Attached files
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| 8-K/A - SONIC SOLUTIONS/CA/ | v206146_8ka.htm |
Exhibit
99.7
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The
unaudited pro forma condensed combined balance sheet at June 30, 2010 and
the unaudited pro forma condensed combined statements of operations for the
three months ended June 30, 2010, and for the year ended March 31,
2010 presented herein are based on the historical financial statements of Sonic
and DivX after giving effect to Sonic’s acquisition of DivX and the assumptions
and adjustments described in the accompanying notes to these unaudited pro forma
condensed combined financial statements. Except for certain reclassifications,
which are also described in the accompanying notes to these unaudited pro forma
condensed combined financial statements, there were no adjustments to conform
DivX’s accounting policies to Sonic’s accounting policies because such
adjustments were considered immaterial for the respective periods
presented.
The
unaudited condensed combined pro forma balance sheet data assume that the merger
took place on June 30, 2010 and combine Sonic’s consolidated balance sheet
as of June 30, 2010 with DivX’s consolidated balance sheet as of
June 30, 2010.
The
unaudited pro forma condensed combined statement of operations data for the
three months ended June 30, 2010 combine the historical unaudited consolidated
statement of operations of Sonic for the three months ended June 30, 2010
with the unaudited consolidated statement of operations of DivX for the three
months ended June 30, 2010. The unaudited pro forma condensed combined
statement of operations data for the three months ended June 30, 2010 give
effect to the merger as if it occurred on April 1, 2009.
The
unaudited pro forma condensed combined statement of operations data for the year
ended March 31, 2010 combine the historical consolidated statement of operations
of Sonic for the year ended March 31, 2010 with the unaudited consolidated
statement of operations of DivX for the twelve months ended March 31, 2010.
The unaudited pro forma condensed combined statement of operations data for the
fiscal year ended March 31, 2010 give effect to the merger as if it
occurred on April 1, 2009. DivX’s historical results of operations were
derived by taking the historical results of operations of DivX for the year
ended December 31, 2009, subtracting DivX’s results of operations for the
three months ended March 31, 2009 and adding DivX’s results of operations
for the three months ended March 31, 2010.
The
unaudited pro forma condensed combined financial statements do not give effect
to the potential impact of current financial conditions, regulatory matters or
any anticipated synergies, operating efficiencies or cost savings that may be
associated with the merger. The unaudited pro forma condensed combined financial
data also do not include any integration costs, cost overlap or estimated future
transaction costs, except for fixed contractual transaction costs that the
companies expect to incur as a result of the merger. In addition, as explained
in more detail in the notes to the unaudited pro forma condensed combined
financial statements, the acquisition date fair values of the identifiable
assets acquired and liabilities assumed reflected in the unaudited pro forma
condensed combined financial statements are subject to adjustment to reflect,
among other things, the actual closing date, and may vary significantly from the
actual amounts that will be recorded upon completion of the acquisition method
accounting.
The
detailed valuation analysed to determine the fair values of DivX’s assets to be
acquired and liabilities to be assumed was performed as of October 7, 2010. The
unaudited pro forma condensed combined financial statements included
herein are presented as of and for the periods ended March 31, 2010 and June 30,
2010, according they include an estimated allocation of the purchase
price. The unaudited pro forma condensed combined financial statements and
related accompanying notes should be read in conjunction with the historical
consolidated financial statements for Sonic and DivX included in their Annual
Reports on Form 10-K and Quarterly Reports on Form 10-Q, which are filed with
the SEC and incorporated by reference into the Current Report on Form 8-K to
which these Unaudited Pro Forma Condensed Combined Financial Statements are an
exhibit.
SONIC
SOLUTIONS
UNAUDITED
PRO FORMA CONDENSED COMBINED BALANCE SHEET
|
As of June 30, 2010
|
||||||||||||||||||||
|
Historical
|
Pro Forma
Adjustments
|
Pro Forma
|
||||||||||||||||||
|
Sonic
|
DivX
|
(Note 5)
|
Combined
|
|||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current
