SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended January 31, 1998
Commission File Number 1-13851
SONUS CORP.
(Exact name of small business issuer as specified in its charter)
Alberta, Canada Not Applicable
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
111 S.W. Fifth Avenue, Suite 2390, Portland, Oregon 97204-3699
(Address of principal executive offices)
Issuer's telephone number, including area code: 503-225-9152
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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___.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 5,834,582 Common Shares, without par
or nominal value, outstanding as of March 10, 1998.
Transitional Small Business Disclosure Format. Yes ___. No X.
<PAGE>
FORWARD-LOOKING STATEMENTS
Statements in this report, to the extent they are not based on
historical events, constitute forward-looking statements. Forward-looking
statements include, without limitation, statements containing the words
"believes," "anticipates," "intends," "expects," and words of similar import.
Investors are cautioned that forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance, or achievements of Sonus Corp. (the "Company") to be
materially different from those described herein. Factors that may result in
such variance, in addition to those accompanying the forward-looking statements,
include economic trends in the Company's market areas, the ability of the
Company to manage its growth and integrate new acquisitions into its network of
hearing care clinics, development of new or improved medical or surgical
treatments for hearing loss or of technological advances in hearing instruments,
changes in the application or interpretation of applicable government laws and
regulations, the ability of the Company to complete additional acquisitions of
hearing care clinics on terms favorable to the Company, the degree of
consolidation in the hearing care industry, the Company's success in attracting
and retaining qualified audiologists and staff to operate its hearing care
clinics, product and professional liability claims brought against the Company
that exceed its insurance coverage, and the availability of and costs associated
with potential sources of financing. The Company disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future events
or developments.
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
SONUS CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
January 31, July 31,
1998 1997
------------------ ------------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 6,150 $ 1,099
Investments available for sale 8,815 ---
Accounts receivable, net of allowance for doubtful
accounts of $68 and $44, respectively 2,571 2,514
Other receivables 409 314
Inventory 662 425
Prepaid expenses 646 260
------------------ ------------------
Total current assets 19,253 4,612
Property and equipment, net 2,781 2,277
Other assets 196 136
Goodwill and covenants not to compete, net 9,540 9,519
------------------ ------------------
$ 31,770 $ 16,544
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans and short-term notes payable $ 89 $ 59
Accounts payable and accrued liabilities 4,154 3,395
Convertible notes payable 2,600 2,600
Capital lease obligation, current portion 124 101
Long term debt, current portion 479 357
------------------ ------------------
Total current liabilities 7,446 6,512
Capital lease obligation, non-current portion 307 305
Long term debt, non-current portion 590 765
Convertible notes payable --- 127
------------------ ------------------
Total liabilities 8,343 7,709
Shareholders' equity:
Series A convertible preferred stock, no par
value per share, 13,333,333 and 0 shares,
respectively, authorized, issued, and outstanding 15,752 ---
Common stock, no par value per share, unlimited
number of shares authorized, 5,460,583 and 5,427,658
shares, respectively, issued and outstanding 11,268 11,131
Notes receivable from shareholders (124) (124)
Accumulated deficit (3,298) (2,117)
Treasury stock, 6,960 and 3,960 shares, respectively, at cost (58) (33)
Cumulative translation adjustment (113) (22)
------------------ ------------------
Total shareholders' equity 23,427 8,835
------------------ ------------------
$ 31,770 $ 16,544
================== ============
See accompanying notes to financial statements
</TABLE>
3
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<TABLE>
SONUS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three months ended Six months ended
January 31, January 31,
---------------------------------- ----------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenues $ 4,109 $ 2,934 $ 9,416 $ 4,202
Costs and expenses:
Cost of products sold 1,366 1,055 3,119 1,547
Clinical expenses 2,279 1,456 4,523 2,102
General and administrative expenses 1,276 863 2,388 1,240
Depreciation and amortization 323 217 600 269
-------------- -------------- -------------- --------------
Total costs and expenses 5,244 3,591 10,630 5,158
-------------- -------------- -------------- --------------
Loss from operations (1,135) (657) (1,214) (956)
Other income (expense):
Interest income 79 34 88 35
Interest expense (29) (15) (55) (15)
Other --- (11) --- (11)
-------------- -------------- -------------- --------------
Net loss $ (1,085) $ (649) $ (1,181) $ (947)
============== ============== ============== ==============
Per share of common stock:
Basic $ (0.24) $ (0.16) $ (0.26) $ (0.27)
Diluted $ (0.24) $ (0.16) $ (0.26) $ (0.27)
Average shares outstanding:
Basic 4,607 4,040 4,595 3,520
Diluted 4,607 4,040 4,595 3,520
See accompanying notes to financial statements
</TABLE>
4
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<TABLE>
SONUS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three months ended Six months ended
