Registration No. 333-23137
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SONUS CORP.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Alberta, Canada
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
5999-0903/8049-9902
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
Not Applicable
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
111 S.W. Fifth Avenue, Suite 2390
Portland, Oregon 97204
(503) 225-9152
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
MN Service Corp. (Oregon)
111 S.W. Fifth Avenue
Suite 3500
Portland, Oregon 97204
(503) 224-5858
(NAME, ADDRESS, AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
With Copies To:
Miller, Nash, Wiener, Hager & Carlsen LLP
111 S.W. Fifth Avenue, Suite 3500
Portland, Oregon 97204-3699
Attn: Mary Ann Frantz
(503) 224-5858
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this registration statement.
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[SONUS LOGO]
SONUS CORP.
3,744,492 COMMON SHARES
This Prospectus relates to 3,744,492 common shares (the "Shares") of
the capital stock of Sonus Corp. (the "Company") which may be offered for sale
from time to time by the selling shareholders identified under "Selling
Shareholders." The expenses of the offering, estimated at $270,000, will be
borne by the Company.
The Company is an Alberta, Canada corporation. Effective February 9,
1998, the Company changed its name from HealthCare Capital Corp. to Sonus Corp.
The Company's common shares, without nominal or par value (the "Common Shares"),
began trading on the American Stock Exchange ("AMEX") on February 10, 1998. The
last reported sale price of the Common Shares on AMEX on March 3, 1998, was
$8.25 per share. Until February 10, 1998, the Common Shares were traded in
Canada on The Alberta Stock Exchange (the "ASE").
The Company has been advised that the selling shareholders expect to
offer the Shares from time to time at prices and on terms then prevailing on
AMEX or at prices related to the then-current market prices, or in negotiated
transactions. See "Selling Shareholders" and "Plan of Distribution."
The Shares covered by this Prospectus include approximately 1.5 million
Common Shares issuable upon the exercise of warrants or convertible securities
acquired by certain selling shareholders prior to the date of this Prospectus.
This Prospectus relates only to the Shares issuable upon the exercise of such
warrants or convertible securities and not to the warrants or convertible
securities themselves.
The selling shareholders and any broker-dealers who may participate in
sales of Shares covered by this Prospectus may be deemed to be statutory
underwriters within the meaning of the Securities Act of 1933. See "Plan of
Distribution."
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF SHARES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is March ----, 1998.
<PAGE>
[Map of United States and Canada Showing Sonus Corp.
Hearing Care Clinic Locations]
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<PAGE>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.............................................................1
RISK FACTORS...................................................................4
SERVICE AND ENFORCEMENT OF LEGAL PROCESS......................................9
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS...........................9
PRICE RANGE OF COMMON SHARES..................................................10
DIVIDEND POLICY..............................................................10
CAPITALIZATION................................................................11
ACQUISITION OF SECURITIES BY WARBURG.........................................12
SELLING SHAREHOLDERS.........................................................13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................21
BUSINESS......................................................................27
MANAGEMENT....................................................................36
EXECUTIVE COMPENSATION.......................................................38
CERTAIN TRANSACTIONS..........................................................43
PRINCIPAL SHAREHOLDERS.......................................................45
DESCRIPTION OF CAPITAL STOCK..................................................46
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS...................................49
INVESTMENT CANADA ACT.........................................................51
TRANSFER AGENT................................................................51
PLAN OF DISTRIBUTION..........................................................51
LEGAL MATTERS.................................................................52
EXPERTS ......................................................................52
ADDITIONAL INFORMATION.......................................................52
PRO FORMA FINANCIAL INFORMATION...............................................54
INDEX TO FINANCIAL STATEMENTS................................................F-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial statements
appearing elsewhere in this Prospectus. Additionally, investors should carefully
consider the information set forth under "Risk Factors." All dollar amounts,
unless otherwise indicated, are expressed in United States dollars and, if
converted from Canadian dollars, have been so converted using the spot exchange
rate on the date indicated as quoted by the Federal Reserve Bank of New York for
the New York Interbank Market.