assets:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 54,861 | $ | 29,355 | $ | (26,257 | ) | (A | ) | $ | 57,959 | |||||||||
|
Short-term
investments
|
— | 113,892 | (100,078 | ) | (A | ) | 13,814 | |||||||||||||
|
Accounts
receivable, net of allowances
|
11,900 | 3,199 | 44,628 | (B | ) | 59,727 | ||||||||||||||
|
Inventory
|
2,225 | — | — | 2,225 | ||||||||||||||||
|
Prepaid
expenses and other current assets
|
3,271 | 9,626 | 1,504 | (C,I | ) | 14,401 | ||||||||||||||
|
Deferred
tax assets
|
119 | 1,025 | (1,025 | ) | (O | ) | 119 | |||||||||||||
|
Total
current assets
|
72,376 | 157,097 | (81,228 | ) | 148,245 | |||||||||||||||
|
Fixed
assets, net
|
1,590 | 1,705 | (220 | ) | (D | ) | 3,075 | |||||||||||||
|
Long-term
investments
|
— | 3,019 | (263 | ) | (E | ) | 2,756 | |||||||||||||
|
Long-term
receivables
|
— | — | 10,210 | (B | ) | 10,210 | ||||||||||||||
|
Purchased
and internally developed software costs, net
|
159 | — | — | 159 | ||||||||||||||||
|
Goodwill
|
4,628 | 17,153 | 59,032 | (F | ) | 80,813 | ||||||||||||||
|
Acquired
intangibles, net
|
16,671 | 11,394 | 77,906 | (G | ) | 105,971 | ||||||||||||||
|
Deferred
tax assets, net
|
124 | 13,014 | (13,014 | ) | (O | ) | 124 | |||||||||||||
|
Other
assets
|
1,308 | 6,457 | 2,193 | (C,H | ) | 9,958 | ||||||||||||||
|
Total
assets
|
$ | 96,856 | $ | 209,839 | $ | 54,616 | $ | 361,311 | ||||||||||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||||||
|
Accounts
payable
|
$ | 4,177 | $ | 1,324 | $ | — | $ | 5,501 | ||||||||||||
|
Accrued
expenses and other current liabilities
|
20,238 | 10,297 | 31,398 |
(I,J,K,O,P
|
) | 61,933 | ||||||||||||||
|
Deferred
revenue
|
7,609 | 4,600 | (3,742 | ) | (L | ) | 8,467 | |||||||||||||
|
Capital
lease
|
120 | — | — | 120 | ||||||||||||||||
|
Total
current liabilities
|
32,144 | 16,221 | 27,656 | 76,021 | ||||||||||||||||
|
Other
long-term liabilities, net of current portion
|
1,887 | 5,114 | 7,330 | (I,K,M,O | ) | 14,331 | ||||||||||||||
|
Deferred
revenue, net of current portion
|
169 | 911 | (757 | ) | (L | ) | 323 | |||||||||||||
|
Capital
lease, net of current portion
|
6 | — | — | 6 | ||||||||||||||||
|
Total
liabilities
|
34,206 | 22,246 | 34,229 | 90,681 | ||||||||||||||||
|
Total
shareholders’ equity
|
62,650 | 187,593 | 20,387 | (N,P | ) | 270,630 | ||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ | 96,856 | $ | 209,839 | $ | 54,616 | $ | 361,311 | ||||||||||||
See
Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
SONIC
SOLUTIONS
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
|
Three Months Ended June 30, 2010
|
||||||||||||||||||||
|
Historical
|
Pro forma
Adjustments
|
Pro Forma
|
||||||||||||||||||
|
Sonic
|
DivX
|
(Note 5)
|
Combined
|
|||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||
|
Net
revenue
|
$ | 25,400 | $ | 19,565 | $ | (69 | ) | (Q | ) | $ | 44,896 | |||||||||
|
Cost
of revenue
|
7,673 | 2,398 | 3,526 | (G,Q | ) | 13,597 | ||||||||||||||
|
Gross
profit
|
17,727 | 17,167 | (3,595 | ) | 31,299 | |||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Marketing
and sales
|
7,102 | 7,629 | (426 | ) | (R | ) | 14,305 | |||||||||||||
|
Research
and development
|
5,933 | 6,868 | (341 | ) | (R | ) | 12,460 | |||||||||||||
|
General
and administrative
|
4,680 | 5,311 | (1,227 | ) | (G,R | ) | 8,764 | |||||||||||||
|
Acquisition
costs
|
1,618 | 1,182 | (2,800 | ) | (S | ) | — | |||||||||||||
|
Total
operating expenses
|
19,333 | 20,990 | (4,794 | ) | 35,529 | |||||||||||||||
|
Operating
income (loss)
|
(1,606 | ) | (3,823 | ) | 1,199 | (4,230 | ) | |||||||||||||
|
Interest
income (expense), net
|
(26 | ) | 385 | — | 359 | |||||||||||||||
|
Other
income (expense)
|
(212 | ) | 71 | — | (141 | ) | ||||||||||||||
|
Income
(loss) before income taxes
|
(1,844 | ) | (3,367 | ) | 1,199 | (4,012 | ) | |||||||||||||
|
Provision
(benefit) for income taxes
|
(776 | ) | (546 | ) | 471 | (T | ) | (851 | ) | |||||||||||
|
Net
income (loss)
|
$ | (1,068 | ) | $ | (2,821 | ) | $ | 728 | $ | (3,161 | ) | |||||||||
|
Net
income (loss) per share:
|
||||||||||||||||||||
|
Basic
|
$ | (0.03 | ) | $ | (0.09 | ) | $ | (0.07 | ) | |||||||||||
|
Diluted
|
$ | (0.03 | ) | $ | (0.09 | ) | $ | (0.07 | ) | |||||||||||
|
Shares
used in computing net income (loss) per share:
|
||||||||||||||||||||
|
Basic
|
30,686 | 33,010 | 47,654 | |||||||||||||||||
|
Diluted
|
30,686 | 33,010 | 47,654 | |||||||||||||||||
See
Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
SONIC
SOLUTIONS
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
|
Twelve Months Ended March 31, 2010
|
||||||||||||||||||||
|
Historical
|
Pro forma
Adjustments
|
Pro Forma
|
||||||||||||||||||
|
Sonic
|
DivX
|
(Note 5)
|
Combined
|
|||||||||||||||||
|
(in thousands, except per share amounts)
|
||||||||||||||||||||
|
Net
revenue
|
$ | 104,345 | $ | 75,184 | $ | (361 | ) | (Q | ) | $ | 179,168 | |||||||||