January 31, January 31,
1998 1997 1998 1997
---------- --------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net loss $ (1,085) $ (649) $ (1,181) $ (947)
Adjustments to reconcile net loss to net cash
provided by (used in)operating activities:
Provision for bad debt expense 33 -- 61 --
Depreciation and amortization 323 217 600 269
Changes in non-cash working capital:
Accounts receivable 110 67 (118) 50
Other receivables 1 -- (95) --
Inventory (36) 94 (237) 22
Prepaid expenses (155) (11) (386) (10)
Accounts payable and accrued liabilities 1,155 (298) 759 (99)
-------- -------- -------- --------
Net cash provided by (used in)operating activities 346 (580) (597) (715)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments available for sale (8,815) -- (8,815) --
Purchase of property and equipment (195) (273) (519) (384)
Deferred acquisition costs and other, net (4) (13) (57) 6
Net cash paid on business acquisitions (331) (1,051) (703) (1,664)
-------- -------- -------- --------
Net cash used in investing activities (9,345) (1,337) (10,094) (2,042)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft (275) -- -- --
Net proceeds (repayments) of long-term debt
and capital lease obligations 138 (73) 69 (14)
Deferred financing costs, net (3) 62 (3) 40
Advances (repayments) of bank loans and
short-term notes payable (421) (70) 30 29
Advances from (payments to) shareholders -- 56 -- 56
Issuance of common stock for cash, net of costs 10 4,844 10 5,995
Issuance of preferred stock for cash, net of costs 15,752 -- 15,752 --
Acquisition of treasury stock (11) -- (25) --
-------- -------- -------- --------
Net cash provided by financing activities 15,190 4,819 15,833 6,106
-------- -------- -------- --------
Net increase in cash and cash equivalents 6,191 2,902 5,142 3,349
Effect on cash and cash equivalents of changes
in foreign translation rate (41) (47) (91) (33)
Cash and cash equivalents, beginning of period -- 472 1,099 11
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 6,150 $ 3,327 $ 6,150 $ 3,327
======== ======== ======== ========
Supplemental disclosure of non-cash investing and financing activities:
Interest paid during the period $ 12 $ 8 $ 38 $ 15
Non-cash financing activities:
Issuance and assumption of long-term debt on acquisitions $ 97 $ 262 $ 97 $ 323
Issuance of convertible notes on acquisitions $ -- $ -- $ -- $ 2,960
Issuance of common stock on acquisitions $ -- $ 701 $ -- $ 2,494
Conversion of convertible note to common stock $ -- $ -- $ (127) $ --
Issuance of common stock upon conversion of onvertible note $ -- -- $ 127 $ --
See accompanying notes to financial statements
</TABLE>
5
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SONUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim Financial Statements
The interim financial statements reflect all adjustments, consisting
only of normal recurring adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods presented.
The results of operations for an interim period are not necessarily indicative
of the results of operations for a full year.
2. Reverse Stock Split
Effective February 9, 1998, the Company effected a one-for-five reverse
stock split of the Common Shares of the Company. All share and per share
information appearing in the accompanying financial statements has been restated
to give effect to the reverse stock split.
3. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS No. 128 supersedes APB Opinion No. 15, "Earnings Per Share" and
specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common shares or
potential common shares. It replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS. Basic EPS,
unlike primary EPS, excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common shares were
exercised or converted into common shares or resulted in the issuance of common
shares that would then share in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS under APB Opinion No. 15. All prior
period EPS data have been restated to conform with SFAS No. 128. Common share
equivalents represented by convertible debt and convertible preferred stock have
not been included in the calculation of earnings per share as the effect would
be anti-dilutive.
4. Change in Depreciation Method and Estimates of Useful Life
On November 1, 1997, the Company changed the method by which it
calculates depreciation on property and equipment to the straight-line method.
Previously, professional equipment was depreciated using the 20% declining
balance method and office and computer equipment and automobiles were
depreciated using the 30% declining balance method. The Company also adopted a
useful life of seven years for professional equipment and five years for office
equipment and automobiles. The cumulative effect of the changes adopted by the
Company for the three-month period ended January 31, 1998, were immaterial.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Three Months Ended January 31, 1998 Compared to Three Months Ended January 31,
1997
Revenues. Total revenues for the three months ended January 31, 1998,
were $4,109,000, representing a 40% increase over revenues of $2,934,000 for the
comparable period in fiscal 1997. The increase was primarily attributable to the
15 additional clinics that were owned by the Company during the three months
ended January 31, 1998, but not during the entire comparable period of the prior
fiscal year.
Gross Profit. Gross profit for the three months ended January 31, 1998,
was $2,743,000 or 67% of revenues, compared to $1,879,000 or 64% of revenues for
the comparable period in fiscal 1997. The increase in gross profit percentage
was primarily due to higher volume discounts and improved product sales
management.
