accordance with the corporate laws of California and the applicable rules of the Principal Market, no more than 19.9% of the Outstanding shares of Common Stock may be issued and sold in the aggregate pursuant to this Agreement. Section 2.2 Mechanics. --------- (a) Put Notice. At any time during the Commitment Period, the Company may deliver a Put Notice to the Investor, subject to the conditions set forth in Section 7.2; 5 provided, however, the Investment Amount for each Put as designated by -------- ------- the Company in the applicable Put Notice shall not be greater than the Maximum Put Amount. (b) Date of Delivery of Put Notice. A Put Notice shall be deemed delivered on (i) the Trading Day it is received by facsimile or otherwise by the Investor if such notice is received prior to 12:00 noon New York time, or (ii) the immediately succeeding Trading Day if it is received by facsimile or otherwise after 12:00 noon New York time on a Trading Day or at any time on a day which is not a Trading Day. No Put Notice may be deemed delivered, on a day that is not a Trading Day. Section 2.3 Closings. On each Closing Date for a Put, the Company shall -------- deliver into escrow one or more certificates, at the Investor's option, representing the Put Shares to be purchased by the Investor pursuant to Section 2.1 herein, registered in the name of the Investor or, at the Investor's option, deposit such certificate(s) into such account or accounts previously designated by the Investor and (ii) the Investor shall deliver to escrow the Investment Amount specified in the Put Notice by wire transfer of immediately available funds to an account or accounts designated by the Company on or before the Closing Date. In addition, on or prior to the Closing Date, each of the Company and the Investor shall deliver all documents, instruments and writings required to be delivered or reasonably requested by either of them pursuant to this Agreement in order to implement and effect the transactions contemplated herein. Payment of funds to the Company and delivery of the certificates to the Investor shall occur out of escrow in accordance with the escrow agreement referred to in Section 7.2(p) following (x) the Company's deposit into escrow of the certificates representing the Put Shares and (y) the Investor's deposit into escrow of the Investment Amount; provided, however, that to the extent the -------- ------- Company has not paid the fees, expenses and disbursements of the Investor's counsel in accordance with Section 13.1, the amount of such fees, expenses and disbursements shall be paid in immediately available funds, at the direction of the Investor, to Investor's counsel with no reduction in the number of Put Shares issuable to the Investor on such Closing Date; provided, further, that so -------- ------- long as the Investor shall maintain professional liability, errors and omissions liability and/or directors' and officers' liability insurance for its activities related to the Put Shares or the Blackout Shares, one and three quarters of one percent (1.75%) of such Investment Amount shall be either (i) retained by the Investor in respect of premium payments for such insurance or (ii) paid in immediately available funds, at the direction of the Investor in respect of such premium payments, in either case, with no reduction in the number of Put Shares to be issued and/or sold to the Investor on such Closing Date. Section 2.4 Special Circumstances; Adjustment Period. ---------------------------------------- (a) Adjustment Period Notice. In the event that the Company shall in good faith anticipate executing an agreement of acquisition, merger or consolidation within ninety (90) days after giving the Investor Adjustment Period Notice (as defined below), the Company may, at its sole discretion, give the Investor at least twenty-one (21) days' irrevocable advance notice, in the form of Exhibit A hereto ("Adjustment Period Notice"), that the Company shall initiate an Adjustment Period (as defined below). The giving of such Adjustment Period Notice shall not constitute the disclosure of non-public information to the Investor under this Agreement. (b) During the Adjustment Period: 1. The Maximum Put Amount shall be $1,000,000; 2. the Purchase Price shall be eighty-three percent (83%) of the Market Price upon a Put Date; 6 3. the duration of the Trading Cushion shall be shortened to ten (10) Trading Days until the expiration of five consecutive weeks (the "Adjustment Period"); 4. the Company shall not deliver a Put Notice such that the number of Put Shares to be purchased by the Investor upon the applicable Closing, when aggregated with all other shares of Common Stock then owned by the Investor beneficially or deemed beneficially owned by the Investor, would result in the Investor owning more than 4.9% of all of such Common Stock as would be outstanding on such Closing Date, as determined in accordance with Section 13(d) of the Exchange Act and the regulations promulgated thereunder. For purposes of this Section 2.4(b), in the event that the amount of Common Stock outstanding as determined in accordance with Section 13(d) of the Exchange Act and the regulations promulgated thereunder is greater on a Closing Date than on the date upon which the Put Notice associated with such Closing Date is given, the amount of Common Stock outstanding on such Closing Date shall govern for purposes of determining whether the Investor, when aggregating all purchases of Common Stock made pursuant to this Agreement, would own more than 4.9% of the Common Stock following such Closing Date. Section 2.5 Termination of Investment Obligation. The obligation of the ------------------------------------ Investor to purchase shares of Common Stock shall terminate permanently (including with respect to any Put, when a Put Notice has been given, but the applicable Closing Date has not yet occurred) in the event that (i) the Registration Statement is not effective within ninety (90) days following the date required therefor in the Registration Rights Agreement, (ii) there shall occur any stop order or suspension of the effectiveness of the Registration Statement for an aggregate of thirty (30) Trading Days during the Commitment Period, for any reason other than deferrals or suspension in accordance with Section 1.1(f) of the Registration Rights Agreement, as a result of corporate developments subsequent to the Subscription Date that would require such Registration Statement to be amended to reflect such event in order to maintain its compliance with the disclosure requirements of the Securities Act or (iii) the Company shall at any time fail to comply with the requirements of Section 6.3, 6.4, 6.5 or 6.6; provided, however, that, in the event that the -------- ------- Registration Statement is not declared effective on or before the date required therefor in the Registration Rights Agreement solely due to the SEC's determination that the transactions contemplated hereby do not qualify for effective registration, then either party may, by five Business Days' prior written notice to the other party, terminate this Agreement and all of the rights and obligations of the parties hereunder. Section 2.6 Blackout Shares. In the event that, (a) within five Trading --------------- Days of any Closing Date, the Company gives notice ("Blackout Notice") to the Investor of an impending blackout period ("Blackout Period") in accordance with Section 1.1(f) of the Registration Rights Agreement, and (b) the Bid Price on the Trading Day immediately preceding such Blackout Period ("Old Bid Price") is greater than the Bid Price on the first Trading Day following such Blackout Period" that the Investor may sell its Registrable Securities pursuant to an effective Registration Statement ("New Bid Price"), then the Company shall issue to the Investor a number of additional shares of Registrable Securities (the Blackout Shares") equal to the difference between (X) the product of the number of Registrable Securities held by Investor immediately prior to the Blackout Period" multiplied by the Old Bid Price, divided by the New Bid Price and (Y) the number of Registrable Securities held by Investor immediately prior to the Blackout Period." Section 2.7 Liquidated Damages. The parties hereto acknowledge and agree ------------------ that the obligation to issue Blackout Securities under Section 2.6 above shall constitute liquidated damages and 7 not penalties. The parties further acknowledge that (a) the amount of loss or damages likely to be incurred is incapable or is difficult to precisely estimate, (b) the amounts specified in such Section bears a reasonable proportion and are not plainly or grossly disproportionate to the probable loss likely to be incurred by the Investor in connection with a Blackout Period under Section 1.1(f) of the Registration Rights Agreement, and (c) the parties are sophisticated business parties and have been represented by sophisticated and able legal and financial counsel and negotiated this Agreement at arm's length. ARTICLE III Representations and Warranties of Investor The Investor represents and warrants to the Company that: Section 3.1 Intent. The Investor is entering into this Agreement for its ------ own account and the Investor has no present arrangement (whether or not legally binding) at any time to sell the Common Stock to or through any person or entity; provided, however, that by making the representations herein, the Investor does not agree to hold the Common Stock for any minimum or other specific term and reserves the right to dispose of the Common Stock at any time in accordance with federal and state securities laws applicable to such disposition. Section 3.2 Sophisticated Investor. The Investor is a sophisticated ---------------------- investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor (as defined in Rule 501 of Regulation D), and Investor has such experience in business and financial matters that it is capable of evaluating the merits and risks of an investment in Common Stock. The Investor acknowledges that an investment in the Common Stock is speculative and involves a high degree of risk. Section 3.3 Authority. This Agreement has been duly authorized and validly --------- executed and delivered by the Investor and is a valid and binding agreement of the Investor enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. Section 3.4 Not an Affiliate. The Investor is not an officer, director or ---------------- "affiliate" (as that term is defined in Rule 405 promulgated under the Securities Act) of the Company. Section 3.5 Organization and Standing. Investor is duly organized, validly ------------------------- existing, and in good standing under the laws of the British Virgin Islands. Section 3.6 Absence of Conflicts. The execution and delivery of this -------------------- Agreement and any other document or instrument executed in connection herewith, and the consummation of the transactions contemplated thereby, and compliance with the requirements thereof, will not violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on Investor, or, to the Investor's knowledge, (b) (a) violate any provision of any indenture, instrument or agreement to which Investor is a party or is subject, or by which Investor or any of its assets is bound, (c) conflict with or constitute a material default thereunder, (d) result in the creation or imposition of any lien pursuant to the terms of any such indenture, instrument or agreement, or constitute a breach of any fiduciary duty owed by Investor to any third party, or (e) require the approval of any third-party (which has not been obtained) pursuant to any material contract, agreement, instrument, relationship or legal obligation to which Investor is subject or to which any of its assets, operations or management may be subject. Section 3.7 Disclosure; Access to Information. Investor has received all --------------------------------- documents, records, books and other information pertaining to Investor's investment in the Company that have been requested 8 by Investor. The Company is subject to the periodic reporting requirements of the Exchange Act, and Investor has reviewed or received copies of any such reports that have been requested by it. Section 3.8 Manner of Sale. At no time was Investor presented with or -------------- solicited by or through any leaflet, public promotional meeting, television advertisement or any other form of general solicitation or advertising. ARTICLE IV Representations and Warranties of the Company The Company represents and warrants to the Investor that: Section 4.1 Organization of the Company. The Company is a corporation duly --------------------------- organized and existing in good standing under the laws of the State of California and has all requisite corporate authority to own, lease and operate its properties and to carry on its business as now being conducted. Except as set forth in the SEC Documents, the Company does not have any subsidiaries. Except as set forth in the SEC Documents, the Company does not own more than fifty percent (50%) of or control any other business entity. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, other than those in which the failure so to qualify would not have a Material Adverse Effect. Section 4.2 Authority. (i) The Company has the requisite corporate power --------- and authority to enter into and perform its obligations under this Agreement and the Registration Rights Agreement and to issue the Put Shares and any Blackout Shares; (ii) the execution, issuance and delivery of this Agreement and the Registration Rights Agreement and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action and no further consent or authorization of the Company or its Board of Directors or stockholders is required; and (iii) this Agreement and the Registration Rights Agreement have been duly executed and delivered by the Company and constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. Section 4.3 Capitalization. The authorized capital stock of the Company -------------- consists of 30,000,000 shares of Common Stock, of which 11,259,720 shares were issued and outstanding as of December 31, 1999, and 10,000,000 shares of Preferred Stock, of which 155,544 were issued and outstanding on December 31, 1999. Except as disclosed in the audited financial statements of the Company included in the annual report on Form 10-K for the fiscal year ended March 31, 1999; options to purchase not more than 1,000,000 shares of Common Stock granted in the ordinary course of business and with purchase prices equal to the fair market value of such Common Stock on the date of grant; and warrants to purchase 90,100 shares of Common Stock in exchange for 90,100 shares of Common Stock, there are no options, warrants, or rights to subscribe to, securities, rights or obligations convertible into or exchangeable for or giving any right to subscribe for any shares of capital stock of the Company. All of the outstanding shares of Common Stock of the Company have been duly and validly authorized and issued and are fully paid and nonassessable. Section 4.4 Common Stock. The Company has registered its Common Stock ------------ pursuant to Section 12(b) or 12(g) of the Exchange Act and is in full compliance with all reporting requirements of the Exchange Act, and the Company has maintained all requirements for the continued listing or 9 quotation of its Common Stock, and such Common Stock is currently listed or quoted on the Principal Market. As of the date hereof, the Principal Market is the Nasdaq National Market. Section 4.5 SEC Documents. The Company has delivered or made available to ------------- the Investor true and complete copies of the SEC Documents (including, without limitation, proxy information and solicitation materials). The Company has not provided to the Investor any information that, according to applicable law, rule or regulation, should have been disclosed publicly prior to the date hereof by the Company, but which has not been so disclosed. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and rules and regulations of the SEC promulgated thereunder and other federal, state and local laws, rules and regulations applicable to such SEC Documents, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Section 4.6 Valid Issuances. The Put Shares and any Blackout Shares may --------------- and will be properly issued and/or sold pursuant to Rule 4(2), Regulation D and/or another exemption from registration under the Securities Act and any applicable state law. When issued and/or sold, the Put Shares and the Blackout Shares shall be duly and validly issued, fully paid, and nonassessable, free and clear of any and all liens, charges, claims or other encumbrances. Neither the sales of the Put Shares and the Blackout Shares pursuant to, nor the Company's performance of its obligations under, this Agreement or the Registration Rights Agreement will (i) result in the creation or imposition of any liens, charges, claims or other encumbrances upon the Put Shares or any of the assets of the Company, or (ii) entitle the holders of Outstanding Capital Shares to preemptive or other rights to subscribe to or acquire the Capital Shares or other securities of the Company. The Put Shares and the Blackout Shares shall not subject the Investor to personal liability by reason of the ownership thereof. Section 4.7 No General Solicitation or Advertising in Regard to this -------------------------------------------------------- Transaction. Neither the Company nor any of its affiliates nor any distributor - ----------- or any person acting on its or their behalf (i) has conducted or will conduct any general solicitation (as that term is used in Rule 502(c) of Regulation D) or general advertising with respect to any of the Put Shares and the Blackout Shares, or (ii) made any offers or sales of any security or solicited any offers to buy any security under any circumstances that would require registration of the Common Stock under the Securities Act. Section 4.8 Corporate Documents. The Company has furnished or made ------------------- available to the Investor true and correct copies of the Company's Articles of Incorporation, as amended and in effect on the date hereof, and the Company's By-Laws, as amended and in effect on the date hereof (the "By-Laws"). Section 4.9 No Conflicts. The execution, delivery and performance of this ------------ Agreement by the Company and the consummation by the Company of the transactions contemplated hereby, including, without limitation, the issuance and sale of the Put Shares and any Blackout Shares do not and will not (i) 10 result in a violation of the Company's Articles of Incorporation or By-Laws or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, indenture, instrument or any "lock-up" or similar provision of any underwriting or similar agreement to which the Company is a party, or (iii) result in a violation of any federal, state, local or foreign law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or by which any property or asset of the Company is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect) nor is the Company otherwise in violation of, conflict with or in default under any of the foregoing; provided that, for purposes of the Company's representations and warranties as to violations of foreign law, rule or regulation referenced in clause (iii), such representations and warranties are made only to the best of the Company's knowledge insofar as the execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby are or may be affected by the status of the Investor under or pursuant to any such foreign law, rule or regulation. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental entity, except for possible violations that either singly or in the aggregate do not and will not have a Material Adverse Effect. The Company is not required under federal, state or local law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or issue and sell the Common Stock in accordance with the terms hereof (other than any SEC, NASD or state securities filings that may be required to be made by the Company subsequent to any Closing, any registration statement that may be filed pursuant hereto, and any shareholder approval required by the rules applicable to companies whose common stock trades on the Nasdaq National Market referenced in Section 5.1); provided that, for purposes of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the relevant representations and agreements of the Investor herein. Section 4.10 No Material Adverse Change. Since March 31, 1999, no Material -------------------------- Adverse Effect has occurred or exists with respect to the Company, except as disclosed in the SEC Documents. Section 4.11 No Undisclosed Liabilities. The Company has no liabilities or -------------------------- obligations which are material, individually or in the aggregate, and are not disclosed in the SEC Documents or otherwise publicly announced, other than those incurred in the ordinary course of the Company's businesses since March 31, 1999 and which, individually or in the aggregate, do not or would not have a Material Adverse Effect on the Company. Section 4.12 No Undisclosed Events or Circumstances. Since March 31, -------------------------------------- 1999, no event or circumstance has occurred or exists with respect to the or its businesses, properties, prospects, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed in the SEC Documents. Section 4.13 No Integrated Offering. Neither the Company, nor any of its ---------------------- affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, other than pursuant to this Agreement, under circumstances that would require registration of the Common Stock under the Securities Act. Section 4.14 Litigation and Other Proceedings. Except as may be set forth -------------------------------- in the SEC Documents, there are no lawsuits or proceedings pending or to the best knowledge of the Company threatened, against the Company, nor has the Company received any written or oral notice of any such 11 action, suit, proceeding or investigation, which might have a Material Adverse Effect. Except as set forth in the SEC Documents, no judgment, order, writ, injunction or decree or award has been issued by or, so far as is known by the Company, requested of any court, arbitrator or governmental agency which might result in a Material Adverse Effect. Section 4.15 No Misleading or Untrue Communication. The Company, any ------------------------------------- Person representing the Company, and, to the knowledge of the Company, any other Person selling or offering to sell the Put Shares in connection with the transactions contemplated by this Agreement, have not made, at any time, any oral communication in connection with the offer or sale of the same which contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. Section 4.16 Material Non-Public Information. The Company is not in ------------------------------- possession of, nor has the Company or its agents disclosed to the Investor, any material non-public information that (i) if disclosed, would, or could reasonably be expected to have, an effect on the price of the Common Stock or (ii) according to applicable law, rule or regulation, should have been disclosed publicly by the Company prior to the date hereof but which has not been so disclosed. ARTICLE V Covenants of the Investor Section 5.1 Compliance with Law. The Investor's trading activities with ------------------- respect to shares of the Company's Common Stock will be in compliance with all applicable state and federal securities laws, rules and regulations and the rules and regulations of the Principal Market on which the Company's Common Stock is listed. Section 5.2 Limitation on Short Sales. The Investor and its affiliates ------------------------- shall not engage in short sales of the Company's Common Stock; provided, -------- however, that the Investor may enter into any short sale or other hedging or - ------- similar arrangement it deems appropriate with respect to Put Shares after it receives a Put Notice with respect to such Put Shares so long as such sales or arrangements do not involve more than the number of such Put Shares (determined as of the date of such Put Notice). ARTICLE VI Covenants of the Company Section 6.1 Registration Rights. The Company shall cause the Registration ------------------- Rights Agreement to remain in full force and effect and the Company shall comply in all respects with the terms thereof. Section 6.2 Reservation of Common Stock. As of the date hereof, the --------------------------- Company has reserved and the Company shall continue to reserve and keep available at all times, free of preemptive rights, shares of Common Stock for the purpose of enabling the Company to satisfy any obligation to issue the Put Shares; such amount of shares of Common Stock to be reserved shall be calculated based upon the minimum Purchase Price therefor under the terms of this Agreement. The number of shares so reserved from time to time, as theretofore increased or reduced as hereinafter provided, may be reduced by the numbers of shares actually delivered hereunder. Section 6.3 Listing of Common Stock. The Company shall maintain the ----------------------- listing of the Common Stock on a Principal Market, and as soon as practicable (but in any event prior to the commencement of the Commitment Period) to list the Put Shares and any Blackout Shares. The Company further shall, if the Company applies to have the Common Stock traded on any other Principal Market, include in such application the Put Shares, and shall take such other action as is necessary or desirable in the opinion of the Investor to cause the Common Stock to be listed on such other Principal Market as 12 promptly as possible. The Company shall take all action necessary to continue the listing and trading of its Common Stock on the Principal Market (including, without limitation, maintaining sufficient net tangible assets) and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the NASD and the Principal Market. Section 6.4 Exchange Act Registration. The Company shall (i) cause its ------------------------- Common Stock to continue to be registered under Section 12(g) or 12(b) of the Exchange Act, will comply in all respects with its reporting and filing obligations under said Act, and will not take any action or file any document (whether or not permitted by said Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Act. The Company will take all action to continue the listing and trading of its Common Stock on the Principal Market and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the NASD and the Principal Market. Section 6.5 Legends. The certificates evidencing the Common Stock to be ------- sold by the Investor pursuant to Section 9.1 shall be free of legends, except as set forth in Article IX. Section 6.6 Corporate Existence. The Company will take all steps ------------------- necessary to preserve and continue the corporate existence of the Company. Section 6.7 Additional SEC Documents. The Company will deliver to the ------------------------ Investor, as and when the originals thereof are submitted to the SEC for filing, copies of all SEC Documents so furnished or submitted to the SEC. Section 6.8 Blackout Period. (a) The Company will immediately notify the --------------- Investor upon the occurrence of any of the following events in respect of a Registration Statement or related prospectus in respect of an offering of Registrable Securities; (i) receipt of any request for additional information by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement, or for amendments or supplements to the Registration Statement or related prospectus; (ii) the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in such Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company's reasonable determination that a post-effective amendment to the registration statement would be appropriate; and the Company will promptly make available to the Investor any such supplement or amendment to the related prospectus. The Company shall not deliver to the Investor any Put Notice during the continuation of any of the foregoing events. Section 6.9 Expectations Regarding Put Notices. Within ten (10) days ---------------------------------- after the commencement of each calendar quarter occurring subsequent to the commencement of the Commitment Period, the Company undertakes to notify the Investor as to its reasonable expectations as to the dollar amount it intends to raise during such calendar quarter, if any, through the issuance of Put Notices. Such 13 notification shall constitute only the Company's good faith estimate and shall in no way obligate the Company to raise such amount, or any amount, or otherwise limit its ability to deliver Put Notices. The failure by the Company to comply with this provision can be cured by the Company's notifying the Investor at any time as to its reasonable expectations with respect to the current calendar quarter. Section 6.10 Consolidation; Merger. The Company shall not, at any time --------------------- after the date hereof, effect any merger or consolidation of the Company with or into, or a transfer of all or substantially all of the assets of the Company to, another entity (a "Consolidation Event") unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the Investor such shares of stock and/or securities as the Investor is entitled to receive pursuant to this Agreement. Section 6.11 Issuance of Put Shares and Blackout Shares. The sale and ------------------------------------------ issuance of the Put Shares shall be made in accordance with the provisions and requirements of Regulation D and any applicable state law. Section 6.12 Legal Opinion on Subscription Date. The Company's ---------------------------------- independent counsel shall deliver to the Investor on the Subscription Date an opinion substantially in the form of Exhibit B, except for paragraph 6 thereof. ARTICLE VII Conditions to Delivery of Put Notices and Conditions to Closing Section 7.1 Conditions Precedent to the Obligation of the Company to Issue -------------------------------------------------------------- and Sell Common Stock. The obligation hereunder of the Company to issue and sell - --------------------- the Put Shares to the Investor incident to each Closing is subject to the satisfaction, at or before each such Closing, of each of the conditions set forth below. (a) Accuracy of the Investor's Representation and Warranties. The