|
Cost
of revenue
|
31,856 | 9,465 | 11,356 | (G,Q | ) | 52,677 | ||||||||||||||
|
Gross
profit
|
72,489 | 65,719 | (11,717 | ) | 126,491 | |||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Marketing
and sales
|
29,975 | 26,962 | (905 | ) | (R | ) | 56,032 | |||||||||||||
|
Research
and development
|
24,696 | 22,597 | (736 | ) | (R | ) | 46,557 | |||||||||||||
|
General
and administrative
|
17,669 | 22,364 | (3,669 | ) | (G,R | ) | 36,364 | |||||||||||||
|
Litigation
settlement gain
|
— | (9,500 | ) | — | (9,500 | ) | ||||||||||||||
|
Restructuring
|
513 | — | — | 513 | ||||||||||||||||
|
Total
operating expenses
|
72,853 | 62,423 | (5,310 | ) | 129,966 | |||||||||||||||
|
Operating
income (loss)
|
(364 | ) | 3,296 | (6,407 | ) | (3,475 | ) | |||||||||||||
|
Interest
income (expense), net
|
(71 | ) | 1,453 | — | 1,382 | |||||||||||||||
|
Other
income (expense)
|
(319 | ) | 578 | — | 259 | |||||||||||||||
|
Income
(loss) before income taxes
|
(754 | ) | 5,327 | (6,407 | ) | (1,834 | ) | |||||||||||||
|
Provision
(benefit) for income taxes
|
459 | 2,508 | (2,515 | ) | (T | ) | 452 | |||||||||||||
|
Net
income (loss)
|
$ | (1,213 | ) | $ | 2,819 | $ | (3,892 | ) | $ | (2,286 | ) | |||||||||
|
Net
income (loss) per share:
|
||||||||||||||||||||
|
Basic
|
$ | (0.04 | ) | $ | 0.09 | $ | (0.05 | ) | ||||||||||||
|
Diluted
|
$ | (0.04 | ) | $ | 0.09 | $ | (0.05 | ) | ||||||||||||
|
Shares
used in computing net income (loss) per share:
|
||||||||||||||||||||
|
Basic
|
27,792 | 32,717 | 44,608 | |||||||||||||||||
|
Diluted
|
27,792 | 33,065 | 44,608 | |||||||||||||||||
See
Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
SONIC
SOLUTIONS
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. Basis
of Unaudited Pro Forma Presentation
The
unaudited pro forma condensed combined balance sheet as of June 30, 2010
and the unaudited pro forma condensed combined statement of operations for the
three months ended June 30, 2010 and for the fiscal year ended
March 31, 2010 are based on the historical consolidated financial
statements of Sonic and DivX.
Sonic
accounts for business combinations in accordance with Financial Accounting
Standards Board Accounting Standards Codification 805, “Business Combinations”
(“ASC 805”). Sonic allocates the purchase price of an acquired company to the
net assets acquired and liabilities assumed based upon their estimated fair
values. Sonic has made significant assumptions and estimates in determining the
unaudited allocation of the purchase price in the unaudited pro forma condensed
combined financial statements. These estimates and assumptions are subject to
change during the purchase price allocation period as Sonic finalizes the
valuations of the net assets and liabilities. These changes could result in
material variances between Sonic’s future financial results and the amounts
presented in these unaudited pro forma condensed combined financial
statements.
The
unaudited pro forma condensed combined financial statements are not intended to
represent or be indicative of Sonic’s consolidated results of operations or
financial position that would have been reported had the merger been completed
as of the dates presented. Additionally, they should not be taken as a
representation of Sonic’s future consolidated results of operations or financial
position. The unaudited pro forma condensed combined financial statements do not
reflect any operating efficiencies and associated cost savings, including
restructuring costs, that may be achieved with respect to the combined
companies.
The
unaudited pro forma condensed combined financial statements should be read in
conjunction with Sonic’s and DivX’s historical consolidated financial statements
and accompanying notes included in each company’s respective annual reports on
Form 10-K and quarterly reports on Form 10-Q.
Accounting
Periods Presented
DivX’s
historical year ended on December 31 and, for purposes of these unaudited
pro forma condensed combined financial statements, its historical results have
been aligned to more closely conform to Sonic’s March 31 year
end.
The
unaudited pro forma condensed combined balance sheet as of June 30, 2010 is
presented as if the merger between Sonic and DivX had occurred on June 30,
2010, and combines the historical balance sheets of Sonic and DivX as of
June 30, 2010.
The
unaudited pro forma condensed combined statement of operations for the three
months ended June 30, 2010 is presented as if the merger between Sonic and
DivX had occurred on April 1, 2009 and combines the historical unaudited
consolidated statement of operations of Sonic for the three months ended
June 30, 2010 with the unaudited consolidated statement of operations of
DivX for the three months ended June 30, 2010.