Clinical Expenses. Clinical expenses include all personnel, marketing,
occupancy and other operating expenses at the clinic level. Clinical expenses
for the three months ended January 31, 1998, were $2,279,000 representing an
increase of 57% over clinical expenses of $1,456,000 for the comparable period
in fiscal 1997. This increase was primarily due to clinical expenses associated
with the 15 additional clinics that were owned by the Company during the three
months ended January 31, 1998, but not during the entire three month period
ended January 31, 1997.
General and Administrative Expenses. General and administrative
expenses increased 48% from $863,000 for the three months ended January 31,
1997, to $1,276,000 for the three months ended January 31, 1998, due to planned
increases in corporate staff and other corporate expenses related to the
operation of a larger organization. As a percentage of revenues, general and
administrative expenses rose to 31% for the three month period ended January 31,
1998, versus 29% for the same period in the prior fiscal year. Management
anticipates that general and administrative expenses will decrease as a
percentage of revenues as the Company establishes a larger revenue base through
its strategic acquisition program and enhanced marketing efforts.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the three months ended January 31, 1998, was $323,000, an increase
of 49% over the depreciation and amortization expense of $217,000 for the same
period in the prior fiscal year. The increase resulted from the depreciation of
fixed assets and amortization of goodwill and covenants not to compete
associated with the 15 additional clinics operated by the Company during the
three month period ended January 31, 1998.
Six Months Ended January 31, 1998 Compared to Six Months Ended January 31, 1997
Revenues. Total revenues for the six months ended January 31, 1998,
were $9,416,000, representing a 124% increase over revenues of $4,202,000 for
the comparable period in fiscal 1997. The increase was primarily attributable to
the 41 clinics acquired by the Company since
7
<PAGE>
October 1, 1996. Product revenues were $8,101,000 for the six months ended
January 31, 1998, up 118% from $3,712,000 for the same period in 1997.
Audiological service revenues of $1,315,000 represented 14% of total revenues
for the six months ended January 31, 1998, as compared to $490,000 or 12% of
total revenues for the comparable period in 1997. This increase is due to the
fact that substantially all of the clinics acquired in the United States
separately charge for the performance of audiological services when a hearing
instrument is purchased. A large proportion of the revenue base in the six-month
period ended January 31, 1997, was attributable to the Company's Canadian
clinics where the policy was to waive the fee for audiological services if a
hearing instrument was purchased.
Gross Profit. Gross profit for the six months ended January 31, 1998,
was $6,297,000 or 67% of revenues, compared to $2,655,000 or 63% of revenues for
the comparable period in fiscal 1997. The increase in gross profit percentage
was primarily due to higher volume discounts and improved product sales
management.
Clinical Expenses. Clinical expenses for the six months ended January
31, 1998, were $4,523,000 representing an increase of 115% over clinical
expenses of $2,102,000 for the comparable period in fiscal 1997. This increase
was attributable to the 41 additional clinics acquired by the Company since
October 1, 1996.
General and Administrative Expenses. General and administrative
expenses increased 93% from $1,240,000 for the six months ended January 31,
1997, to $2,388,000 for the six months ended January 31, 1998, due to planned
increases in corporate staff and other corporate expenses related to the
operation of a larger organization. As a percentage of revenues, general and
administrative expenses decreased to 25% for the six month period ended January
31, 1998, from 30% for the same period in the prior fiscal year. Management
anticipates that general and administrative expenses will continue to decrease
as a percentage of revenues as the Company establishes a larger revenue base
through its strategic acquisition program and enhanced marketing efforts.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the six months ended January 31, 1998, was $600,000, an increase of
123% over the depreciation and amortization expense of $269,000 for the same
period in the prior fiscal year. The increase resulted from the depreciation of
fixed assets and amortization of goodwill and covenants not to compete
associated with 41 additional clinics operated by the Company during the six
month period ended January 31, 1998.
LIQUIDITY AND CASH RESERVES
Sonus-Canada Ltd., the Company's Canadian operating subsidiary, has a
revolving demand loan with the Royal Bank of Canada, providing for borrowings up
to $171,000 at January 31, 1998. As of January 31, 1998, $89,000 was outstanding
against this line. Advances under the line of credit bear interest at 1% above
the Royal Bank of Canada prime rate, are secured by all the assets of
Sonus-Canada Ltd., and are personally guaranteed by a shareholder.
The Company's operating subsidiary in the United States, Sonus-USA,Inc.
('Sonus-
8
<PAGE>
USA'), has a $500,000 line of credit from a hearing instrument manufacturer,
none of which was outstanding at January 31, 1998. The line of credit is secured
by a portion of Sonus-USA's accounts receivable, is guaranteed by the Company
and bears interest at the prime rate on a fully floating basis. Debt service is
interest only payable monthly until July 16, 1998, when all amounts outstanding
under the line of credit will be due.