representations and warranties of the Investor shall be true and correct in all material respects as of the date of this Agreement and as of the date of each such Closing as though made at each such time. (b) Performance by the Investor. The Investor shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Investor at or prior to such Closing. Section 7.2 Conditions Precedent to the Right of the Company to Deliver a ------------------------------------------------------------- Put Notice and the Obligation of the Investor to Purchase the Put Shares. The - ------------------------------------------------------------------------ right of the Company to deliver a Put Notice and the obligation of the Investor hereunder to acquire and pay for the Put Shares incident to a Closing is subject to the satisfaction, on (i) the date of delivery of such Put Notice and (ii) the applicable Closing Date (each a "Condition Satisfaction Date"), of each of the following conditions: (a) Registration of the Registrable Securities with the SEC. As set forth in the Registration Rights Agreement, the Company shall have filed with the SEC a Registration Statement with respect to the resale of the Registrable Securities that shall have been declared effective by the SEC prior to the first Put Date, but in no event later than one hundred twenty (120) days after Subscription Date. (b) Effective Registration Statement. As set forth in the Registration Rights Agreement, the Registration Statement shall have previously become effective and shall 14 remain effective on each Condition Satisfaction Date and (i) neither the Company nor the Investor shall have received notice that the SEC has issued or intends to issue a stop order with respect to the Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently, or intends or has threatened to do so (unless the SEC's concerns have been addressed and the Investor is reasonably satisfied that the SEC no longer is considering or intends to take such action), and (ii) no other suspension of the use or withdrawal of the effectiveness of the Registration Statement or related prospectus shall exist. (c) Accuracy of the Company's Representations and Warranties. The representations and warranties of the Company shall be true and correct in all material respects as of each Condition Satisfaction Date as though made at each such time (except for representations and warranties specifically made as of a particular date) with respect to all periods, and as to all events and circumstances occurring or existing to and including each Condition Satisfaction Date, except for any conditions which have temporarily caused any representations or warranties herein to be incorrect and which have been corrected with no continuing impairment to the Company or the Investor. (d) Performance by the Company. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement and the Registration Rights Agreement to be performed, satisfied or complied with by the Company at or prior to each Condition Satisfaction Date. (e) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or adopted by any court or governmental authority of competent jurisdiction that prohibits or directly and adversely affects any of the transactions contemplated by this Agreement, and no proceeding shall have been commenced that may have the effect of prohibiting or adversely affecting any of the transactions contemplated by this Agreement. (f) Adverse Changes. Since the date of filing of the Company's most recent SEC Document, no event that had or is reasonably likely to have a Material Adverse Effect has occurred. (g) No Suspension of Trading In or delisting of Common Stock. The trading of the Common Stock (including without limitation the Put Shares) shall not have been suspended by the SEC, the Principal Market or the NASD and the Common Stock (including without limitation the Put Shares) shall have been approved for listing or quotation on and shall not have been delisted from the Principal Market. The issuance of shares of Common Stock with respect to the applicable Closing, if any, shall not violate the shareholder approval requirements of the Principal Market. (h) Legal Opinions. The Company shall have caused to be delivered to the Investor, within five (5) Trading Days of the Effective Date of the Registration Statement, an opinion of the Company's independent counsel in the form of Exhibit B hereto, addressed to the Investor; provided, however, that in the event that such an opinion cannot be -------- ------- delivered by the Company's independent counsel to the Investor, the Company shall promptly revise the Registration Statement and shall not deliver a Put Notice. If a Put Notice shall have been delivered in good faith without knowledge by the Company that an opinion of independent counsel cannot be delivered as required, at the option of the Investor, either the applicable Closing Date shall automatically be postponed for a period 15 of up to five (5) Trading Days until such an opinion is delivered to the Investor, or such Closing shall otherwise be canceled. In the event of such a postponement, the Purchase Price of the Common Stock to be issued at such Closing as determined pursuant of Section 2.2 shall be the lower of the Purchase Price as calculated as of the originally scheduled Closing Date and as of the actual Closing Date. The Company's independent counsel shall also deliver to the Investor upon execution of this Agreement an opinion in form and substance reasonably satisfactory to the Investor addressing, among other things, corporate matters and the exemption from registration under the Securities Act of the issuance of the Registrable Securities by the Company to the Investor under this Agreement and the Registration Rights Agreement. (i) Due Diligence. No dispute between the Company and the Investor shall exist pursuant to Section 8.2(c) as to the adequacy of the disclosure contained in the Registration Statement. (j) Ten Percent Limitation. On each Closing Date, the number of Put Shares then to be purchased by the Investor shall not exceed the number of such shares that, when aggregated with all other shares of Registrable Securities then owned by the Investor beneficially or deemed beneficially owned by the Investor, would result in the Investor owning no more than 9.9% of all of such Common Stock as would be outstanding on such Closing Date, as determined in accordance with Section 16 of the Exchange Act and the regulations promulgated thereunder. For purposes of this Section 3.2(k), in the event that the amount of Common Stock outstanding as determined in accordance with Section 16 of the Exchange Act and the regulations promulgated thereunder is greater on a Closing Date than on the date upon which the Put Notice associated with such Closing Date is given, the amount of Common Stock outstanding on such Closing Date shall govern for purposes of determining whether the Investor, when aggregating all purchases of Common Stock made pursuant to this Agreement and, if any, Blackout Shares, would own more than 9.9% of the Common Stock following such Closing Date. (k) Intentionally omitted. (l) Minimum Average Trading Volume. The average trading volume for the Common Stock over the previous fifteen (15) Trading Days equals or exceeds 10,000 shares per Trading Day. (m) No Knowledge. The Company shall have no knowledge of any event more likely than not to have the effect of causing such Registration Statement to be suspended or otherwise ineffective (which event is more likely than not to occur within the fifteen Trading Days following the Trading Day on which such Notice is deemed delivered). (n) Trading Cushion. The Trading Cushion shall have elapsed since the immediately preceding Put Date. (o) Shareholder Vote. The issuance of shares of Common Stock with respect to the applicable Closing, if any, shall not violate the shareholder approval requirements of the Principal Market. (p) Escrow Agreement. The parties hereto shall have entered into a mutually acceptable escrow agreement for the Purchase Prices due hereunder, providing for reasonable interest on any funds deposited into the escrow account established under such agreement. 16 (q) Other. On each Condition Satisfaction Date, the Investor shall have received such other certificates and documents as shall have been reasonably requested by the Investor in order for the Investor to confirm the Company's satisfaction of the conditions set forth in this Section 7.2., including, without limitation, a certificate in substantially the form and substance of Exhibit C hereto, executed in either case by an executive officer of the Company and to the effect that all the conditions to such Closing shall have been satisfied as at the date of each such certificate. ARTICLE VIII Due Diligence Review; Non-Disclosure of Non-Public Information Section 8.1 Due Diligence Review. The Company shall make available for -------------------- inspection and review by the Investor, advisors to and representatives of the Investor (who may or may not be affiliated with the Investor and who are reasonably acceptable to the Company), any underwriter participating in any disposition of the Registrable Securities on behalf of the Investor pursuant to the Registration Statement, any such registration statement or amendment or supplement thereto or any blue sky, NASD or other filing, all financial and other records, all SEC Documents and other filings with the SEC, and all other corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Company's officers, directors and employees to supply all such information reasonably requested by the Investor or any such representative, advisor or underwriter in connection with such Registration Statement (including, without limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of the Registration Statement for the sole purpose of enabling the Investor and such representatives, advisors and underwriters and their respective accountants and attorneys to conduct initial and ongoing due diligence with respect to the Company and the accuracy of the Registration Statement. Section 8.2 Non-Disclosure of Non-Public Information. ---------------------------------------- (a) The Company represents and warrants that the Company and its officers, directors, employees and agents have not disclosed any non- public information to the Investor or advisors to or representatives of the Investor. The Company covenants and agrees that it shall refrain from disclosing, and shall cause its officers, directors, employees and agents to refrain from disclosing, (including, without limitation, in connection with the giving of the Adjustment Period Notice pursuant to Section 2.4), unless prior to disclosure of such information the Company identifies such information as being non- public information and provides the Investor, such advisors and representatives with the opportunity to accept or refuse to accept such non-public information for review. The Company may, as a condition to disclosing any non-public information hereunder, require the Investor's advisors and representatives to enter into a confidentiality agreement in form reasonably satisfactory to the Company and the Investor. (b) Nothing herein shall require the Company to disclose non-public information to the Investor or its advisors or representatives, and the Company represents that it does not disseminate non-public information to any investors who purchase stock in the Company in a public offering, to money managers or to securities analysts, provided, however, that notwithstanding anything herein to the contrary, the Company will, as herein above provided, immediately notify the advisors and representatives of the Investor and, if any, underwriters, of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting non- 17 public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities), which, if not disclosed in the prospectus included in the Registration Statement would cause such prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements, therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this Section 8.2 shall be construed to mean that such persons or entities other than the Investor (without the written consent of the Investor prior to disclosure of such information) may not obtain non-public information in the course of conducting due diligence in accordance with the terms of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of a material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. ARTICLE IX Legends Section 9.1 Legends. Unless otherwise provided below, each certificate ------- representing Registrable Securities will bear the following legend (the "Legend"): THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY SET FORTH IN A PRIVATE EQUITY LINE AGREEMENT BETWEEN SONIC SOLUTIONS AND KINGSBRIDGE CAPITAL LIMITED DATED MAY 3RD, 2000. A COPY OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE OBTAINED FROM THE COMPANY'S EXECUTIVE OFFICES. Prior to the execution and delivery hereof, the Company has issued to the transfer agent for its Common Stock (and to any substitute or replacement transfer agent for its Common Stock upon the Company's appointment of any such substitute or replacement transfer agent) instructions in substantially the form of Exhibit D hereto with a copy to the Investor. Such instructions shall be irrevocable by the Company from and after the date hereof or from and after the issuance thereof to any such substitute or replacement transfer agent, as the case may be, except as otherwise expressly provided in the Registration 18 Rights Agreement. It is the intent and purpose of such instructions, as provided therein, to require the transfer agent for the Common Stock from time to time upon transfer of Registrable Securities by the Investor to issue certificates evidencing such Registrable Securities free of the Legend during the following periods and under the following circumstances and without consultation by the transfer agent with the Company or its counsel and without the need for any further advice or instruction or documentation to the transfer agent by or from the Company or its counsel or the Investor: (a) at any time after the Effective Date, upon surrender of one or more certificates evidencing Common Stock that bear the Legend, to the extent accompanied by a notice requesting the issuance of new certificates free of the Legend to replace those surrendered; provided that (i) the Registration Statement shall then be effective; (ii) the Investor confirms to the transfer agent that it has sold, pledged or otherwise transferred or agreed to sell, pledge or otherwise transfer such Common Stock in a bona fide transaction to a third party that is not an affiliate of the Company; and (iii) the Investor confirms to the transfer agent that the Investor has complied with the prospectus delivery requirement; and (b) at any time upon any surrender of one or more certificates evidencing Registrable Securities that bear the Legend, to the extent accompanied by a notice requesting the issuance of new certificates free of the Legend to replace those surrendered and containing representations that (i) the Investor is permitted to dispose of such Registrable Securities without limitation as to amount or manner of sale pursuant to Rule 144(k) under the Securities Act or (ii) the Investor