Sonic Solutions, Inc.

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Sonic Solutions, Inc.

101 Rowland Way
Novato, California 94945
U.S.A.
Telephone: (415) 893-8000
Fax: (415) 893-8008
Web site: http://www.sonic.com

Public Company
Incorporated: 1986
Employees: 637
Sales: $148.68 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: SNIC
NAIC: 511210 Software Publishers

Sonic Solutions, Inc., is the world's leading maker of software for creating CDs and DVDs. The company's professional line includes Scenarist, which is used to master the bulk of DVDs released worldwide; and AuthorScript, a CD and DVD-burning program that is licensed to firms including Microsoft, America Online, and Yahoo. Sonic Solutions' consumer software includes such popular titles as Easy Media Creator, MyDVD, PhotoSuite, and RecordNow, which are sold under the Roxio brand name.

EARLY YEARS

Sonic Solutions was founded in San Francisco in 1986 by Robert Doris, James "Andy" Moorer, and Mary Sauer to use digital technology to remove hiss, clicks, and other imperfections from analog recordings. The three had worked for Star Wars director George Lucas's computer audio firm Droid Works, with the Harvard-educated Doris serving as its president. He would also head the new firm.

In mid-1987 the company's NoNoise system was unveiled, and it quickly proved a sensation in professional audio circles. The software program, which ran on a modified Apple Macintosh computer, analyzed a digital copy of an analog recording in two ways. The first compared an example of steady noise such as tape hiss or amplifier hum with the rest of a recording and then removed the audible frequencies of the offending sound throughout. The second removed clicks and other unwanted transient noises and then replaced each with sound synthesized from the digital information immediately before and afterward.

Sonic Solutions charged $103 per minute for cleaning up stereo sound, or about $6,000 for an hour-long compact disc. Processing an hour of music took as much as ten hours' time depending on the complexity of the work being done. One of the young firm's first assignments was a live recording by rock band The Doors in which some 12 minutes of lead singer Jim Morrison's vocals had been marred by static noise bursts due to a faulty microphone cable. Sonic Solutions was able to remove the noise and make the previously unusable material releasable. Other early restoration jobs included a 1930s recording of Ravel's "Bolero" conducted by the composer, and vintage albums by Louis Armstrong, Liberace, Barbra Streisand, and the Grateful Dead. Most reviewers praised the system, which was a major step up from older, less precise methods that used filters to eliminate certain frequencies or a razor blade to slice out a millisecond of sound where an unwanted click occurred. Application of NoNoise required a skilled technician, however, and over-use could remove some of the original sound or make vintage recordings lose their natural warmth.

In 1988 the company introduced the Desktop Audio system, which enabled users to perform digital mixing, equalization, and mastering of a compact disc (CD). The Macintosh-based system was priced at $44,100, with NoNoise software costing an additional $60,000. Two years later it was expanded with the addition of the CD Maker compact disc recording device, which had been developed by Sony Corp. and Start Lab. It could create a unique "burned" CD that would play on any standard deck or could be used as a master disc for replication. Users included radio stations and theater companies that needed to play back unique bits of digital audio repeatedly. In 1992 the less expensive SonicStation audio processing workstation was introduced at a more affordable price of $4,995.

For the fiscal year ended in March 1993 Sonic Solutions had revenues of $9.43 million and a profit of $1.21 million. In the fall of that year the company announced it would begin integrating Sony's higher-definition Super Bit Mapping CD audio technology into its products. The firm's equipment was being used by most major record companies, studios such as London's famed Abbey Road, and organizations such as the British Broadcasting Corporation.

1994: INITIAL PUBLIC OFFERING, INTRODUCTION OF MEDIANET

In early 1994 Sonic Solutions made an initial public stock offering on NASDAQ, selling 1.9 million shares at $9.50 each, of which about a third came from existing shareholders. The firm also introduced a new product called MediaNet, which was a high-speed local area computer network that could store and transmit digital files via fiber-optic cables. It was targeted at recording studios and companies that worked with computer graphics or digital video files, and could serve up to 64 users with overall bandwidth of one gigabyte of data per second from both Macintosh and UNIX-based computers. MediaNet was also compatible with the products of other firms including Cisco Systems, Silicon Graphics, and Sun Microsystems.

Sonic Solutions' software was being incorporated into such products as Digidesign's popular Pro Tools recording studio system and editing gear from Avid Technology. The company was continually upgrading its offerings, and by the fall had added more enhancements to the NoNoise and MediaNet systems, including a new 500-disc CD jukebox and database system option for the latter, as well as several entry-level models that retailed for as low as $2,995. The firm was also beginning to get its feet wet in the realm of digital video, and in 1994 introduced the SonicCinema MPEG Video-CD PreMastering System, which provided the ability to record video on compact discs in a format that had recently been announced by Sony, Philips, JVC, and others.

During 1994 the company introduced a new sound processing card, the Ultra-Sonic Processor (USP), but there were serious problems with both its design and manufacturing. Other projects were put on hold as Sonic Solutions tried to appease a host of dissatisfied customers, causing earnings to drop. The firm subsequently improved its internal procedures for getting products from design to manufacturing and added more oversight.