On December 24, 1997, the Company consummated the sale of 13,333,333
Series A Convertible Preferred Shares (the "Convertible Shares"), together with
warrants (the "Warrants") to purchase 2,000,000 common shares of the Company
(the "Common Shares") for $12 per share in a private placement to Warburg Pincus
Ventures, L.P., a Delaware limited partnership, for an aggregate purchase price
of $18 million (the "Warburg Transaction"). The Company believes that the net
proceeds of $15.8 million from the Warburg Transaction and cash generated from
operations will provide it with sufficient capital to fund its operations and
planned acquisitions over the next 12 months.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
As described in Item 2 of Part I above, the Company completed the
Warburg Transaction on December 24, 1997, for which it relied on the exemption
from registration provided by Section 4(2) under the Securities Act of 1933 with
respect to the sale of the Convertible Shares and the Warrants. Additional
information regarding the Warburg Transaction is contained in the Company's
Current Reports on Form 8-K dated November 21, 1997, and December 24, 1997. Such
information is incorporated herein by reference.
On February 9, 1998, the Company changed its name from HealthCare
Capital Corp. to Sonus Corp. and effected a one-for-five reverse stock split of
its Common Shares. On February 10, 1998, the Common Shares commenced trading on
the American Stock Exchange under the symbol SSN and ceased trading on The
Alberta Stock Exchange where they had traded under the symbol HCL. As a result
of the reverse split, each Convertible Share is presently convertible into
one-fifth of a Common Share and is entitled to one-fifth of a vote on all
matters presented for action by the Company's shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
An annual and special general meeting of the Company's shareholders was
held on December 5, 1997 (the "Annual Meeting"). At the Annual Meeting, the
number of directors of the Company was fixed at six (until such time as the
directors of the Company determine by resolution to appoint one or more
additional directors in accordance with the Company's Articles) by the following
vote: 3,822,108 for; 196,074 against or withheld; 0 abstentions and broker
non-votes.
9
<PAGE>
The following directors were elected at the Annual Meeting to serve
until the next annual general meeting:
Abstentions
and Broker
For Withheld Non-votes
--- -------- ---------
Gene K. Balzer, Ph.D. 4,011,002 5,580 0
Brandon M. Dawson 4,011,002 5,580 0
William DeJong 4,011,002 5,580 0
Gregory J. Frazer 4,011,802 5,580 0
Douglas F. Good 4,011,802 5,580 0
Hugh T. Hornibrook 4,012,602 5,580 0
At the Annual Meeting, KPMG Peat Marwick LLP was approved as
independent auditors of the Company and the board of directors was authorized to
fix the auditors' remuneration by the following vote: 4,017,882 for; 300 against
or withheld; and 0 abstentions and broker non-votes. In addition, an amendment
to the Company's bylaws increasing the quorum required at shareholders' meetings
from 10 percent to 33 1/3 percent was ratified by the following vote: 3,381,239
for; 93,599 against or withheld; and 0 abstentions and broker non-votes. The
Company's Second Amended and Restated Stock Award Plan (the "Plan") was also
approved by the following vote: 3,358,748 for; 107,070 against or withheld; and
0 abstentions and broker non-votes.
Beginning on December 8, 1997, the Company solicited written consents
from 44 shareholders approving the issuance of the Convertible Shares and the
Warrants in order to satisfy the requirement of shareholder approval imposed by
the policies of The Alberta Stock Exchange. The Company received written
consents approving such issuance from shareholders holding 3,290,066 shares,
which represented 60.3% of the Common Shares then issued and outstanding.
A special meeting of shareholders of the Company was held on February
9, 1998 (the "Special Meeting"), at which the Company's Articles of
Incorporation were amended to change the name of the Company from HealthCare
Capital Corp. to Sonus Corp. The amendment was approved by the following vote:
4,663,661 for; 6,780 against or withheld; and 0 abstentions and broker
non-votes. A one-for-five reverse stock split of the Common Shares was also
approved at the Special Meeting by the following vote: 4,641,441 for; 5,740
against or withheld; and 0 abstentions and broker non-votes. A resolution
authorizing the issuance of up to 3,000,000 Common Shares in transactions and at
prices as determined by the Company's board of directors was approved at the
Special Meeting by the following vote: 4,631,881 for; 41,880 against or
withheld; and 0 abstentions and broker non-votes. The shareholders also approved
an amendment to the Plan to increase the number of Common Shares issuable
thereunder from 600,000 to 1,800,000 by the following vote: 4,596,801 for;
76,060 against or withheld: and 1,900 abstentions and broker non-votes.
10
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits filed as part of this report or incorporated by
reference herein are listed in the accompanying exhibit index.
(b) Reports on Form 8-K. During the quarter ended January 31, 1998, the
Company filed the following reports on Form 8-K:
1. Current Report on Form 8-K dated November 21, 1997, reporting the
execution of a Securities Purchase Agreement in connection with the Warburg
Transaction under Items 1 and 5 and filing certain exhibits under Item 7.