The
unaudited pro forma condensed combined statement of operations for the fiscal
year ended March 31, 2010 is presented as if the merger between Sonic and
DivX had occurred on April 1, 2009, and combines Sonic’s historical
statement of operations for the fiscal year ended March 31, 2010 with
DivX’s historical unaudited statement of operations. DivX’s historical results
of operations were derived by taking the historical results of operations of
DivX for the year ended December 31, 2009, subtracting DivX’s results of
operations for the three months ended March 31, 2009 and adding DivX’s
results of operations for the three months ended March 31,
2010.
SONIC
SOLUTIONS
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL
STATEMENTS—(Continued)
Fair
Value Estimate of Stock Awards Assumed
As of
October 7, 2010, DivX had approximately 2.9 million in-the-money stock
awards outstanding. In accordance with the merger agreement, the conversion
ratio of the number of shares to be issued for each stock award assumed was
based upon a conversion ratio of 0.8546, which was calculated as the Exchange
Ratio of 0.514 plus the quotient obtained by dividing the per share merger cash
consideration of $3.75, by $11.01, the October 6, 2010 closing price per share
of Sonic common stock, as reported on the Nasdaq Global Market.
The share
exercise price of each in-the-money DivX stock option was determined by
multiplying the exercise price per share of DivX common stock of each such
option by the conversion ratio of 0.8546, rounded up to the nearest whole
cent.
The fair
values of stock awards assumed were determined using a Black-Scholes-Merton
valuation model with the following assumptions: market stock price of $11.48,
the October 7, 2010 closing price per share of Sonic common stock, weighted
average expected life of between 1.5 and 5.0 years, weighted average
risk-free interest rate of between 0.54% and 1.1%, expected volatility of 86.69%
and no dividend yield. The fair values of assumed unvested DivX stock awards
will be recorded as operating expenses on a straight-line basis over the
remaining service periods, while the fair values of assumed vested options are
included in the total purchase price.
2.
Exclusion of Integration and Merger Related Costs from Unaudited Pro Forma
Condensed Combined Statements of Operations
In
accordance with ASC Topic 805-10-25, integration and merger costs are required
to be expensed as incurred. As of June 30, 2010 both Sonic and DivX expect to
incur substantial additional integration and merger related costs. These
expenses are expected to include professional fees for financial and legal
advisors of both Sonic and DivX. Sonic’s costs are estimated to be approximately
$3.4 million, a majority of which is expected to be expensed as of the day the
acquisition closed or shortly thereafter. DivX’s costs are estimated at $5.3
million, all of which are expected to be incurred prior to the acquisition with
the majority expected to be expensed as of the day the acquisition closes or
shortly thereafter. Additional costs, including those not currently
contemplated, may be incurred by both Sonic and DivX.
These
merger and integration costs relate directly to the transaction; however,
although they are material, they are nonrecurring, and are therefore are not
included in the unaudited pro forma condensed combined statement of operations
presented herein. As discussed in Note 5(P), the liabilities relating to
these expenses are included in the pro forma condensed combined balance sheet as
of June 30, 2010.
3.
Purchase Price
The
purchase price of DivX, as presented below, is subject to change, as Sonic
finalizes the DivX purchase accounting.
As more
fully described in the terms of the merger agreement, each share of DivX common
stock issued and outstanding immediately prior to the effective date of the
First Merger was converted into the right to receive 0.514 shares of Sonic
Solutions common stock and $3.75 in cash.
SONIC
SOLUTIONS
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL
STATEMENTS—(Continued)
The
following table presents the total purchase price for accounting purposes
based on Sonic’s common stock price of $11.48 at October 7, 2010 and 33,689,190
outstanding DivX shares at October 7, 2010 (in thousands, except share and per
share amounts):
|
Cash
consideration to be paid to 33.7 million shares of outstanding common
stock of DivX at $3.75 per share
|
$ | 126,334 | ||
|
Equivalent
value of Sonic common stock to be exchanged for the 33.7 million
shares of outstanding common stock of DivX at an exchange ratio of
0.514 per share
|
198,791 | |||
|
Fair
value of vested DivX stock awards assumed
|
5,120 | |||
|
Fair
value of shares issued for the conversion of stock options for
non-continuing employee
|
5,294 | |||
|
Fair
value of DivX warrants assumed
|
514 | |||
|
Fair
value of contingent milestone consideration
|
1,581 | |||
|
Payment
of cash portion due upon the conversion of stock options for
non-continuing employees
|
3,454 | |||
|
Payment
of payroll taxes related to the release of restricted stock units for
non-continuing employees
|
1,021 | |||
|
Payment
for the extension of director and officer’s insurance
|
745 | |||
|
Payment
of change-in-control and severance benefits based on DivX severance
plan
|
13,215 | |||
|
Total
purchase price
|
$ | 356,069 |
4. Estimated
Purchase Price Allocation
The
estimated pro forma condensed combined financial statements presented, including
the allocation of the purchase price, is based on estimates of the fair values
of assets acquired and liabilities assumed and is based on the net book value of
DivX’s tangible assets and liabilities as of October 7, 2010. The estimates are
based on available information, certain assumptions, and valuation estimates
which may change upon finalization of the fair values of assets acquired and
liabilities assumed.