THE COMPANY
The Company, through its primary operating subsidiaries Sonus-Canada
Ltd., a British Columbia corporation ("Sonus-Canada"), and SONUS-USA, INC., a
Washington corporation ("Sonus-USA"), currently owns and operates a network of
62 hearing care clinics in the United States and Western Canada. The clinics are
located primarily in the metropolitan areas of Tucson, Arizona; Los Angeles,
California; San Diego, California; Chicago, Illinois; Lansing, Michigan;
Albuquerque, New Mexico; Portland, Oregon; Vancouver, British Columbia; and
Calgary, Alberta. The Company intends to expand its network of hearing care
clinics by acquiring clinics in its existing as well as new geographic markets.
From August 1, 1996, to February 28, 1998, the Company acquired 52 hearing care
clinics.
Each of the Company's hearing care clinics provides its hearing
impaired patients with a full range of audiological products and services.
Substantially all of the Company's hearing care clinics are staffed by
audiologists. The Company's operating strategy is to provide patients with high
quality and cost-effective hearing care while at the same time increasing its
operating margins by attracting and retaining patients, recruiting qualified and
productive audiologists, achieving economies of scale and administrative
efficiencies, and pursuing large group and managed care contracts. The Company
believes that it is well positioned to provide retail hearing rehabilitative
services to consumers while simultaneously serving the diagnostic needs of
referring physicians and meeting the access and cost concerns of managed care
providers and insurance companies.
The Company was incorporated under the laws of the Province of Alberta,
Canada in July 1993, under the name "575035 Alberta Ltd." The Company changed
its name to HealthCare Capital Corp. in October 1994. On February 9, 1998, the
Company changed its name to Sonus Corp. The Company's executive offices are
located at 111 S.W. Fifth Avenue, Suite 2390, Portland, Oregon 97204 (telephone
(503) 225-9152), and an additional corporate office is located at Suite 1120,
595 Howe Street, Vancouver, B.C. V6B 1NZ (telephone (604) 685-4854).
RECENT DEVELOPMENTS
On December 24, 1997, the Company completed the sale of 13,333,333
shares of the Company's Series A Convertible Preferred Shares, without nominal
or par value (the "Convertible Shares"), together with warrants to purchase an
additional 2,000,000 Common Shares at an exercise price of $12.00 per share (the
"Warrants"), to Warburg Pincus Ventures, L.P., a Delaware limited partnership
("Warburg"), for an aggregate price of $18,000,000 (the "Warburg Sale"). See
"Acquisition of Securities by Warburg." As a result of the Warburg Sale,
Warburg, Pincus & Co., the general partner of Warburg, holds voting power with
respect to 33% of the outstanding voting securities of the Company. See "Risk
Factors--Concentration of Share Ownership." Including the Common Shares issuable
upon exercise of the Warrants, Warburg, Pincus & Co. beneficially owns
approximately 46% of the Company's outstanding voting securities. The
Convertible Shares have the rights, privileges, and preferences set forth in the
section of this Prospectus entitled "Description of Capital Stock--Convertible
Shares." The Company has granted Warburg certain registration rights with
respect to Common Shares issuable upon conversion of the Convertible Shares.
Under the terms of the Warburg Sale, the Company is required to
nominate and use its reasonable best efforts to cause to be elected and remain
as directors two persons designated by Warburg, subject to certain
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conditions. See "Description of Capital Stock--Convertible Shares." On December
24, 1997, Gene K. Balzer, Ph.D., resigned as a director of the Company and
Warburg's designee, Joel Ackerman, was appointed to fill the resulting vacancy.
See "Management." A second nominee designated by Warburg has not yet been
appointed as a director.
Also on December 24, 1997, the Company finalized employment contracts
with certain of its executive officers who were not previously parties to
employment agreements with the Company, including Brandon M. Dawson, President
and Chief Executive Officer, Edwin J. Kawasaki, Vice President-Finance and Chief
Financial Officer, and Randall E. Drullinger, Vice President-Marketing. See
"Executive Compensation--Employment and Consulting Agreements." In addition,
effective February 2, 1998, the Company granted stock options to certain of its
executive officers pursuant to the terms of the Company's 1996 Stock Award Plan.