2. Current Report on Form 8-K dated December 24, 1997, reporting the
closing of the Warburg Transaction under Item 1 and the granting of conditional
listing approval of the Common Shares on the American Stock Exchange under Item
5 and filing certain exhibits under Item 7.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONUS CORP.
By: /s/ Edwin J. Kawasaki
---------------------
Edwin J. Kawasaki
Vice President-Finance
(Principal Financial Officer)
DATED: March 13, 1998
11
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EXHIBIT INDEX
-------------
Exhibit
Number Description of Exhibit
------ ----------------------
3.1 Articles of Incorporation of the Registrant. Incorporated by reference
to Exhibit 3.1 to Post-Effective Amendment No. 1 to Registration
Statement on Form SB-2 (File No. 333-23137) (the "Amendment").
3.2 Bylaws of the Registrant. Incorporated by reference to Exhibit 3.2 to
the Amendment.
10.1 Warrant Agreement between the Registrant and Warburg, Pincus Ventures,
L.P., dated December 24, 1997. Incorporated by reference to Exhibit
10.13 to the Amendment.
10.2 Second Amended and Restated Stock Award Plan (as amended December 18,
1997). Incorporated by reference to Exhibit 10.27 to the Amendment.
10.3 Employment Agreement dated December 24, 1997, between the Registrant
and Brandon M. Dawson. Incorporated by reference to Exhibit 10.30 to
the Amendment.
10.4 Employment Agreement dated December 24, 1997, between the Registrant
and Edwin J. Kawasaki. Incorporated by reference to Exhibit 10.31 to
the Amendment.
10.5 Employment Agreement dated December 24, 1997, between the Registrant
and Randall E. Drullinger. Incorporated by reference to Exhibit 10.32
to the Amendment.
10.6 Stock Purchase Agreement dated January 5, 1998, by and between Gregory
J. Frazer, Rhonda Jespersen and SONUS-USA, Inc. Incorporated by
reference to Exhibit 10.41 to the Amendment.
10.7 Stock Purchase Agreement dated February 12, 1998, by and between
Gregory J. Frazer, Donal M. Welch, and SONUS-USA, Inc. Incorporated by
reference to Exhibit 10.42 to the Amendment.
27 Financial Data Schedule.
99 Description of Common Shares of Sonus Corp.
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S CONSOLIDATED BALANCE SHEETS AND RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE PERIOD ENDED JANUARY 31, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 6,150
<SECURITIES> 8,815
<RECEIVABLES> 2,639
<ALLOWANCES> 68
<INVENTORY> 662
<CURRENT-ASSETS> 19,253
<PP&E> 2,781
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,770
<CURRENT-LIABILITIES> 7,746
<BONDS> 590
0
15,752
<COMMON> 11,268
<OTHER-SE> (3,593)
<TOTAL-LIABILITY-AND-EQUITY> 31,770
<SALES> 9,416
<TOTAL-REVENUES> 9,416
<CGS> 3,119
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,511
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (55)
<INCOME-PRETAX> (1,181)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,181)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,181)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
EXHIBIT 99
DESCRIPTION OF COMMON SHARES
OF SONUS CORP.
The authorized capital stock of Sonus Corp. (the "Company") consists of
an unlimited number of Common Shares, without nominal or par value (the "Common
Shares"), and an unlimited number of Preferred Shares, without nominal or par
value (the "Preferred Shares"). The Company is incorporated under the laws of
Alberta, Canada.
The Company's Board of Directors (the "Board") has the authority to
issue Preferred Shares in one or more series and to fix the number of shares
comprising any such series and the designations, rights, privileges,
restrictions, and conditions attaching thereto, including the rate or amount of
dividends or the method of calculating dividends, the dates of payment of
dividends, the redemption, purchase, and/or conversion price or prices and the
terms and conditions of any such redemption, purchase, and/or conversion, and
any sinking fund or other provisions, without any further vote or action by the
holders of Common Shares. The only outstanding series of Preferred Shares is a
series designated as Series A Convertible Preferred Shares, consisting of
13,333,333 shares issued on December 24, 1997. A summary of certain of the
preferences, limitations and relative rights of the Series A Convertible
Preferred Shares is set forth below.