has sold, pledged or otherwise transferred or agreed to sell, pledge or otherwise transfer such Registrable Securities in a manner other than pursuant to an effective registration statement, to a transferee who will upon such transfer be entitled to freely tradeable securities. Any of the notices referred to above in this Section 9.1 may be sent by facsimile to the Company's transfer agent. Section 9.2 No Other Legend or Stock Transfer Restrictions. No legend ---------------------------------------------- other than the one specified in Section 8.1 has been or shall be placed on the share certificates representing the Common Stock and no instructions or "stop transfers orders," so called, "stock transfer restrictions," or other restrictions have been or shall be given to the Company's transfer agent with respect thereto other than as expressly set forth in this Article IX. Section 9.3 Investor's Compliance. Nothing in this Article VIII shall --------------------- affect in any way the Investor's obligations under any agreement to comply with all applicable securities laws upon resale of the Common Stock. ARTICLE X Choice of Law Section 10.1 Choice of Law. This Agreement shall be construed under the ------------- laws of the State of California, without giving effect to provisions regarding conflicts of law or choice of law. ARTICLE XI Assignment; Entire Agreement, Amendment; Termination Section 11.1 Assignment. Neither this Agreement nor any rights of the ---------- Investor or the Company hereunder may be assigned by any party to any other Person. Notwithstanding the foregoing, (a) the provisions of this Agreement shall inure to the benefit of, and be enforceable by, any transferee of 19 any of the Common Stock purchased or acquired by the Investor hereunder with respect to the Common Stock held by such person, and (b) the Investor's interest in this Agreement may be assigned at any time, in whole or in part, to any other person or entity (including any affiliate of the Investor) upon the prior written consent of the Company, which consent shall not to be unreasonably withheld. Section 11.2 Termination. This Agreement shall terminate twenty-four (24) ----------- months after the commencement of the Commitment Period; provided, however, that -------- ------- the provisions of Articles VI, VII, VIII, X, XI, and XII shall survive the termination of this Agreement. Section 11.3 Entire Agreement, Amendment; Waiver. This Agreement and the ----------------------------------- Registration Rights Agreement constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth in this Agreement or therein. Except as expressly provided in this Agreement, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by both parties hereto. Any term or condition of this Agreement may be waived at any time by the party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party waiving such term or condition. No waiver by any party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. ARTICLE XII Notices; Indemnification Section 12.1 Notices. All notices, demands, requests, consents, ------- approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: If to the Company: Robert J. Doris President and Chief Executive Officer Sonic Solutions 101 Rowland Way, Suite 110 Novato, California 94945 Telephone: (415) 893-8000 Facsimile: (415) 893-8008 with a copy to (which communication shall not constitute notice): Kyle Guse, Esq. 20 Heller Ehrman White & McAuliffe 2500 Sand Hill Road, Suite 100 Menlo Park, California 94025-7063 Telephone: (650) 234-4200 Facsimile: (650) 234-4299 If to the Investor: Adam Gurney Kingsbridge Capital Limited c/o Kingsbridge Corporate Services Limited Main Street Kilcullen, County Kildare Republic of Ireland Telephone: 011-353-45-481-811 Facsimile: 011-353-45-482-003 with a copy to (which communication shall not constitute notice): Keith M. Andruschak, Esq. Clifford Chance Rogers & Wells 200 Park Avenue New York, NY 10166 Telephone: (212) 878-8000 Facsimile: (212) 878-8375 Either party hereto may from time to time change its address or facsimile number for notices under this Section 12.1 by giving at least ten (10) days' prior written notice of such changed address or facsimile number to the other party hereto. Section 12.2 Indemnification. --------------- (a) The Company agrees to indemnify and hold harmless the Investor, its partners, affiliates, officers, directors, employees, and duly authorized agents, and each Person or entity, if any, who controls the Investor within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, together with the Controlling Persons (as defined in the Registration Rights Agreement) from and against any Damages, joint or several, and any action in respect thereof to which the Investor, its partners, affiliates, officers, directors, employees, and duly authorized agents, and any such Controlling Person becomes subject to, resulting from, arising out of or relating to any misrepresentation, breach of warranty or nonfulfillment of or failure to perform any covenant or agreement on the part of Company contained in this Agreement as such Damages are incurred. (b) The Investor agrees to indemnify and hold harmless the Company, its partners, affiliates, officers, directors, employees, and duly authorized agents, and each Person or entity, if any, who controls the Investor within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, together with the Controlling Persons (as defined in the Registration Rights Agreement) from and against any Damages, joint or several, and any action in respect thereof to which the Company, its partners, affiliates, officers, directors, employees, and duly authorized agents, and any such Controlling Person becomes subject to, resulting from, arising out of or relating to any 21 misrepresentation, breach of warranty or nonfulfillment of or failure to perform any covenant or agreement on the part of Investor contained in this Agreement in an aggregate amount not to exceed $140,000. Section 12.3 Method of Asserting Indemnification Claims. All claims for ------------------------------------------ indemnification by any Indemnified Party (as defined below) under Section 12.2 will be asserted and resolved as follows: (a) In the event any claim or demand in respect of which any person claiming indemnification under any provision of Section 12.2 (an "Indemnified Party") might seek indemnity under Section 12.2 is asserted against or sought to be collected from such Indemnified Party by a person other than the Company, the Investor or any affiliate of the Company or (a "Third Party Claim"), the Indemnified Party shall deliver a written notification, enclosing a copy of all papers served, if any, and specifying the nature of and basis for such Third Party Claim and for the Indemnified Party's claim for indemnification that is being asserted under any provision of Section 12.2 against any person (the "Indemnifying Party"), together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in good faith, of such Third Party Claim (a "Claim Notice") with reasonable promptness to the Indemnifying Party. If the Indemnified Party fails to provide the Claim Notice with reasonable promptness after the Indemnified Party receives notice of such Third Party Claim, the Indemnifying Party will not be obligated to indemnify the Indemnified Party with respect to such Third Party Claim to the extent that the Indemnifying Party's ability to defend has been irreparably prejudiced by such failure of the Indemnified Party. The Indemnifying Party will notify the Indemnified Party as soon as practicable within the period ending thirty (30) calendar days following receipt by the Indemnifying Party of either a Claim Notice or an Indemnity Notice (as defined below) (the "Dispute Period") whether the Indemnifying Party disputes its liability or the amount of its liability to the Indemnified Party under Section 12.2 and whether the Indemnifying Party desires, at its sole cost and expense, to defend the Indemnified Party against such Third Party Claim. (i) If the Indemnifying Party notifies the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Indemnified Party with respect to the Third Party Claim pursuant to this Section 12.3(a), then the Indemnifying Party will have the right to defend, with counsel reasonably satisfactory to the Indemnified Party, at the sole cost and expense of the Indemnifying Party, such Third Party Claim by all appropriate proceedings, which proceedings will be vigorously and diligently prosecuted by the Indemnifying Party to a final conclusion or will be settled at the discretion of the Indemnifying Party (but only with the consent of the Indemnified Party in the case of any settlement that provides for any relief other than the payment of monetary damages or that provides for the payment of monetary damages as to which the Indemnified Party will not be indemnified in full pursuant to Section 12.2). The Indemnifying Party will have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that the Indemnified Party may, at the sole -------- ------- cost and expense of the Indemnified Party, at any time prior to the Indemnifying Party's delivery of the notice referred to in the first sentence of this clause (i), file any motion, answer or other pleadings or take any other action that the Indemnified Party reasonably believes to be necessary or appropriate to protect its interests; and provided further, that if requested by the Indemnifying Party, the Indemnified Party will, at 22 the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnifying Party in contesting any Third Party Claim that the Indemnifying Party elects to contest. The Indemnified Party may participate in, but not control, any defense or settlement of any Third Party Claim controlled by the Indemnifying Party pursuant to this clause (i), and except as provided in the preceding sentence, the Indemnified Party will bear its own costs and expenses with respect to such participation. Notwithstanding the foregoing, the Indemnified Party may take over the control of the defense or settlement of a Third Party Claim at any time if it irrevocably waives its right to indemnity under Section 12.2 with respect to such Third Party Claim. (ii) If the Indemnifying Party fails to notify the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Third Party Claim pursuant to Section 12.3(a), or if the Indemnifying Party gives such notice but fails to prosecute vigorously and diligently or settle the Third Party Claim, or if the Indemnifying Party fails to give any notice whatsoever within the Dispute Period, then the Indemnified Party will have the right to defend, at the sole cost and expense of the Indemnifying Party, the Third Party Claim by all appropriate proceedings, which proceedings will be prosecuted by the Indemnified Party in a reasonable manner and in good faith or will be settled at the discretion of the Indemnified Party (with the consent of the Indemnifying Party, which consent will not be unreasonably withheld). The Indemnified Party will have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that if requested by the Indemnified Party, the Indemnifying Party will, at the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnified Party and its counsel in contesting any Third Party Claim which the Indemnified Party is contesting. Notwithstanding the foregoing provisions of this clause (ii), if the Indemnifying Party has notified the Indemnified Party within the Dispute Period that the Indemnifying Party disputes its liability or the amount of its liability hereunder to the Indemnified Party with respect to such Third Party Claim and if such dispute is resolved in favor of the Indemnifying Party in the manner provided in clause (iii) below, the Indemnifying Party will not be required to bear the costs and expenses of the Indemnified Party's defense pursuant to this clause (ii) or of the Indemnifying Party's participation therein at the Indemnified Party's request, and the Indemnified Party will reimburse the Indemnifying Party in full for all reasonable costs and expenses incurred by the Indemnifying Party in connection with such litigation. The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this clause (ii), and the Indemnifying Party will bear its own costs and expenses with respect to such participation. (iii) If the Indemnifying Party notifies the Indemnified Party that it does not dispute its liability or the amount of its liability to the Indemnified Party with respect to the Third Party Claim under Section 12.2 or fails to notify the Indemnified Party within the Dispute Period whether the Indemnifying Party disputes its liability or the amount of its liability to the Indemnified Party with respect to such Third Party Claim, the Loss in the amount specified in the Claim Notice will be conclusively deemed a liability of the Indemnifying Party under Section 12.2 and the Indemnifying Party shall pay the amount of such Loss to the 23 Indemnified Party on demand. If the Indemnifying Party has timely disputed its liability or the amount of its liability with respect to such claim, the Indemnifying Party and the Indemnified Party will proceed in good faith to negotiate a resolution of such dispute, and if not resolved through negotiations within the Resolution Period, such dispute shall be resolved by arbitration in accordance with paragraph (c) of this Section 12.3. (b) In the event any Indemnified Party should have a claim under Section 12.2 against the Indemnifying Party that does not involve a Third Party Claim, the Indemnified Party shall deliver a written notification of a claim for indemnity under Section 12.2 specifying the nature of and basis for such claim, together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in good faith, of such claim (an "Indemnity Notice") with reasonable promptness to the Indemnifying Party. The failure by any Indemnified Party to give the Indemnity Notice shall not impair such party's rights hereunder except to the extent that the Indemnifying Party demonstrates that it has been irreparably prejudiced thereby. If the Indemnifying Party notifies the Indemnified Party that it does not dispute the claim or the amount of the claim described in such Indemnity Notice or fails to notify the Indemnified Party within the Dispute Period whether the Indemnifying Party disputes the claim or the amount of the claim described in such Indemnity Notice, the Loss in the amount specified in the Indemnity Notice will be conclusively deemed a liability of the Indemnifying Party under Section 12.2 and the Indemnifying Party shall pay the amount of such Loss to the Indemnified Party on demand. If the Indemnifying Party has timely disputed its liability or the amount of its liability with respect to such claim, the Indemnifying Party and the Indemnified Party will proceed in good faith to negotiate a resolution of such dispute, and if not resolved through negotiations within the Resolution Period, such dispute shall be resolved by arbitration in accordance with paragraph (c) of this Section 12.3. (c) Any dispute under this Agreement (including, without limitation, in connection with this Section 12.3) or the Registration Rights Agreement shall be submitted to arbitration and shall be finally and conclusively determined by the decision of a single arbitrator who shall be