The
following table presents the purchase price allocation as of October 7, 2010 (in
thousands):
|
Cash
and cash equivalents
|
$ | 29,355 | ||
|
Investments
|
113,892 | |||
|
Accounts
receivable
|
58,037 | |||
|
Prepaid
and other current assets
|
11,130 | |||
|
Fixed
assets
|
1,485 | |||
|
Acquired
intangible assets
|
89,300 | |||
|
Goodwill
|
76,185 | |||
|
Other
assets
|
11,406 | |||
|
Accounts
payable and other accrued liabilities
|
(21,240 | ) | ||
|
Deferred
revenue
|
(1,012 | ) | ||
|
Other
long-term liabilities
|
(12,469 | ) | ||
|
Total
estimated purchase price allocation
|
$ | 356,069 |
Intangible
Assets
In
performing the purchase price allocation, the fair value of certain significant
intangibles, developed technology, customer relationships and trademarks, was
calculated primarily using an income approach. The rates utilized to discount
net cash flows to their present values were based on a weighted average cost of
capital of 17-19%. The discount rates were determined after consideration of the
overall enterprise rate of return, the relative risk, and relative importance of
the asset to the generation of the cash flows.
SONIC
SOLUTIONS
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL
STATEMENTS—(Continued)
The
following table sets forth the components of intangible assets associated with
the DivX acquisition (in thousands):
|
Fair Value
|
Useful Life
|
|||||
|
Developed
technology
|
$ | 57,600 |
8.25-9.25 years
|
|||
|
Customer
relationships
|
17,000 |
5.25-10.25 years
|
||||
|
Trademarks
and other
|
14,700 |
7.25
years
|
||||
|
Total
intangible assets
|
$ | 89,300 | ||||
Developed
technology is comprised of products that have reached technological feasibility
and are a part of DivX’s product lines. Proprietary knowledge can be leveraged
to continue to enhance and add new features. Customer relationships represent
the underlying relationships and agreements with DivX’s customers. Trademarks
represent the brand and name recognition associated with the marketing of DivX’s
products and services.
Accounts
Receivable
The
purchase price allocation includes estimated accounts receivable of $58.0
million. Of this amount, $54.8 million is attributable to an adjustment to
record the fair value of assumed contractual payments due to DivX for which no
additional obligations exists in order to receive such payments. These
contractual payments are for fixed multi-year site licenses, guaranteed
minimum-royalty licenses, and unbilled per-unit royalties for unit shipped prior
to the acquisition.
DivX’s
revenue was primarily derived from royalties paid by licensees to acquire
intellectual property rights. Revenue in such transactions was recognized during
the period in which such customers reported the number of royalty-eligible units
that they have shipped (in accordance with ASC Topic 605 “Revenue
Recognition”).
As the first royalty report received from customers post-acquisition will be for
shipments made prior to the acquisition, these amounts will not meet the
requirements for Sonic to recognize the revenue. However, the cash payment
associated with these reports will be received by Sonic.
In
certain multi-year site licenses and guaranteed minimum-royalty licenses, DivX
entered into extended payment programs. Revenue related to such extended payment
programs were recognized at the earlier of when cash was received or when
periodic payments became due, (in accordance with ASC Topic 605). The payment
terms extend over the term of the multi-year license, the remaining contractual
payments that exist at the acquisition date will be received by Sonic. As Sonic
assumed no additional obligations under such contracts, these payments are
considered a fixed payment stream, rather than revenue. This fixed payment
stream is accounted for as an element of accounts receivable and included as
part of the purchase accounting.
The fair
value of the remaining contractual payment due under the applicable contracts is
estimated by calculating the discounted cash flows associated with such future
billings. Although, Sonic will not recognize revenue as it collects the
corresponding site license payments under these pre-acquisition contracts, Sonic
will recognize interest income on the discounted rate of the fair valued
receivable. The reduction in future revenues related directly to the
transaction; however, because they are material and nonrecurring, are not
reflected in the unaudited pro forma condensed combined statement of operations
presented herein.
SONIC
SOLUTIONS
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL
STATEMENTS—(Continued)
As of
October 7, 2010, license payments excluded from future years’ revenue, along
with the interest income to be recognized associated with the fixed contractual
payments, are set forth in the table below (in thousands):
|
Fiscal Year
Ending March 31,
|
Future License
Payments to
be Excluded
from Revenue
|
Interest
Income to be
Recognized
from Fixed
Contractual
Payments
|
||||||
|
2011
(remaining)
|
$ | 38,050 | $ | 936 | ||||
|
2012
|
18,207 | 1,197 | ||||||
|
2013
|
777 | 95 | ||||||
|
2014
|
20 | 4 | ||||||
|
2015
|
20 | 4 | ||||||
| $ | 57,074 | $ | 2,236 | |||||
Deferred
Revenue
The
estimated fair value of DivX deferred revenue assumed by Sonic as of October 7,
2010 totaled $1.0 million, and was determined using a cost build-up approach.
The cost build-up approach determines fair value by estimating the costs
relating to fulfilling the obligations plus an appropriate fulfillment
margin.