In 1995 the company introduced the Multitrack USP Sonic System, an audio editing and mixing device that could handle up to 64 channels of input and output. The firm's audio workstations continued to be popular, with more than half of the 300 songs nominated for Grammy Awards in 1995 mastered on Sonic Solutions equipment. Its products were also finding uses in other areas, with the tape of a telephone call made to 911 operators by O. J. Simpson's wife enhanced for prosecutors using the NoNoise program.

COMPANY PERSPECTIVES

Sonic Solutions' mission is to power digital media creation, management and consumption with a broad range of interoperable, platform independent, PC and CE software tools and applications for creative professionals, consumers and OEMs. Unlike other companies in the digital media space, Sonic's products and services are used across the digital media value chain—from Hollywood to the home.

DVD CREATOR, HIGH-DENSITY AUDIO DEBUT IN 1996

The firm was working hard to develop products for digital video applications, and in mid-1996 introduced the industry's first integrated digital video disc (DVD) pre-mastering system, DVD Creator. Standards had recently been set for the DVD format, with the first players due to ship in late 1996, and the company helped form an alliance of content providers and production firms to streamline the process of bringing DVD titles to consumers.

Sonic Solutions also upgraded its audio line in 1996 with the SonicStudio High-Density workstation, which could handle the new 96kHz sampling rate and 24-bit data samples. This data-intensive audio format was expected to form the basis of the next generation of digital audio on higher-capacity DVD discs. A group of interested companies were engaged to test and promote the new equipment, and Sonic Solutions partnered with Sony to use that firm's Direct Stream Digital audio format in its system.

Despite such initiatives, audio workstation sales were falling off significantly, and revenues for the fiscal year ending in March dropped from $20.2 million a year earlier to $13.9 million. With the firm pouring resources into developing new DVD mastering systems, it also recorded a loss of $3.6 million. One positive note during the year was an Emmy Award won in the fall by the NoNoise program for its contribution to television sound quality.

In January 1997 Sonic Solutions received $5.1 million in new financing from Hambrecht & Quist, but losses grew to $5.2 million for the March-ended fiscal year as its engineers continued to focus on digital video products, for which there were few sales as yet. In September the firm introduced the industry's first integrated DVD-authoring system, the Sonic DVD Creator Workstation, priced at $99,999, while the Macintosh-based authoring software, DVD Producer, was available separately for $24,999.

At the start of 1998 Sonic Solutions secured $7 million in new equity-based funding, and during the year the firm announced new products including Sonic DVD Vobulator (for creators of multimedia DVD-ROM discs, priced at $7,999), and Sonic DesktopDVD for business users ($39,999). Shipment of some products was delayed while the company addressed problems that had begun cropping up with DVD Creator, however.

INTRODUCTION OF CONSUMER-FRIENDLY DVDIT! SOFTWARE: 1999

By whis time, computers were increasingly being produced with built-in DVD drives, while home DVD players were dropping in price from initial levels of more than $1,000. In August 1999 Sonic Solutions introduced the $499 DVDit! software program which allowed home users to create DVDs on computers with DVD-burning drives. It was soon bundled with products from such firms as Avid, Media 100, and NEC, and variations including a professional edition were subsequently added. Also during 1999, the firm secured an additional $12 million in equity-based funding.

As sales of DVDit! started taking off, a web site was launched to sell the product while Broadfield Distributing began wholesaling it via a network of 3,000-plus retailers. By February 2000 more than 10,000 copies had been sold.

New products added during 2000 included eDVD, which enabled DVD Creator users to add links to World Wide Web content; Streaming DVD, which allowed corporations and educators to stream video over the Internet; DVD Fusion, for corporate video makers and artists; and MyDVD, a more consumer-friendly, lower-cost version of DVDit! In 2001 Royal Philips Electronics began bundling the latter with its new DVD recorder and Dell, NEC, and Hewlett-Packard loaded it onto their computers.

In late 2001 and early 2002 Microsoft, Adobe Systems, and Sony licensed the firm's new AuthorScript DVD-authoring software for their products, and in November of the latter year Sonic Solutions bought Veritas Software Corporation's desktop and mobile division for $9.2 million. The company soon began selling Veritas's RecordNow CD and DVD-ROM burning software and data backup programs.

KEY DATES

1986:: Sonic Solutions is founded in San Francisco, California.
1987:: NoNoise system debuts.
1994:: Company holds initial public stock offering; MediaNet is introduced.
1996:: First DVD-authoring product is developed.
1999:: Consumer-grade disc-burning program DVDit! debuts.
2002:: Company purchases Veritas Software desktop and mobile division.
2004:: Acquisitions of InterActual, Roxio boost size of firm.
2006:: New high-definition DVD-authoring system is introduced.