COMMON SHARES
Voting Rights. Holders of Common Shares are entitled to one vote per
share at all meetings of shareholders of the Company. Except as otherwise
required by law or unless the Board determines otherwise with respect to a
particular series of Preferred Shares, the Common Shares and all series of the
Preferred Shares having voting rights will vote together as one class. Under the
Business Corporations Act (Alberta), the holders of each class of shares are
generally entitled to vote as a separate class (whether or not such class
otherwise has voting rights) upon any proposal to amend the Company's Articles
to (i) increase or decrease the maximum number of authorized shares of that
class, (ii) increase the maximum number of authorized shares of another class
having rights or privileges equal or superior to those of that class, (iii)
effect an exchange, reclassification or cancellation of all or a portion of the
shares of that class, (iv) add, change or remove the rights, privileges,
restrictions or conditions attached to that class, (v) increase the rights or
privileges of any class having rights or privileges equal or superior to those
of that class, (vi) create a new class having rights or privileges equal or
superior to those of that class, (vii) change the rights or privileges of any
class with inferior rights or privileges such that they are equal to or superior
to those of that class; (viii) effect an exchange of shares of another class
into the shares of that class, or (ix) restrict the issue or transfer of the
shares of that class or extend or remove that restriction.
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Other. All Common Shares rank ratably with regard to dividends (if and
when declared by the Board). In the event of a liquidation, dissolution, or
winding up of the Company, holders of Common Shares are entitled to share
equally and ratably in the assets of the Company, if any, remaining after the
payment of all liabilities of the Company and the liquidation preference of any
outstanding class or series of Preferred Shares. The Common Shares do not have
preemptive rights. All outstanding Common Shares are fully paid and
nonassessable.
SERIES A CONVERTIBLE PREFERRED SHARES
Certain of the preferences, limitations and relative rights of the
Series A Convertible Preferred Shares (the "Convertible Shares") are summarized
below.
Voting Rights. Each Convertible Share is entitled to one-fifth of a
vote (or such other number of votes equal to the number of Common Shares into
which such Convertible Share shall be convertible from time to time) in the
election of directors and any other matters presented to the shareholders of the
Company for their action or consideration. Except to the extent otherwise
required by law or the Company's Articles, holders of Convertible Shares and of
any other outstanding series of Preferred Shares will vote together with the
holders of Common Shares as a single class. See "Common Shares--Voting Rights."
Any change in the rights and preferences of the Convertible Shares will require
the approval of the holders of at least 66-2/3% of the outstanding Convertible
Shares, voting separately as a class.
Dividends. Each Convertible Share is entitled to receive, when, as and
if declared by the Board out of the Company's assets legally available for
payment, cumulative dividends from the date of original issuance, payable
annually at a rate of 5% per annum on a base amount of $1.35 per share (the
"Base Amount"). All accrued and unpaid dividends will be forfeited upon the
conversion of the Convertible Shares. The dividend rate will be subject to
increase on specified dates in the event that certain conditions (the
"Triggering Conditions") have not been met. The Triggering Conditions are as
follows:
(a) The Common Shares are listed on the New York Stock Exchange,
the American Stock Exchange, or the Nasdaq National Market (each a
"U.S. Principal Market");
(b) The Common Shares are traded on a U.S. Principal Market at a
daily closing price greater than $12.00 per Common Share on each of the
ten consecutive trading days preceding the applicable date; and
(c) The Company's net income before income taxes, dividends on the
Convertible Shares, and amortization of goodwill and covenants not to
compete for the three consecutive fiscal quarters preceding the
applicable date shall have averaged at least $.35 per fully diluted
Common Share per fiscal quarter (for purposes of making this
calculation, the Common Shares issuable upon the exercise of the
Warrants will not be counted).
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If the Triggering Conditions have not been met by:
(x) January 1, 2003, the dividend rate will thereafter be 15% per
annum of the Base Amount;
(y) January 1, 2004, the dividend rate will thereafter be 18% per
annum of the Base Amount; or
(z) January 1, 2005, the dividend rate will thereafter be 21% per
annum of the Base Amount.
As soon as the Triggering Conditions have been satisfied, the dividend rate will
revert to 5% per annum of the Base Amount. All references to per share amounts
or prices with respect to the Triggering Conditions will be adjusted for any
subdivision, consolidation, or reclassification of the Common Shares.
Dividends on the Convertible Shares may, in the discretion of the Board
and subject to applicable regulatory approvals at the time of payment, be paid
in Common Shares based on the market price of such shares. Accruals of dividends
on the Convertible Shares will not bear interest.
No dividends on the Common Shares or any other share capital ranking,
as to dividends, equal to or junior to the Convertible Shares as to dividends
may be declared or paid unless full accumulated dividends on the Convertible
Shares have been paid or declared and sufficient funds set aside for such
payment. The foregoing prohibition will not apply to dividends or distributions
payable in Common Shares or certain other comparable actions.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the Company subject to the rights of
holders of any securities of the Company ranking senior to the Convertible
Shares upon liquidation, the holders of Convertible Shares will be entitled to
receive, out of the assets of the Company available for distribution to
shareholders, before any distribution of assets is made to holders of Common
Shares or any other securities ranking junior to the Convertible Shares upon
liquidation, a liquidating distribution in an amount equal to the greater of (i)
$1.35 per share plus any accrued and unpaid dividends or (ii) the amount that
would have been distributable to such holders if they had converted their
Convertible Shares into Common Shares immediately prior to such dissolution,
liquidation, or winding up, plus any accrued and unpaid dividends. The sale,
conveyance, mortgage, pledge or lease of all or substantially all the assets of
the Company will be deemed to be a liquidation of the Company for purposes of
the liquidation rights of the holders of Convertible Shares. After payment of
the full amount of the liquidating distribution to which they are entitled, the
holders of Convertible Shares will have no right to any of the remaining assets
of the Company.