a retired San Francisco Superior Court Judge with experience in civil litigation involving interpretation of stock purchase agreements (the "Arbitrator"). The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. (S)(S) 1-16, 201-208 and judgment upon the award rendered by the Arbitrator may be entered by any United States federal or state court in and of the State of California, to the non-exclusive jurisdiction of which each of the parties hereto irrevocably submits. The parties agree to cooperate and use their reasonable best efforts to cause the Arbitrator render a decision in any dispute within thirty (30) days following the commencement of proceedings with respect thereto and, to the extent practicable, the decision of the Arbitrator shall be rendered no more than thirty (30) calendar days following such commencement. The Arbitrator shall cause its written decision to be delivered to the Indemnified Party and the Indemnifying Party within three (3) business days following such decision. Any decision made by the Arbitrator (either prior to or after the expiration of such thirty (30) calendar- day period) shall be final, binding and conclusive on the Indemnified Party and the Indemnifying Party and shall be entitled to be enforced to the fullest extent permitted by law and entered in any court of competent jurisdiction. Each party to any arbitration shall bear its own expense in relation thereto, including but not limited to such party's attorneys' fees, if any, and the expenses and fees of the Arbitrator shall be divided between the Indemnifying Party and the Indemnified Party in the same proportion as the 24 portion of the related claim determined by the Arbitrator to be payable to the Indemnified Party bears to the portion of such claim determined not to be so payable. ARTICLE XIII Miscellaneous Section 13.1 Fees and Expenses. Each of the Company and the Investor ----------------- agrees to pay its own expenses incident to the performance of its obligations hereunder, except that the Company shall pay the fees, expenses and disbursements of the Investor's counsel up to an aggregate maximum of $10,000 in connection with the preparation, negotiation, execution and delivery of this Agreement and the Registration Rights Agreement. Section 13.2 Brokerage. Each of the parties hereto represents that it has --------- had no dealings in connection with this transaction with any finder or broker who will demand payment of any fee or commission from the other party. The Company on the one hand, and the Investor, on the other hand, agree to indemnify the other against and hold the other harmless from any and all liabilities to any persons claiming brokerage commissions or finder's fees on account of services purported to have been rendered on behalf of the indemnifying party in connection with this Agreement or the transactions contemplated hereby. Section 13.3 Counterparts. This Agreement may be executed in multiple ------------ counterparts, each of which may be executed by less than all of the parties and shall be deemed to be an original instrument which shall be enforceable against the parties actually executing such counterparts and all of which together shall constitute one and the same instrument. Section 13.4 Entire Agreement. This Agreement, the Exhibits hereto and the ---------------- Registration Rights Agreement set forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior and contemporaneous agreements, negotiations and understandings between the parties, both oral and written relating to the subject matter hereof. The terms and conditions of all Exhibits to this Agreement are incorporated herein by this reference and shall constitute part of this Agreement as if fully set forth herein. Section 13.5 Survival; Severability. The representations, warranties, ---------------------- covenants and agreements of the parties hereto shall survive each Closing hereunder. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that such severability shall be ineffective if it materially changes the economic benefit of this Agreement to any party. Section 13.6 Title and Subtitles. The titles and subtitles used in this ------------------- Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. Section 13.7 Reporting Entity for the Common Stock. The reporting entity ------------------------------------- relied upon for the determination of the trading price or trading volume of the Common Stock on any given Trading Day for the purposes of this Agreement shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of the Investor and the Company shall be required to employ any other reporting entity. 25 IN WITNESS WHEREOF, the parties hereto have caused this Private Equity Line Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above. KINGSBRIDGE CAPITAL LIMITED By:______________________________________ Valentine O'Donoghue Director SONIC SOLUTIONS By:______________________________________ Robert J. Doris President and Chief Executive Officer EXHIBIT A ADJUSTMENT PERIOD NOTICE SONIC SOLUTIONS Notice is hereby granted that the Board of Directors of Sonic Solutions (the "Company") anticipates executing a merger or acquisition agreement within ninety (90) days of the date hereof. The following five-week period is hereby designated as an Adjustment Period pursuant to Section 2.4 of the Private Equity Line Agreement, dated as of May __, 2000, by and between the Company and Kingsbridge Capital Limited. Beginning: ______________________ (no sooner that twenty-one (21) days from the date this notice is deemed to be delivered) Expiring:_______________________ The undersigned has executed this Certificate this ____ day of ________, 200_. _________________________________________ Robert J. Doris Chairman and Chief Executive Officer EXHIBIT B FORM OF OPINION OF THE COMPANY'S INDEPENDENT COUNSEL [FORM TO BE PROVIDED BY COUNSEL TO THE COMPANY] EXHIBIT C COMPLIANCE CERTIFICATE SONIC SOLUTIONS The undersigned, Robert J. Doris, hereby certifies, with respect to shares of common stock of the Sonic Solutions (the "Company") issuable in connection with the Put Notice, dated _____________ (the "Notice"), delivered pursuant to Article II of the Private Equity Line Agreement, dated May __,2000, by and between the Company and Kingsbridge Capital Limited (the "Agreement"), as follows: 1. The undersigned is the duly elected Chairman and Chief Executive Officer of the Company. 2. The representations and warranties of the Company set forth in Article IV of the Agreement are true and correct in all material respects as though made on and as of the date hereof. 3. The Company has performed in all material respects all covenants and agreements to be performed by the Company on or prior to the Closing Date related to the Notice and has complied in all material respects with all obligations and conditions contained in Article VII of the Agreement. The undersigned has executed this Certificate this ____ day of ________, 200_. _________________________________________ Robert J. Doris Chairman and Chief Executive Officer EXHIBIT D INSTRUCTIONS TO TRANSFER AGENT SONIC SOLUTIONS [DATE] [Name, address and phone and fax number of Transfer Agent] Dear Sirs: Reference is made to the Private Equity Line Agreement (the "Agreement"), dated as of May __, 2000 between Kingsbridge Capital Limited (the "Investor") and Sonic Solutions (the "Company"). Pursuant to the Agreement, subject to the terms and conditions set forth in the Agreement the Investor has agreed to purchase from the Company and the Company has agreed to sell to the Investor from time to time during the term of the Agreement shares of Common Stock of the Company, no par value (the "Common Stock"). As a condition to the effectiveness of the Agreement, the Company has agreed to issue to you, as the transfer agent for the Common Stock (the "Transfer Agent"), these instructions relating to the Common Stock to be issued to the Investor (or a permitted assignee) pursuant to the Agreement. All terms used herein and not otherwise defined shall have the meaning set forth in the Agreement. 1. ISSUANCE OF COMMON STOCK WITHOUT THE LEGEND Pursuant to the Agreement, the Company is required to prepare and file with the Commission, and maintain the effectiveness of, a registration statement or registration statements registering the resale of the Common Stock to be acquired by the Investor under the Agreement. The Company will advise the Transfer Agent in writing of the effectiveness of any such registration statement promptly upon its being declared effective. The Transfer Agent shall be entitled to rely on such advice and shall assume that the effectiveness of such registration statement remains in effect unless the Transfer Agent is otherwise advised in writing by the Company and shall not be required to independently confirm the continued effectiveness of such registration statement. In the circumstances set forth in the following two paragraphs, the Transfer Agent shall deliver to the Investor certificates representing Common Stock not bearing the Legend without requiring further advice or instruction or additional documentation from the Company or its counsel or the Investor or its counsel or any other party (other than as described in such paragraphs). At any time after the effective date of the applicable registration statement (provided that the Company has not informed the Transfer Agent in writing that such registration statement is not effective) upon any surrender of one or more certificates evidencing Common Stock which bear the Legend, to the extent accompanied by a notice requesting the issuance of new certificates free of the Legend to replace those surrendered, the Transfer Agent shall deliver to the Investor the certificates representing the Common Stock not bearing the Legend, in such names and denominations as the Investor shall request, provided that: (a) in connection with such event, the Investor (or its permitted assignee) shall confirm in writing to the Transfer Agent that (i) the Investor confirms to the transfer agent that it has sold, pledged or otherwise transferred or agreed to sell, pledge or otherwise transfer such Common Stock in a bona fide transaction to a designated transferee that is not an affiliate of the Company; and (ii) the Investor confirms to the transfer agent that the Investor has complied with the prospectus delivery requirement; (b) the Investor (or its permitted assignee) shall represent that it is permitted to dispose thereof with limitation as to amount of manner of sale pursuant to Rule 144(k) under the Securities Act; or (c) the Investor, its permitted assignee, or either of their brokers confirms to the transfer agent that (i) the Investor has held the shares of Common Stock for at least one year, (ii) counting the shares surrendered as being sold upon the date the unlegended Certificates would be delivered to the Investor (or the Trading Day immediately following if such date is not a Trading Day), the Investor will not have sold more than the greater of (a) one percent (1%) of the total number of outstanding shares of Common Stock or (b) the average weekly trading volume of the Common Stock for the preceding four weeks during the three months ending upon such delivery date (or the Trading Day immediately following if such date is not a Trading Day), and (iii) the Investor has complied with the manner of sale and notice requirements of Rule 144 under the Securities Act. Any advice, notice or instructions to the Transfer Agent required or permitted to be given hereunder may be transmitted via facsimile to the Transfer Agent's facsimile number of (___)-___-____. 2. MECHANICS OF DELIVERY OF CERTIFICATES REPRESENTING COMMON STOCK In connection with any Closing pursuant to which the Investor acquires Common Stock under the Agreement, the Transfer Agent shall deliver certificates representing Common Stock (with or without the Legend, as appropriate) as promptly as practicable, but in no event later than three business days, after such Closing. 3. FEES OF TRANSFER AGENT; INDEMNIFICATION The Company agrees to pay the Transfer Agent for all fees incurred in connection with these Irrevocable Instructions. The Company agrees to indemnify the Transfer Agent and its officers, employees and agents, against any losses, claims, damages or liabilities, joint or several, to which it or they become subject based upon the performance by the Transfer Agent of its duties in accordance with the Irrevocable Instructions. 4. THIRD PARTY BENEFICIARY The Company and the Transfer Agent acknowledge and agree that the Investor is an express third party beneficiary of these Irrevocable Instructions and shall be entitled to rely upon, and enforce, the provisions hereof. SONIC SOLUTIONS By:____________________________________ Robert J. Doris Chairman and Chief Executive Officer AGREED: [NAME OF TRANSFER AGENT] By:__________________________ Name: Title: 2 EXECUTION COPY PRIVATE EQUITY LINE AGREEMENT by and between KINGSBRIDGE CAPITAL LIMITED and SONIC SOLUTIONS ________________________________________________________________ Dated as of May 4, 2000 ________________________________________________________________ ARTICLE I CERTAIN DEFINITIONS...................................... 1 Section 1.1 "Adjustment Period"................................. 1 Section 1.2 "Bid Price"......................................... 1 Section 1.3 "Capital Shares".................................... 1 Section 1.4 "Closing"........................................... 1 Section 1.5 "Closing Date"...................................... 1 Section 1.6 "Commitment Period"................................. 1 Section 1.7 "Common Stock"...................................... 2 Section 1.8 "Common Stock Equivalents".......................... 2 Section 1.9 "Condition Satisfaction Date"....................... 2 Section 1.10 "Damages"........................................... 2 Section 1.11 "Effective Date".................................... 2 Section 1.12 "Exchange Act"...................................... 2 Section 1.13 "Investment Amount"................................. 2 Section 1.14 "Legend"............................................ 2 Section 1.15 "Market Price"...................................... 2 Section 1.16 "Material Adverse Effect"........................... 2 Section 1.17 "Maximum Commitment Amount"......................... 2 Section 1.18 "Maximum Put Amount"................................ 2 Section 1.19 "NASD".............................................. 3 Section 1.20 "Outstanding"....................................... 3 Section 1.21 "Person"............................................ 3 Section 1.22 "Principal Market".................................. 3 Section 1.23 "Purchase Price".................................... 3 Section 1.24 "Put"............................................... 3 Section 1.25 "Put Date".......................................... 3 Section 1.26 "Put Notice"........................................ 3 Section 1.27 "Put Shares"........................................ 3 Section 1.28 "Registrable Securities"............................ 3 Section 1.29 "Registration Rights Agreement"..................... 4 Section 1.30 "Registration Statement"............................ 4 Section 1.31 "Regulation D"...................................... 4 Section 1.32 "SEC"............................................... 4 Section 1.33 "Section 4(2)"...................................... 4