In early 2003 Sonic Solutions reached an agreement with America Online (AOL), which would use AuthorScript in its MusicNet download service. For 2003, ended in March, revenues leapt from the $19.1 million reported in 2002 to $32.7 million, with net income in the black for the first time in several years. By August, total sales of the MyDVD and DVDit! programs had topped six million. The firm had an estimated 85 percent share of the market for such products, while its professional DVD-authoring software had been used to prepare some 80 percent of the commercial DVD titles released worldwide.

During 2003 the company also introduced Sonic PrimeTime for Windows XP Media Center, began licensing AuthorScript for set-top DVD recorders, and opened a new development facility in Shanghai, China. The firm completed several additional stock offerings during the year as its share price continued to rise.

In February 2004 Sonic Solutions announced plans to sell up to $80 million worth of stock and warrants in additional periodic offerings. That same month saw the acquisition of InterActual, which made Internet-linking DVD software for computers and home entertainment equipment. More than half of the 160-plus million computers expected to be sold in 2004 were likely to have a CD or DVD burner, or both, and Sonic Solutions was working to boost its original equipment manufacturer (OEM) agreements with computer makers such as Dell. Sales jumped again during the latest fiscal year to $56.9 million, with a net profit of $11.1 million recorded.

ACQUISITION OF ROXIO

In December 2004 Sonic Solutions purchased the consumer software division of rival Roxio, Inc., which would henceforth become known as Napster as it focused on a music download service. Roxio/Napster would receive $70 million in cash and $10 million worth of stock. The software unit, which had annual sales of approximately $80 million, produced popular products including Toast, Easy Media Creator, VideoWave, Photo-Suite, and Easy DVD Copy. Some were similar to Sonic Solutions offerings, but Roxio had a greater presence in retail stores, with Sonic's sales generated more from online vendors. The firm's Desktop Products unit was soon merged into Roxio and renamed the Roxio division, with other units also merged and/or restructured. The company's other divisions consisted of a professional products group and an advanced technology group.

December also saw an office opened in Burbank, California, to serve the needs of the successful InterActual subsidiary's customers. Sonic Solutions had product development offices in Toronto, Shanghai, and Germany, in addition to several locations in California, and numerous sales offices internationally.

In the spring of 2005 the company released new software packages that combined popular Sonic Solutions and Roxio programs such as MyDVD, Record-Now, Easy Media Creator, and Easy DVD Copy. They would be marketed under the Roxio name, which was more familiar at retail. More than 10,000 stores carried the line.

In early 2005 the company introduced new software that could burn dual-layer DVDs, which had nearly double the data storage capacity of standard ones, and announced plans for a product that would let users burn DVDs legally downloaded from the Internet. In May the AuthorScript disc-burning program was licensed by Yahoo for its music download service, with other deals having been made with Kodak, Microsoft, TiVo, and Iomega. Sonic Solutions was also busy developing upgraded versions of its products or creating new ones, and the fall saw new versions of the Roxio Easy Media Creator suite, Toast, and iPod-friendly video program Popcorn released to strong sales.

In September 2005 the firm appointed Dave Habiger, who had begun serving as president several months earlier, to the position of CEO. Cofounder Bob Doris would take the title of non-executive chairman of the board.

In the spring of 2006 the new CineVision encoding workstation and Scenarist 4 were released. The latter was an authoring program for high-definition DVDs, which were expected to come to market during the year. An alliance of interested parties including Sony, Samsung, and Pioneer was formed to advise the firm on further developments to the software, which could handle both the Blu-Ray and HD-DVD formats that had been proposed. Avid Technology also signed an agreement to use Sonic HD software in its Avid DVD product, while a consumer-grade Roxio HD authoring product began shipping with Blu-Ray recorders from Pioneer, Sony, and Fujitsu. In other business areas, the firm was working with digital photography company Lucidiom to supply it with photo-DVD burning software for photo kiosks, and Sonic Solutions' advanced technology group was developing products for the medical imaging and automotive entertainment sectors.

In June 2006 the company launched Roxio Labs Web, which allowed users to try new software applications from Sonic Solutions or outside vendors and offer suggestions for improvements. For the fiscal year ended in March, the company reported record sales of $148.7 million and net income of $19.3 million.

In 20 years Sonic Solutions, Inc., had established itself as the leading producer of software for digital audio and video creators. With the technology constantly evolving, and new formats such as Blu-Ray and HD-DVD periodically entering the marketplace, continued growth appeared certain.

PRINCIPAL SUBSIDIARIES

InterActual Technologies, Inc.; Sonic IP, Inc.; Sonic Solutions International, Inc.; MGI Software Corp. (Canada); Live Picture S.A.R.L. (France); OLI V R Corporation Ltd. (Israel); Sonic Solutions Japan, KK; Sonic Software (Shanghai) Co., Ltd. (China); Roxio UK, Ltd.

PRINCIPAL COMPETITORS

Adobe Systems, Inc.; Apple Computer, Inc.; ArcSoft, Inc.; Avid Technology, Inc.; BHA Corp.; CyberLink Corp.; InterVideo Inc.; MedioStream, Inc.; Nero AG; NewTech Infosystems, Inc.