5. Pro
Forma Financial Statement Adjustments
The
following adjustments are included in the unaudited pro forma condensed combined
financial statements:
|
(A)
|
To
record the cash portion of the aggregate purchase price of $126.3 million
(See Note 3).
|
|
(B)
|
To
record $54.8 million fair value adjustment to accounts receivable,
attributable to fixed multi-year site licenses, guaranteed minimum-royalty
licenses, and unbilled per-unit royalties for units shipped prior to the
acquisition (See Note 4).
|
|
(C)
|
To
record the difference between the fair values and the historical carrying
amounts related to the contractual right to distribute content in the DivX
format. This included a reduction of $1.3 million in prepaid
expense and $2.8 million in other
assets.
|
|
(D)
|
To
record the difference between the fair values and the historical carrying
amounts of the fixed assets
acquired.
|
|
(E)
|
To
record the difference between the fair values and the historical carrying
amounts of auction rates securities acquired. Fair value was
based on quoted market prices for identical or similar assets or
liabilities in an inactive market.
|
|
(F)
|
To
eliminate DivX’s historical goodwill of $17.2 million and to record the
estimate of goodwill from Sonic’s acquisition of DivX of
$76.2 million.
|
SONIC
SOLUTIONS
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL
STATEMENTS—(Continued)
|
(G)
|
To
record the difference between the historical values and estimated fair
values of DivX’s intangible assets acquired and the associated pre-tax
amortization expenses. The calculations associated with this adjustment
are set forth in the table below (in
thousands):
|
|
DivX
Historical
Amounts,
Net
|
Estimated
Fair
Values
|
Increase
|
Three Month
Amortization
Based Upon
Estimated
Fair Values
|
Annual
Amortization
Based Upon
Estimated
Fair Values
|
||||||||||||||||
|
Developed
technology
|
$ | 5,555 | $ | 57,600 | $ | 52,045 | $ | 2,366 | $ | 7,559 | ||||||||||
|
Customer
relationships
|
517 | 17,000 | 16,483 | 669 | 2,221 | |||||||||||||||
|
In-process research and
development
|
4,345 | — | (4,345 | ) | — | — | ||||||||||||||
|
Trademarks and
other
|
977 | 14,700 | 13,723 | 610 | 1,973 | |||||||||||||||
|
Total
intangible assets
|
$ | 11,394 | $ | 89,300 | $ | 77,906 | $ | 3,645 | $ | 11,753 | ||||||||||
|
Total
DivX historical amortization of intangible assets
|
475 | 2,178 | ||||||||||||||||||
|
Total
increase in amortization of intangible assets
|
$ | 3,170 | $ | 9,575 | ||||||||||||||||
The $0.5
million and $2.2 million of DivX historical amortization of intangibles noted in
the above table are presented as an adjustment to general and administrative
operating expenses in the unaudited pro forma condensed combined statements of
operations for the three months ended June 30, 2010 and for fiscal year
ended March 31, 2010, respectively. The $3.7 million and $11.8
million of amortization related to the estimated fair values of intangibles
noted in the above table are presented as an adjustment to cost of revenue, to
conform to Sonic’s presentation, in the unaudited pro forma condensed combined
statements of operations for the three months ended June 30, 2010 and for
the fiscal year ended March 31, 2010, respectively.
|
(H)
|
To
record a decrease of $0.3 million between the fair value and the
historical carrying amounts of a privately held
investment. Fair value was based on unobservable inputs that
reflect the reporting entity’s own assumptions about the assumptions
market participants would use in pricing the asset developed based on the
best information available in the
circumstances.
|
|
|
(I)
|
To
record the fair value of assumed contractual obligations. This
included an increase of $2.8 million in current liabilities and $5.3
million in other long term liabilities to record the discounted cash
payments due under the various agreements. Corresponding assets
were established through an increase of $2.8 million in prepaid expense
and $5.3 million in other assets.
|
|
|
(J)
|
To
record purchase price consideration liability payments (in
thousands):
|
|
Payment
of cash portion due upon the conversion of stock options for
non-continuing employees
|
$ | 3,455 | ||
|
Payment
of payroll taxes related to the release of restricted stock unit for
non-continuing employees
|
1,021 | |||
|
Payment
for the extension of director and officer’s insurance
|
745 | |||
|
Payment
of change-in-control and severance benefits based on DivX severance
plan
|
13,215 | |||
|
Total
|
$ | 18,436 |
|
(K)
|
To
record an increase of $1.6 million in the fair value of the contingent
milestone consideration in connection with DivX’s acquisition of AnySource
Media in August 2009, as a result of a change-in-control provision. The
change-in-control provision also provided for $2.1 million in long-term
liabilities to become due and payable; thus these amounts were
reclassified to current
liabilities.
|
|
(L)
|
To
record the difference between the fair values and the historical carrying
amounts of DivX deferred revenues. The fair values represent amounts
equivalent to the estimated costs plus an appropriate profit margin to
fulfill the obligations assumed.
|
|
(M)
|
To
eliminate $0.5 million in deferred rent and record $1.2 million related to
the fair value of unfavorable market terms associated with a building
lease.