Optional Redemption. The Convertible Shares may not be redeemed before
January 1, 2003. Thereafter, the Convertible Shares may be redeemed at the
option of the
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Company, in whole or in part. The redemption price will be an amount equal to
the greater of (i) $1.35 per share plus any accrued and unpaid dividends or (ii)
the fair market value of a Convertible Share as determined by a nationally
recognized independent investment banking firm selected by mutual agreement of
the Company and the holder of a majority of the outstanding Convertible Shares.
The Convertible Shares are not subject to mandatory redemption or any sinking
fund provisions.
Conversion Rights. The Convertible Shares may be converted at any time,
in whole or in part, at the option of the holder thereof, into Common Shares.
The conversion rate is presently equal to one Common Share for every five
Convertible Shares surrendered for conversion. The conversion rate is subject to
further adjustment for stock dividends, stock splits, recapitalizations, and
other anti-dilution adjustments. Upon the conversion of any Convertible Shares,
any accrued and unpaid dividends with respect to such shares will be forfeited.
The Company has the right to force conversion of the Convertible Shares, in
whole or in part, upon satisfaction of all the Triggering Conditions. Common
Shares issuable upon conversion of the Convertible Shares will be fully paid and
nonassessable and will not have preemptive rights.
Preemptive Rights. The Convertible Shares do not have preemptive
rights.
WARRANTS
At February 28, 1998, the Company had outstanding share purchase
warrants as follows:
(1) Share purchase warrants governed by an indenture dated
September 17, 1996 (the "September Warrants"), between the Company and
CIBC Mellon Trust Company, as trustee and warrant agent, to purchase
1,093,482 Common Shares at an exercise price of $10.00 per share until
August 31, 1998. If the closing bid for the Common Shares is in excess
of $15.00 per share on each of 20 consecutive trading days, the Company
has the option, upon 45 days' prior written notice to the holders, to
force the exercise or cancellation of the September Warrants.
(2) Share purchase warrants, issued as part of the fees paid to
the Company's placement agents in private placements of the Company's
securities in Canada and the United States during 1996, to purchase
99,180 Common Shares at an exercise price of $6.25 per share until
August 31, 1998. The Company has the option upon 45 days' prior written
notice to force the exercise or cancellation of the warrants if the
closing bid for the Common Shares is at least $15.00 per share on each
of 20 consecutive trading days.
(3) Share purchase warrants issued in connection with the private
placement of the Convertible Shares in December 1997 to purchase
2,000,000 Common Shares at an exercise price of $12.00 per share until
December 24, 2002. The Company
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may force the exercise of the warrants upon satisfaction of all the
Triggering Conditions.
The share amounts and exercise prices of all outstanding share purchase
warrants are subject to adjustment under certain circumstances, including any
subdivision, consolidation, or reclassification of the Common Shares or any
reorganization of the Company.
CONVERTIBLE SECURITIES AND STOCK OPTIONS
At February 10, 1998, the Company had outstanding convertible
subordinated notes in an aggregate principal amount of $2,600,000 convertible
into 400,000 Common Shares, 13,333,333 Convertible Shares convertible into
2,666,666 Common Shares, and stock options held by employees, directors and
officers of, and consultants to, the Company exercisable for a total of
1,462,400 Common Shares.
CANADIAN FEDERAL INCOME TAX CONSEQUENCES
Following is a summary of the principal Canadian federal income tax
consequences pursuant to the Income Tax Act (Canada) (the "Tax Act") and the
regulations thereunder generally applicable to a person who holds Common Shares
as capital property and deals at arm's length with the Company. Generally,
Common Shares will be considered to be capital property provided the holder does
not hold the Common Shares in the course of carrying on a business and has not
acquired it in one or more transactions considered to be an adventure in the
nature of trade. Special rules apply to non-resident insurers that carry on an
insurance business in Canada and elsewhere.
This summary is based upon the Company's understanding of the
provisions of the Tax Act in force as of the date hereof, all specific proposals
to amend the Tax Act that have been publicly announced prior to March 5, 1998
(the "Proposed Amendments"), and the current published administrative and
assessing policies and practices of Revenue Canada, Customs, Excise and Taxation
("Revenue Canada"). For the purposes of this summary, it has been assumed that
the Tax Act will be amended as proposed, although no assurance can be given in
this regard. This summary is not exhaustive of all possible federal income tax
consequences and, except for the Proposed Amendments, does not anticipate any
changes in the law, whether by legislative, governmental or judicial decision or
action. This summary also does not take into account provincial, territorial or
foreign tax considerations, which may differ significantly from those discussed
herein. This summary is not applicable to traders or dealers in securities, to a
holder that is a "financial institution" as defined in the Tax Act for purposes
of the mark-to-market rules, or to a holder of an interest that would be a "tax
shelter investment" as defined in the Proposed Amendments.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND
SHOULD NOT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER.