Section 1.34 "Securities Act".............................................................. 4 Section 1.35 "SEC Documents"............................................................... 4 Section 1.36 "Subscription Date"........................................................... 4 Section 1.37 "Trading Cushion"............................................................. 4 Section 1.38 "Trading Day"................................................................. 4 Section 1.39 Reserved...................................................................... 4 Section 1.40 "Valuation Event"............................................................. 4 Section 1.41 "Valuation Period"............................................................ 5 ARTICLE II PURCHASE AND SALE OF COMMON STOCK.................................................. 5 Section 2.1 Investments................................................................... 5 Section 2.2 Mechanics..................................................................... 5 Section 2.3 Closings...................................................................... 6 Section 2.4 Special Circumstances; Adjustment Period...................................... 6 Section 2.5 Termination of Investment Obligation.......................................... 7 Section 2.6 Blackout Shares............................................................... 7 Section 2.7 Liquidated Damages............................................................ 8 ARTICLE III REPRESENTATIONS AND WARRANTIES OF INVESTOR......................................... 8 Section 3.1 Intent........................................................................ 8 Section 3.2 Sophisticated Investor........................................................ 8 Section 3.3 Authority..................................................................... 8 Section 3.4 Not an Affiliate.............................................................. 8 Section 3.5 Organization and Standing..................................................... 8 Section 3.6 Absence of Conflicts.......................................................... 8 Section 3.7 Disclosure; Access to Information............................................. 9 Section 3.8 Manner of Sale................................................................ 9 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................................... 9 Section 4.1 Organization of the Company................................................... 9 Section 4.2 Authority..................................................................... 9 Section 4.3 Capitalization................................................................ 9 Section 4.4 Common Stock.................................................................. 10 Section 4.5 SEC Documents................................................................. 10 Section 4.6 Valid Issuances............................................................... 10 Section 4.7 No General Solicitation or Advertising in Regard to this Transaction.......... 10 Section 4.8 Corporate Documents........................................................... 10
2 Section 4.9 No Conflicts............................................ 11 Section 4.10 No Material Adverse Change.............................. 11 Section 4.11 No Undisclosed Liabilities.............................. 11 Section 4.12 No Undisclosed Events or Circumstances.................. 11 Section 4.13 No Integrated Offering.................................. 11 Section 4.14 Litigation and Other Proceedings........................ 12 Section 4.15 No Misleading or Untrue Communication................... 12 Section 4.16 Material Non-Public Information......................... 12 ARTICLE V COVENANTS OF THE INVESTOR.................................... 12 Section 5.1 Compliance with Law..................................... 12 Section 5.2 Limitation on Short Sales............................... 12 ARTICLE VI COVENANTS OF THE COMPANY..................................... 12 Section 6.1 Registration Rights..................................... 12 Section 6.2 Reservation of Common Stock............................. 12 Section 6.3 Listing of Common Stock................................. 13 Section 6.4 Exchange Act Registration............................... 13 Section 6.5 Legends................................................. 13 Section 6.6 Corporate Existence..................................... 13 Section 6.7 Additional SEC Documents................................ 13 Section 6.8 Blackout Period......................................... 13 Section 6.9 Expectations Regarding Put Notices...................... 14 Section 6.10 Consolidation; Merger................................... 14 Section 6.11 Issuance of Put Shares and Blackout Shares.............. 14 Section 6.12 Legal Opinion on Subscription Date...................... 14 ARTICLE VII CONDITIONS TO DELIVERY OF PUT NOTICES AND CONDITIONS TO CLOSING................................................... 14 Section 7.1 Conditions Precedent to the Obligation of the Company to Issue and Sell Common Stock.................. 14 Section 7.2 Conditions Precedent to the Right of the Company and the Selling Shareholder to Deliver a Put Notice and the Obligation of the Investor to Purchase the Put Shares................................. 14 ARTICLE VIII DUE DILIGENCE REVIEW; NON-DISCLOSURE OF NON-PUBLIC INFORMATION.................................................. 17 Section 8.1 Due Diligence Review.................................... 17 Section 8.2 Non-Disclosure of Non-Public Information................ 17 ARTICLE IX LEGENDS...................................................... 18
3 Section 9.1 Legends............................................. 18 Section 9.2 No Other Legend or Stock Transfer Restrictions...... 19 Section 9.3 Investor's Compliance............................... 20 ARTICLE X CHOICE OF LAW............................................ 20 Section 10.1 Choice of Law....................................... 20 ARTICLE XI ASSIGNMENT; ENTIRE AGREEMENT, AMENDMENT; TERMINATION..... 20 Section 11.1 Assignment.......................................... 20 Section 11.2 Termination......................................... 20 Section 11.3 Entire Agreement, Amendment; Waiver................. 20 ARTICLE XII NOTICES; INDEMNIFICATION................................. 20 Section 12.1 Notices............................................. 20 Section 12.2 Indemnification..................................... 21 Section 12.3 Method of Asserting Indemnification Claims.......... 22 ARTICLE XIII MISCELLANEOUS............................................ 25 Section 13.1 Fees and Expenses................................... 25 Section 13.2 Brokerage........................................... 25 Section 13.3 Counterparts........................................ 25 Section 13.4 Entire Agreement.................................... 25 Section 13.5 Survival; Severability.............................. 25 Section 13.6 Title and Subtitles................................. 26 Section 13.7 Reporting Entity for the Common Stock............... 26
4 EX-10.14 3 0003.txt REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.14 REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of May 4, 2000, is made and entered into between SONIC SOLUTIONS, a California corporation (the "Company"), and KINGSBRIDGE CAPITAL LIMITED (the "Investor"). WHEREAS, the Company and the Investor have entered into that certain Private Equity Line Agreement, dated as of the date hereof (the "Equity Line Agreement"), pursuant to which the Company will issue and sell to the Investor and the Investor will purchase, from time to time, up to $20,000,000 worth of shares of Common Stock (as determined pursuant to the Equity Line Agreement); WHEREAS, pursuant to the terms of, and in consideration for, the Investor's agreement to enter into the Equity Line Agreement, the Company has agreed to provide the Investor with certain registration rights with respect to the Registrable Securities; NOW, THEREFORE, in consideration of the premises, the representations, warranties, covenants and agreements contained herein and in the Equity Line Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, intending to be legally bound hereby, the parties hereto agree as follows (capitalized terms used herein and not defined herein shall have the meaning ascribed to such terms in the Equity Line Agreement): ARTICLE I REGISTRATION RIGHTS Section 1.1. REGISTRATION STATEMENT. (a) Filing of Registration Statement. Subject to the terms and -------------------------------- conditions of this Agreement, the Company shall file with the SEC within thirty (30) days following the Subscription Date a registration statement on Form S-1 or such other form acceptable to the SEC under the Securities Act for the registration of the Registerable Securities for resale by the Investor to the public (the "Registration Statement"). (b) Effectiveness of the Registration Statement. The Company ------------------------------------------- shall use its reasonable best efforts to have the Registration Statement declared effective by the SEC by no later than one hundred twenty (120) days following Subscription Date and to ensure that the Registration Statement remains in effect throughout the term of this Agreement as set forth in Section 4.2, subject to the terms and conditions of this Agreement; provided, however, -------- ------- that if the Equity Line Agreement shall be terminated in accordance with Section 2.5 thereof, the Company shall have no further obligation to cause the Registration Statement to become effective. (c) Intentionally Omitted. (d) Failure to Maintain Effectiveness of Registration Statements. ------------------------------------------------------------ In the event the Company fails to maintain the effectiveness of a Registration Statement (or the underlying prospectus) throughout the period set forth in Section 4.2, other than temporary suspensions as set forth in Section 1.1(f), and the Investor holds any Registrable Securities at any time during the period of such ineffectiveness (an "Ineffective Period"), the Company shall pay to the Investor in immediately available funds into an account designated by the Investor an amount equal to one half of one percent (0.5%) of the aggregate Purchase Price of all of the Registrable Securities then held by the Investor for the each of the first four seven-calendar-day periods (or portion thereof) of an Ineffective Period and one percent (1.0%) of such aggregate Purchase Price for each subsequent seven-calendar-day periods (or pro rata portion thereof) of such Ineffective Period. Such amounts shall not be payable with respect to suspensions of the effectiveness of a Registration Statement (or use of the underlying prospectus), in accordance with Section 1.1(f). Such payments shall be made on the first Trading Day after the earliest to occur of (i) the expiration of the Commitment Period, (ii) the expiration of an Ineffective Period, (iii) the expiration of the first twenty-eight (28) calendar days of an Ineffective Period and (iv) the expiration of each additional twenty-eight calendar-day period during an Ineffective Period. (e) SEC Disapproval. Sections 1.1 (b) and (c) notwithstanding, --------------- the date by which a Registration Statement is required to become effective shall be extended for up to sixty (60) days without default or penalty in the event that the Company's failure to obtain effectiveness of a Registration Statement by no later than one hundred twenty (120) days after Subscription Date results solely from the SEC's disapproval of the structure of the transactions contemplated by the Equity Line Agreement. In such event, the parties agree to cooperate with one another in good faith to arrive at a resolution acceptable to the SEC and the Company shall not be in default hereunder or under the Equity Line Agreement and no liquidated damages or penalties shall accrue against or be owing by the Company if the parties are unable to arrive at such a resolution. (f) Deferral and Suspension. Sections 1.1(b), (c) and (d) ----------------------- notwithstanding, if the Company shall furnish to the Investor notice signed by the Chairman and Chief Executive Officer of the Company stating that the Board of Directors of the Company has, by duly authorized resolution, determined in good faith that it would be seriously detrimental to the Company and its shareholders for the Registration Statement to be filed (or remain in effect) and it is therefore essential to defer the filing of such Registration Statement (or temporarily suspend the effectiveness of such Registration Statement or use of the related prospectus) (a "Blackout Notice"), the Company shall have the right to defer such filing (or suspend such effectiveness) immediately for a period of not more than thirty (30) days beyond such the date by which such Registration Statement was otherwise required to be filed (or required to remain in effect). The Investor acknowledges that it would be seriously detrimental to the Company and its shareholders for such Registration Statement to be filed (or remain in effect) and therefore essential to defer such filing (or suspend such effectiveness) and agrees to cease any disposition of the Registrable Securities immediately upon receipt of such notice. The Company may not utilize any of its rights under this Section 1.1(f) to defer the filing of a Registration Statement (or suspend its effectiveness) more than twice in any twelve (12) month period. Following such deferral or suspension, the Investor shall be entitled to Blackout Shares as set forth in Section 2.7 of the Equity Line Agreement. 