|
|
(N)
|
To
record the following adjustments to shareholders’ equity (in
thousands):
|
|
To
record the portion of the aggregate purchase price expected to be paid in
the form of Sonic common stock
|
|
$
|
204,085
|
|
|
To
record the estimated fair values of vested DivX stock awards assumed in
connection with the merger
|
|
5,120
|
|
|
|
To
record the DivX warrants assumed
|
514
|
|||
|
To
eliminate DivX’s historical shareholders’ equity
|
|
(187,593
|
)
|
|
|
Total
|
|
$
|
22,126
|
SONIC
SOLUTIONS
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL
STATEMENTS—(Continued)
|
(O)
|
The
following table summarizes the pro forma adjustments relating to deferred
taxes. The estimated tax rate applied represents the estimated weighted
average statutory tax rates of the jurisdictions in which the respective
deferred tax asset or liability is expected to be
settled.
|
|
Estimated
Fair Value
Adjustment
|
Deferred
Tax
Asset
Current
|
Deferred
Tax
Liability
Current
|
Deferred
Tax Asset
Non-Current
|
Deferred
Tax
Liability
Non-current
|
||||||||||||||||
|
Pro
forma adjustments related to:
|
||||||||||||||||||||
|
Fair
value adjustment to accounts receivable
|
$ | 44,628 | $ | — | $ | (17,391 | ) | — | — | |||||||||||
|
Fair
value adjustment to fixed assets
|
(220 | ) | — | — | 86 | — | ||||||||||||||
|
Fair
value adjustment long-term Investments
|
(263 | ) | — | — | 103 | — | ||||||||||||||
|
Fair
value adjustment to long-term receivable
|
10,210 | — | — | — | (3,987 | ) | ||||||||||||||
|
Fair
value adjustment to other assets
|
(290 | ) | — | — | 114 | — | ||||||||||||||
|
Decrease
in prepaid expense
|
(1,273 | ) | 500 | — | — | — | ||||||||||||||
|
Decrease
in other assets
|
(2,824 | ) | — | — | 1,109 | — | ||||||||||||||
|
Increase
in acquired intangibles
|
77,906 | — | — | — | (29,519 | ) | ||||||||||||||
|
Decrease
in current portion of deferred revenue
|
3,744 | — | (1,424 | ) | — | — | ||||||||||||||
|
Decrease
in long-term portion of deferred revenue
|
757 | — | — | — | (295 | ) | ||||||||||||||
|
Adjustment
to tax basis goodwill
|
(945 | ) | — | (371 | ) | — | — | |||||||||||||
|
Deductible
transaction costs for tax purposes
|
541 | 212 | — | — | — | |||||||||||||||
|
Deductible
compensation costs for tax purposes
|
2,014 | 790 | — | — | — | |||||||||||||||
|
Rate
differential for US versus foreign tax adjustments
|
— | — | (171 | ) | — | (1,082 | ) | |||||||||||||
|
Deferred
tax adjustments
|
1,502 | (19,357 | ) | 1,412 | (34,883 | ) | ||||||||||||||
|
DivX
deferred tax balances before acquisition
|
1,025 | — | 13,014 | (1,704 | ) | |||||||||||||||
|
Tax
rate adjustment from DivX ETR to ETR
|
— | (11 | ) | 904 | ||||||||||||||||
|
Deferred
tax balances before valuation allowance
|
2,527 | (19,368 | ) | 15,330 | (36,587 | ) | ||||||||||||||
|
Valuation
allowance adjustment
|
(2,527 | ) | 18,815 | (15,330 | ) | 31,375 | ||||||||||||||
|
Total
deferred tax adjustment
|
$ | — | $ | (553 | ) | $ | — | $ | (5,212 | ) | ||||||||||
|
Pro
Forma Deferred Tax Adjustment
|
$ | (1,025 | ) | $ | (553 | ) | $ | (13,014 | ) | $ | (3,508 | ) | ||||||||
The pro
forma adjustments reflect net deferred tax liabilities of approximately $50.4
million related to basis differences resulting from the acquisition of
DivX. As
a result, the adjustments reflect a release of a portion of Sonic’s valuation
allowance amounting to approximately $32.3 million. The release of the valuation
allowance relates directly to the transaction; however, because of the material
nonrecurring nature of this benefit, it is not reflected in the unaudited pro
forma condensed combined statement of operations presented herein.
|
|
(P)
|
As
discussed in Note 2, as of June 30, 2010 both Sonic and DivX expected
to incur substantial additional integration and merger related costs. The
following table summarizes the adjustments necessary to the unaudited pro
forma condensed combined balance sheet using the high-end of the range of
aggregate payments (in thousands):
|
|
Pro
forma adjustments to unaudited condensed combined balance sheet at
June 30, 2010:
|
||||
|
Sonic:
|
||||
|
Integration
and merger related costs expected to be incurred
|
3,356 | |||
|
DivX:
|
||||
|
Integration
and merger related costs expected to be incurred
|
5,334 | |||
| 8,690 | ||||
|
Less
integration and merger related costs previously recorded by Sonic and DivX
as of June 30, 2010
|
2,800 | |||
| $ | 5,890 | |||
SONIC
SOLUTIONS
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL
STATEMENTS—(Continued)
The $5.9
million in merger and integration related costs expected to be incurred was
recorded in the unaudited pro forma condensed combined balance sheet at
June 30, 2010 as accrued expenses and other current liabilities. Of this
amount, $4.2 million related to DivX’s portion of such costs and was recorded as
an increase to goodwill and $1.7 million related to Sonics’s portion of such
costs and was recorded as a reduction to retained earnings in the unaudited pro
forma condensed combined balance sheet at June 30, 2010. These merger and
integration costs relate directly to the transaction; however, because of the
material nonrecurring nature of these costs, they are not included in the
unaudited pro forma condensed combined statements of operations, presented
herein.