ACCORDINGLY, HOLDERS SHOULD CONSULT THEIR INDEPENDENT TAX ADVISERS FOR ADVICE
WITH RESPECT TO THE INCOME TAX CONSEQUENCES RELEVANT TO THEIR PARTICULAR
CIRCUMSTANCES.
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The following applies to holders who are not resident in Canada for
purposes of the Tax Act and who do not use or hold and are not deemed to use or
hold their Common Shares in, or in the course of, carrying on a business in
Canada.
Dispositions of Common Shares. A non-resident holder will, upon a
disposition or deemed disposition of Common Shares, not be subject to taxation
in Canada on any gain realized on the disposition unless the share is "taxable
Canadian property" for the purposes of the Tax Act and no relief is afforded
under an applicable tax convention between Canada and the country of residence
of the holder. Since the Common Shares are listed on a prescribed stock exchange
for the purposes of the Tax Act, Common Shares held by a non-resident holder
will generally not be "taxable Canadian property" unless, at any time during the
five-year period immediately preceding the disposition, the non-resident holder,
persons with whom the non-resident holder did not deal at arm's length, or the
non-resident holder together with such persons, owned or had the right to
acquire 25% or more of the issued shares of any class of the capital of the
Company. Any interest in shares or options in respect of shares will be
considered to be the equivalent of ownership of such shares for purposes of the
definition of taxable Canadian property.
Subject to the discussion below regarding the application of the
Canada-United States Income Tax Convention, 1980 (the "Convention") to U.S.
resident holders, non-residents whose shares constitute "taxable Canadian
property" will be subject to taxation thereon on the same basis as Canadian
residents unless otherwise exempted by an applicable tax convention between
Canada and the country of residence of the holder.
Pursuant to the Convention, shareholders of the Company that are
residents in the U.S. for the purposes of the Convention and whose shares might
otherwise be "taxable Canadian property" may be exempt from Canadian taxation in
respect of any gains on the disposition of the Common Shares, provided the
principal value of the Company is not derived from real property located in
Canada at the time of disposition.
Non-resident holders who might hold their Common Shares as "taxable
Canadian property" should consult their own tax advisers with respect to the
income tax consequences of a disposition of their Common Shares.
Non-resident holders whose shares are repurchased by the Company,
except in respect of certain purchases made by the Company in the open market,
will be deemed to have received the payment of a dividend by the Company in an
amount equal to the excess paid over the paid-up capital of the Common Shares so
purchased. Such deemed dividend will be excluded from the holder's proceeds of
disposition of such Common Shares for the purposes of computing any capital gain
or loss but will be subject to Canadian non-resident withholding tax in the
manner described below under "--Dividends."
Dividends. Dividends received by a non-resident holder of Common Shares
will be subject to Canadian withholding tax at the rate of 25% of the amount
thereof unless the rate is reduced under the provisions of an applicable tax
convention between Canada and the
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country of residence of the holder. The provisions of the Convention generally
reduce the rate to 15%. A further reduction to 5% under the Convention will be
available if the recipient is a company which owns at least 10% of the voting
securities of the Company.
INVESTMENT CANADA ACT
The Investment Canada Act (the "ICA") prohibits the acquisition of
control of a Canadian business by non-Canadians without review and approval of
the Investment Review Division of Industry Canada, the agency that administers
the ICA, unless such acquisition is exempt from review under the provisions of
the ICA. The Investment Review Division of Industry Canada must be notified of
such exempt acquisitions. The ICA covers acquisitions of control of corporate
enterprises, whether by purchase of assets, shares or "voting interests" of an
entity that controls, directly or indirectly, another entity carrying on a
Canadian business.
Apart from the ICA, there are no other limitations on the right of
nonresident or foreign owners to hold or vote securities imposed by Canadian law
or the Company's Articles. There are no other decrees or regulations in Canada
that restrict the export or import of capital, including foreign exchange
controls, or that affect the remittance of dividends, interest or other payments
to nonresident holders of the Common Shares, except as discussed above under
"Canadian Federal Income Tax Consequences."
OTHER
The foregoing is only a brief description of the rights and limitations
of the Common Shares and is subject to and qualified by reference to all
applicable provisions of the Business Corporations Act (Alberta) and the
Company's Articles.
CIBC Mellon Trust Company and ChaseMellon Shareholder Services L.L.C.
are co- transfer agents and co-registrars for the Common Shares.
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