2 (g) Liquidated Damages. The parties hereto acknowledge and agree ------------------ that the sums payable under Section 1(d) above shall constitute liquidated damages and not penalties. The parties further acknowledge that (a) the amount of loss or damages likely to be incurred is incapable or is difficult to precisely estimate, (b) the amounts specified in such Sections bear a reasonable proportion and are not plainly or grossly disproportionate to the probable loss likely to be incurred in connection with any failure by the Company to obtain or maintain the effectiveness of a Registration Statement, (c) one of the reasons for the parties reaching an agreement as to such amounts was the uncertainty and cost of litigation regarding the question of actual damages, and (d) the parties are sophisticated business parties and have been represented by sophisticated and able legal and financial counsel and negotiated this Agreement at arm's length. ARTICLE II REGISTRATION PROCEDURES Section 2.1. FILINGS; INFORMATION. The Company will effect the registration and sale of such Registrable Securities in accordance with the intended methods of disposition thereof. Without limiting the foregoing, the Company in each such case will do the following as expeditiously as possible, but in no event later than the deadline, if any, prescribed therefor in this Agreement: (a) The Company shall (i) prepare and file with the SEC a Registration Statement on Form S-1 (if use of such form is then available to the Company pursuant to the rules of the SEC and, if not, on such other form promulgated by the SEC for which the Company then qualifies and which counsel for the Company shall deem appropriate and which form shall be available for the sale of the Registrable Securities to be registered thereunder in accordance with the provisions of this Agreement and in accordance with the intended method of distribution of such Registrable Securities); (ii) use reasonable best efforts to cause such filed Registration Statement to become and remain effective (pursuant to Rule 415 under the Act or otherwise); (iii) prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for the time periods prescribed by Section 1.1(b); and (iv) comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during such period in accordance with the intended methods of disposition by the Investor set forth in such Registration Statement. (b) The Company shall file all necessary amendments to the Registration Statement in order to effectuate the purpose of this Agreement and the Equity Line Agreement. (c) If so requested by the managing underwriters, if any, or the holders of a majority in aggregate principal amount of the Registrable Securities being sold in connection with the filing of a Registration Statement under the Securities Act for the offering on a continuous or delayed basis in the future of all of the Registrable Securities (a "Shelf Registration"), the Company shall (i) promptly incorporate in a prospectus supplement or post-effective amendment such information as the managing underwriters, if any, and such holders agree should be included therein, and (ii) make all required filings of such prospectus supplement or post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such prospectus 3 supplement or post-effective amendment; provided, however, that the Company shall not be required to take any action pursuant to this Section 2.1(c)(ii) that would, in the opinion of counsel for the Company, violate applicable law. (d) In connection with the filing of a Shelf Registration, the Company shall enter into such agreements and take all such other reasonable actions in connection therewith (including those reasonably requested by the managing underwriters, if any, or the holders of a majority in aggregate principal amount of the Registrable Securities being sold) in order to expedite or facilitate the disposition of such Registrable Securities, and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration, (i) make such representations and warranties to the holders of such Registrable Securities and the underwriters, if any, with respect to the business of the Company (including with respect to businesses or assets acquired or to be acquired by the Company), and the Registration Statement, prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings, and confirm such representations and warranties if and when requested; (ii) if an underwriting agreement is entered into, the same shall contain indemnification provision and procedures no less favorable to the selling holders of such Registrable Securities and the underwriters, if any, than those set forth herein (or such other provisions and procedures acceptable to the holders of a majority in aggregate principal amount of Registrable Securities covered by such Registration Statement and the managing underwriters, if any); and (iii) deliver such documents and certificates as may be reasonably requested by the holders of a majority in aggregate principal amount of the Registrable Securities being sold, their counsel and the managing underwriters, if any, to evidence the continued validity of their representations and warranties made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. (e) Five (5) Trading Days prior to filing the Registration Statement or prospectus, or any amendment or supplement thereto (excluding amendments deemed to result from the filing of documents incorporated by reference therein), the Company shall deliver to the Investor and one firm of counsel representing the Investor, in accordance with the notice provisions of Section 4.8, copies of such Registration Statement as proposed to be filed, together with exhibits thereto, which documents will be subject to review by such parties, and thereafter deliver to the Investor and its counsel, in accordance with the notice provisions of Section 4.8, such number of copies of such Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in such Registration Statement (including each preliminary prospectus) and such other documents or information as the Investor or counsel may reasonably request in order to facilitate the disposition of the Registrable Securities. (f) The Company shall deliver, in accordance with the notice provisions of Section 4.8, to each seller of Registrable Securities covered by such Registration Statement such number of conformed copies of such Registration Statement and of each amendment and supplement thereto (in each case including all exhibits and documents incorporated by 4 reference), such number of copies of the prospectus contained in such Registration Statement (including each preliminary prospectus and any summary prospectus) and any other prospectus file under Rule 424 promulgated under the Securities Act relating to such seller's Registrable Securities, and such other documents, as such seller may reasonably request to facilitate the disposition of its Registrable Securities. (g) After the filing of the Registration Statement, the Company shall promptly notify the Investor of any stop order issued or threatened by the SEC in connection therewith and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered. (h) The Company shall use its reasonable best efforts to (i) register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions in the United States as the Investor may reasonably (in light of its intended plan of distribution) request, and (ii) cause such Registrable Securities to be registered with or approved by such other governmental agencies or authorities in the United States as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be reasonably necessary or advisable to enable the Investor to consummate the disposition of the Registrable Securities; provided that the Company will not be required to qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (h), subject itself to taxation in any such jurisdiction, or consent or subject itself to general service of process in any such jurisdiction. (i) The Company shall immediately notify the Investor upon the occurrence of any of the following events in respect of a Registration Statement or related prospectus in respect of an offering of Registrable Securities: (i) receipt of any request for additional information by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for additional information, amendments or supplements to the Registration Statement or related prospectus; (ii) the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in the Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate; and the Company will promptly make available to the Investor any such supplement or amendment to the related prospectus. 5 (j) The Company shall enter into customary agreements and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities (whereupon the Investor may, at its option, require that any or all of the representations, warranties and covenants of the Company also be made to and for the benefit of the Investor). (k) The Company shall make available to the Investor (and will deliver to Investor's counsel), subject to restrictions imposed by the United States federal government or any agency or instrumentality thereof, copies of all correspondence between the SEC and the Company, its counsel or auditors and will also make available for inspection by the Investor and any attorney, accountant or other professional retained by the Investor (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers and employees to supply all information reasonably requested by any Inspectors in connection with such Registration Statement. Records that the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such Registration Statement or (ii) the disclosure or release of such Records is requested or required pursuant to oral questions, interrogatories, requests for information or documents or a subpoena or other order from a court of competent jurisdiction or other process; provided that prior to any disclosure or release pursuant to clause (ii), the Inspectors shall provide the Company with prompt notice of any such request or requirement so that the Company may seek an appropriate protective order or waive such Inspectors' obligation not to disclose such Records; and, provided further, that if failing the entry of a protective order or the waiver by the Company permitting the disclosure or release of such Records, the Inspectors, upon advice of counsel, are compelled to disclose such Records, the Inspectors may disclose that portion of the Records which counsel has advised the Inspectors that the Inspectors are compelled to disclose. The Investor agrees that information obtained by it solely as a result of such inspections (not including any information obtained from a third party who, insofar as is known to the Investor after reasonable inquiry, is not prohibited from providing such information by a contractual, legal or fiduciary obligation to the Company) shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company or its affiliates unless and until such information is made generally available to the public. The Investor further agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential. (l) The Company shall deliver, in accordance with the notice provisions of Section 4.8, to the Investor a signed counterpart, addressed to the Investor, of (1) an opinion or opinions of counsel to the Company, and (2) to the extent required by law or reasonably necessary to effect a sale of Registrable Securities in accordance with prevailing business practices at the time of any sale of Registrable Securities pursuant to a Registration Statement, a comfort letter or comfort letters from the Company's independent public accountants, each in customary form and covering such matters of the type customarily covered by opinions or comfort letters, as the case may be, as the Investor therefor reasonably requests. 6 (m) The Company shall otherwise comply with all applicable rules and regulations of the SEC, including, without limitation, compliance with applicable reporting requirements under the Exchange Act. (n) The Company shall appoint a transfer agent and registrar for all such Registrable Securities covered by such Registration Statement not later than the effective date of such Registration Statement. (o) The Company may require the Investor to promptly furnish in writing to the Company such information as may be legally required in connection with such registration including, without limitation, all such information as may be requested by the SEC or the National Association of Securities Dealers. The Investor agrees to provide such information requested in connection with such registration within ten (10) business days after receiving such written request and the Company shall not be responsible for any delays in obtaining or maintaining the effectiveness of the Registration Statement caused by the Investor's failure to timely provide such information. Section 2.2. REGISTRATION EXPENSES. In connection with each Registration Statement, the Company shall pay all registration expenses incurred in connection with the registration thereunder (the "Registration Expenses"), including, without limitation: (i) all registration, filing, securities exchange listing and fees required by the National Association of Securities Dealers, (ii) all registration, filing, qualification and other fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (iii) all word processing, duplicating, printing, messenger and delivery expenses, (iv) the Company's internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), (v) the fees and expenses incurred in connection with the listing of the Registrable Securities, (vi) reasonable fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the Company (including the expenses of any special audits or comfort letters or costs associated with the delivery by independent certified public accountants of such special audit(s) or comfort letter(s) requested pursuant to Section 2.1(l) hereof), (vii) the fees and expenses of any special experts retained by the Company in connection with such registration, (viii) all reasonable fees and expenses of one firm of counsel for the Investor retained as the Investor's counsel with respect to such Registration Statement up to an amount of $5,000, unless a greater amount is required due the nature of the review performed by Investor's counsel (an estimate of such greater fees and expenses of such firm of counsel to be provided to the Company prior to the undertaking of such counsel's review), (ix) premiums and other costs of policies of insurance obtained at the discretion of the Company against liabilities arising out of any public offering of the Registrable Securities being registered, and (x) any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, but excluding underwriting fees, discounts, transfer taxes or commissions, if any, attributable to the sale of Registrable Securities, which shall be payable by each holder of Registrable Securities pro rata on the basis of the number of Registrable Securities of each such holder that are included in a registration under this Agreement. 