|
(Q)
|
To
eliminate transactions between Sonic and DivX for the historical periods
presented (related balance sheet amounts included in the unaudited pro
forma condensed combined balance sheet were nominal). These transactions
related to the licensing of technology from DivX to Sonic. The adjustment
includes a reduction to revenue, partially offset by a reduction in cost
of revenue.
|
|
(R)
|
To
record the estimated share-based compensation expense related to the
unvested portion of DivX stock awards assumed in connection with the
merger using the straight-line amortization method over the remaining
vesting periods (in thousands).
|
|
Three Months Ended June 30, 2010
|
||||||||||||
|
DivX
Historical
Share-Based
Compensation
|
Share-Based
Compensation
Expense
Based Upon
Estimated
Fair Values
|
Decrease in
Share-Based
Compensation
Expense
|
||||||||||
|
Sales
and marketing
|
$ | 753 | $ | 327 | $ | 426 | ||||||
|
Research
and development
|
601 | 260 | 341 | |||||||||
|
General
and administrative
|
1,328 | 576 | 752 | |||||||||
|
Total
share-based compensation
|
$ | 2,682 | $ | 1,163 | $ | 1,519 | ||||||
|
Year Ended March 31,
2010
|
||||||||||||
|
DivX
Historical
Share-Based
Compensation
|
Share-Based
Compensation
Expense
Based Upon
Estimated
Fair Values
|
Decrease in
Share-Based
Compensation
Expense
|
||||||||||
|
Sales
and marketing
|
$ | 2,741 | $ | 1,836 | $ | 905 | ||||||
|
Research
and development
|
2,230 | 1,494 | 736 | |||||||||
|
General
and administrative
|
4,519 | 3,028 | 1,491 | |||||||||
|
Total
share-based compensation
|
$ | 9,490 | $ | 6,358 | $ | 3,132 | ||||||
Sonic is
assuming previously granted, in-the-money awards granted under DivX’s equity
plans to employees continuing with the combined company after the
merger.
|
|
(S)
|
To
eliminate merger related costs previously expensed in the unaudited pro
forma condensed combined statement of operations for the three months
ended June 30, 2010. There were no such costs incurred by either
company in the unaudited condensed combined statement of operations for
the year ended March 31, 2010.
|
SONIC
SOLUTIONS
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL
STATEMENTS—(Continued)
|
(T)
|
To
record the pro forma income tax impact at the weighted average estimated
income tax rates applicable to the jurisdictions in which the pro forma
adjustments are expected to be recorded. The pro forma combined provision
for income taxes does not reflect the amounts that would have resulted had
Sonic and DivX filed consolidated income tax returns during the periods
presented (dollars in thousands).
|
|
Three
Months Ended
June 30, 2010
|
Year Ended
March 31, 2010
|
|||||||
|
Total
pro forma adjustments recorded to decrease income before provision for
income taxes in the unaudited pro forma condensed combined statements
of operations
|
$ | 1,199 | $ | (6,407 | ) | |||
|
Estimated
provision for income taxes rates applicable to pro forma
adjustments
|
39.25 | % | 39.25 | % | ||||
|
Pro
forma provision for income taxes adjustment
|
$ | 471 | $ | (2,515 | ) | |||
6.
Pro Forma Earnings Per Share
The pro
forma basic and diluted earnings per share amounts presented in the unaudited
pro forma condensed combined statement of operations are based upon the
historical weighted average number of common shares outstanding, including the
equivalent Sonic common stock exchanged and are adjusted for additional stock
options assumed from the DivX stock option plans pursuant to the treasury stock
method as if those stock options had been assumed at the acquisition date as of
the beginning of each period presented without consideration for any subsequent
stock option activity such as exercises, forfeitures and cancellations. The
following table reflects the weighted average common shares outstanding (in
thousands, except per share data):
|
Three Months Ended
June 30,
2010
|
Year Ended
March 31,
2010
|
|||||||
|
Numerator:
|
||||||||
|
Net
loss for basic calculation
|
$ | (3,161 | ) | $ | (2,286 | ) | ||
|
Denominator:
|
||||||||
|
Basic weighted average number of
common shares outstanding(1)
|
47,654 | 44,608 | ||||||
|
Diluted weighted average number
of common shares outstanding(2)
|
47,654 | 44,608 | ||||||
|
Basic
and diluted net loss per share
|
$ | (0.07 | ) | $ | (0.05 | ) | ||
|
(1)
|
Weighted
average number of common shares outstanding excludes unvested stock
options, restricted stock units, and
warrants.
|
|
(2)
|
Potentially
dilutive securities are excluded from the computation of diluted net loss
per share for the three months ended June 30, 2010 and for the year
ended March 31, 2010 because their effect would have been
anti-dilutive.
|