7 ARTICLE III INDEMNIFICATION AND CONTRIBUTION Section 3.1. INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and hold harmless the Investor, its partners, affiliates, officers, directors, employees and duly authorized agents, and each Person or entity, if any, who controls the Investor within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, together with the partners, Affiliates, officers, directors, employees and duly authorized agents of such controlling Person or entity (collectively, the "Controlling Persons"), from and against any loss, claim, damage, liability, costs and expenses (including, without limitation, reasonable attorneys' fees and disbursements and costs and expenses of investigating and defending any such claim) (collectively, "Damages"), joint or several, and any action or proceeding in respect thereof to which the Investor, its partners, affiliates, officers, directors, employees and duly authorized agents, and any such Controlling Person may become subject under the Securities Act or otherwise as incurred and, insofar as such Damages (or actions or proceedings in respect thereof) arise out of, or are based upon, any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or prospectus relating to the Registrable Securities or any preliminary prospectus, or arises out of, or are based upon, any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are based upon information furnished in writing to the Company by the Investor expressly for use therein, and shall reimburse the Investor, its partners, affiliates, officers, directors, employees and duly authorized agents, and each such Controlling Person for any legal and other expenses reasonably incurred by the Investor, its partners, affiliates, officers, directors, employees and duly authorized agents, or any such Controlling Person, as incurred, in investigating or defending or preparing to defend against any such Damages or actions or proceedings; provided, however, that the Company shall not be liable to the Investor to the extent that any such Damages arise out of or are based upon an untrue statement or omission made in any preliminary prospectus if (i) the Investor failed to send or deliver a copy of the final prospectus delivered by the Company to the Investor with or prior to the delivery of written confirmation of the sale by the Investor to the Person asserting the claim from which such Damages arise, and (ii) the final prospectus would have corrected such untrue statement or alleged untrue statement or such omission or alleged omission. Section 3.2. CONDUCT OF INDEMNIFICATION PROCEEDINGS. Promptly after receipt by any person or entity in respect of which indemnity may be sought pursuant to Section 3.1 (an "Indemnified Party") of notice of any claim or the commencement of any action, the Indemnified Party shall, if a claim in respect thereof is to be made against the person or entity against whom such indemnity may be sought (the "Indemnifying Party"), notify the Indemnifying Party in writing of the claim or the commencement of such action; in the event an Indemnified Party shall fail to give such notice as provided in this Section 3.2 and the Indemnifying Party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, the indemnification provided for in Section 3.1 shall be reduced to the extent of any actual prejudice resulting from such failure to so notify the Indemnifying Party; provided, that the failure to notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability that it may have to an Indemnified Party otherwise than under Section 3.1. If any such claim or action 8 shall be brought against an Indemnified Party, and it shall notify the Indemnifying Party thereof, the Indemnifying Party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified Indemnifying Party, to assume the defense thereof with counsel reasonably satisfactory to the Indemnified Party. After notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense of such claim or action, the Indemnifying Party shall not be liable to the Indemnified Party for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof other than reasonable costs of investigation; provided that the Indemnified Party shall have the right to employ separate counsel to represent the Indemnified Party and its Controlling Persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Indemnified Party against the Indemnifying Party, but the fees and expenses of such counsel shall be for the account of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (ii) in the reasonable judgment of the Company and such Indemnified Party, representation of both parties by the same counsel would be inappropriate due to actual or potential conflicts of interest between them, it being understood, however, that the Indemnifying Party shall not, in connection with any one such claim or action or separate but substantially similar or related claims or actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for all Indemnified Parties, or for fees and expenses that are not reasonable. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any claim or pending or threatened proceeding in respect of which the Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all liability arising out of such claim or proceeding. Whether or not the defense of any claim or action is assumed by the Indemnifying Party, such Indemnifying Party will not be subject to any liability for any settlement made without its consent, which consent will not be unreasonably withheld. Section 3.3. OTHER INDEMNIFICATION. Indemnification similar to that specified in the preceding paragraphs of this Article 3 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of securities under any federal or state law or regulation of any governmental authority other than the Securities Act. The provisions of this Article III shall be in addition to any other rights to indemnification, contribution or other remedies which an Indemnified Party may have pursuant to law, equity, contract or otherwise. Section 3.4. CONTRIBUTION. If the indemnification provided for in this Article III is unavailable to the Indemnified Parties in respect of any Damages referred to herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Damages as between the Company on the one hand and the Investor on the other, in such proportion as is appropriate to reflect the relative fault of the Company and of the Investor in connection with such statements or omissions, as well as other equitable considerations. The relative fault of the Company on the one hand and of the Investor on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the 9 parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Investor agree that it would not be just and equitable if contribution pursuant to this Section 3.4 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the Damages referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 3.4, the Investor shall in no event be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities of the Investor were sold to the public (less underwriting discounts and commissions) exceeds the amount of any damages which the Investor has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. ARTICLE IV MISCELLANEOUS Section 4.1. NO OUTSTANDING REGISTRATION RIGHTS. The Company represents and warrants to the Investor that there is not in effect on the date hereof any agreement by the Company pursuant to which any holders of securities of the Company have a right to cause the Company to register or qualify such securities under the Securities Act or any securities or blue sky laws of any jurisdiction that would conflict or be inconsistent with any provision of this Agreement or the Equity Line Agreement. Section 4.2. TERM. The registration rights provided to the holders of Registrable Securities hereunder shall terminate at such time as all Put Shares (i) have been disposed of pursuant to the Registration Statement, (ii) have been sold under circumstances under which all of the applicable conditions of Rule 144 (or any similar provision then in force) under the Securities Act ("Rule 144") are met, (iii) have been otherwise transferred to holders who may trade such shares without restriction under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend, or (iv) may be sold without any time, volume or manner limitations pursuant to Rule 144(k) (or any similar provision then in effect) under the Securities Act in the opinion of counsel to the Company, which counsel shall be reasonably acceptable to the Investor; provided, however, that -------- ------- such registration rights shall not terminate sooner than two years following the Subscription Date. Notwithstanding the foregoing, paragraphs (c) and (d) of Section 1.1, Article III, Section 4.8, and Section 4.9 shall survive the termination of this Agreement. Section 4.3. RULE 144. The Company covenants that it will file all reports required to be filed by it under the Act and the Exchange Act and that it will take such further action as holders of Registrable Securities may reasonably request, all to the extent required from time to time to 10 enable the Investor to sell Registrable Securities without registration under the Act within the limitation of the exemptions provided by (a) Rule 144, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. If at any time the Company is not required to file such reports, it will, upon the request of any holder of Registrable Securities, make publicly available other information so long as necessary to permit sales pursuant to Rule 144. Upon the request of the Investor, the Company will deliver to the Investor a written statement as to whether it has complied with such requirements. Section 4.4. CERTIFICATE. The Company will, at its expense, forthwith upon the request of any holder of Registrable Securities, deliver to such holder a certificate, signed by the Company's principal financial officer, stating (a) the Company's name, address and telephone number (including area code), (b) the Company's Internal Revenue Service identification number, (c) the Company's Commission file number, (d) the number of shares of each class of Stock outstanding as shown by the most recent report or statement published by the Company, and (e) whether the Company has filed the reports required to be filed under the Exchange Act for a period of at least ninety (90) days prior to the date of such certificate and in addition has filed the most recent annual report required to be filed thereunder. Section 4.5. AMENDMENT AND MODIFICATION. Any provision of this Agreement may be waived, provided that such waiver is set forth in a writing executed by both parties to this Agreement. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the holders of a majority of the then outstanding Registrable Securities. Notwithstanding the foregoing, the waiver of any provision hereof with respect to a matter that relates exclusively to the rights of holders of Registrable Securities whose securities are being sold pursuant to a Registration Statement and does not directly or indirectly affect the rights of other holders of Registrable Securities may be given by holders of at least a majority of the Registrable Securities being sold by such holders; provided that the provisions of this sentence may not be amended, modified or supplemented except in accordance with the provisions of the immediately preceding sentence. No course of dealing between or among any Person having any interest in this Agreement will be deemed effective to modify, amend or discharge any part of this Agreement or any rights or obligations of any person under or by reason of this Agreement. Section 4.6. SUCCESSORS AND ASSIGNS; ENTIRE AGREEMENT. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The Investor may assign its rights under this Agreement to any subsequent holder the Registrable Securities, provided that the Company shall have the right to require any holder of Registrable Securities to execute a counterpart of this Agreement as a condition to such holder's claim to any rights hereunder; provided further that such holder is an "accredited investor" as defined in Rule 501 of Regulation D of the Securities Act. This Agreement, together with the Equity Line Agreement and the Escrow Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and merges and supersedes all prior discussions, agreements and understandings of any and every nature among them. 11 Section 4.7. SEPARABILITY In the event that any provision of this Agreement or the application of any provision hereof is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, the remainder of this Agreement shall not be affected except to the extent necessary to delete such illegal, invalid or unenforceable provision unless that provision held invalid shall substantially impair the benefits of the remaining portions of this Agreement. Section 4.8. NOTICES. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: If to Sonic Solutions, Inc.: Robert J. Doris President and Chief Executive Officer Sonic Solutions 101 Rowland Way, Suite 110 Novato, California 94945 Telephone: (415) 893-8000 Facsimile: (415) 893-8008 with a copy to (which communication shall not constitute notice): Kyle Guse, Esq. Heller Ehrman White & McAuliffe 2500 Sand Hill Road, Suite 100 Menlo Park, California 94025-7063 Telephone: (650) 234-4200 Facsimile: (650) 234-4299 If to the Investor: Adam Gurney Kingsbridge Capital Limited c/o Kingsbridge Corporate Services Limited Main Street Kilcullen, County Kildare 12 Republic of Ireland Telephone: 011-353-45-481-811 Facsimile: 011-353-45-482-003 with a copy to (which communication shall not constitute notice): Keith M. Andruschak, Esq. Clifford Chance Rogers & Wells LLP 200 Park Avenue New York, NY 10166 Telephone: (212) 878-8000 Facsimile: (212) 878-8375 Either party hereto may from time to time change its address or facsimile number for notices under this Section 4.8 by giving at least ten (10) days' prior written notice of such changed address or facsimile number to the other party hereto. Section 4.9. GOVERNING LAW. This Agreement shall be construed under the laws of the State of California, without giving effect to provisions regarding conflicts of law or choice of law. Section 4.10. HEADINGS. The headings in this Agreement are for convenience of reference only and shall not constitute a part of this Agreement, nor shall they affect their meaning, construction or effect. Section 4.11. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original instrument and all of which together shall constitute one and the same instrument. Section 4.12. FURTHER ASSURANCES. Each party shall cooperate and take such action as may be reasonably requested by another party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. Section 4.13. REMEDIES. In the event of a breach or a threatened breach by any party to this Agreement of its obligations under this Agreement, any party injured or to be injured by such breach will be entitled to specific performance of its rights under this Agreement or to injunctive relief, in addition to being entitled to exercise all rights provided in this Agreement and granted by law. The parties agree that the provisions of this Agreement shall be specifically enforceable, it being agreed by the parties that the remedy at law, including monetary damages, for breach of any such provision will be inadequate compensation for any loss and that any defense or objection in any action for specific performance or injunctive relief that a remedy at law would be adequate is waived. 13 IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above. SONIC SOLUTIONS By: ----------------------------------------------- Robert J. Doris President and Chief Executive Officer KINGSBRIDGE CAPITAL LIMITED By: ----------------------------------------------- Valentine O'Donoghue Director 14 EX-23.1 4 0004.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Sonic Solutions We consent to the incorporation by reference in the registration statement (No. 333-66187) on Form S-8 of Sonic Solutions of our report dated April 28, 2000, except as to note 11 which is as of May 4, 2000, relating to the balance sheets of Sonic Solutions as of March 31, 2000 and 1999, and the related statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended March 31, 2000, and the related financial statement schedule, which report appears or is incorporated by reference in the March 31, 2000, annual report on Form 10-K of Sonic Solutions. /S/ KPMG LLP San Francisco, California June 26, 2000 EX-27 5 0005.txt FINANCIAL DATA SCHEDULE
5 1,000 12-MOS 12-MOS MAR-31-2000 MAR-31-1999 APR-01-1999 APR-01-1998 MAR-31-2000 MAR-31-1999 5,179 2,414 0 0 5,565 6,002 930 599 945 807 11,184 8,911 8,765 7,915 7,250 5,602 14,968 13,765 6,208 7,744 0 0 0 0 506 956 27,083 18,121 (18,839) (13,145) 14,968 13,765 20,827 21,899 20,827 21,899 8,992 9,547 17,377 13,909 0 0 0 0 249 302 (5,791) (1,859) 97 0 (5,694) (1,859) 0 0 0 0 0 0 (5,694) (1,859) (0.56) (0.21) (0.56) (0.21)
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