On February 9, 1998, the Company's shareholders approved a one-for-five
reverse stock split of the Common Shares, and on February 10, 1998, the Common
Shares became listed on AMEX. All share and per share values in this Prospectus
have been restated to reflect the effect of the reverse split.
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SUMMARY FINANCIAL, OPERATING AND PRO FORMA DATA
The summary historical financial data presented below for the years
ended July 31, 1996 and 1997 has been derived from the audited financial
statements of the Company included elsewhere in this Prospectus. The summary
historical financial data presented below for the three months ended October 31,
1997, has been derived from the unaudited financial statements of the Company.
All summary historical financial data should be read in conjunction with the
financial statements and notes thereto included elsewhere in this Prospectus.
The summary pro forma data for the fiscal year ended July 31, 1997
reflects the acquisition of 11 clinics operated by the Hearing Care Associates
Group ("HCA") as of October 1, 1996, and 14 clinics comprising the Midwest
Division of Hearing Health Services, Inc. (the "Midwest Division"), as of
October 31, 1996, as if such acquisitions had occurred on August 1, 1996. Such
data should be read in conjunction with the information presented under "Pro
Forma Financial Information" herein.
<TABLE>
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
Year ended July 31, Three months ended October 31,
------------------- ------------------------------
Pro Forma
1996 1997 1997 1996 1997
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Operating revenue $ 2,389 $ 13,462 $ 15,027 $ 1,268 $ 5,307
Cost of sales 1,017 5,010 5,527 492 1,753
Operating expenses 1,961 10,185 11,279 1,075 3,633
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Loss from operations (589) (1,733) (1,779) (299) (79)
Other income (expense), net 8 32 40 1 (17)
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Loss before income taxes (581) (1,701) (1,739) (298) (96)
Income tax expense (benefit) -- -- (31) -- --
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Net loss $ (581) $ (1,701) $ (1,708) $ (298) $ (96)
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Net loss per common share $ (0.27) $ (0.42) $ (0.42) $ (0.10) $ (.02
===============================================================
Weighted average number of
shares outstanding 2,120 4,010 4,091 3,030 4,583
===============================================================
</TABLE>
July 31, October 31,
1997 1997
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BALANCE SHEET DATA:
Cash and cash equivalents $ 1,099 $ -
Working capital (1,900) (2,600)
Total assets 16,544 16,646
Long-term debt, net of current portion 765 722
Convertible debt 2,600 2,600
Shareholders' equity 8,835 8,803
RECENT OPERATING RESULTS
The following table presents operating results for the Company for the periods
indicated:
Quarter ended January 31,
1997 1998
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Net revenues 2,934 4,101
Costs and expenses 3,606 5,141
Loss from operations (672) (1,040)
Other income (expense) 23 7
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Net loss (649) (1,033)
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RISK FACTORS
The Shares offered hereby should be considered a highly speculative
investment. Prospective investors should carefully consider the following
factors, in addition to the other information contained herein, before deciding
to purchase Shares. This Prospectus contains forward-looking statements within
the meaning of the federal securities laws. Such forward-looking statements
involve risks and uncertainties, and actual results may differ from those
projected due to a number of factors, including those set forth below and
elsewhere in this Prospectus. See "Special Note Regarding Forward-Looking
Statements."
SHORT OPERATING HISTORY
The Company has a limited history of operations consisting primarily of
operating a small number of hearing care clinics in British Columbia beginning
in October 1994. The Company did not begin operating in the United States until
it purchased two hearing care clinics in Santa Maria, California, in July 1996.
The Company currently operates 50 hearing care clinics in the United States and
12 clinics in Canada.
OPERATING LOSSES
For the fiscal year ended July 31, 1997, the Company sustained a net
loss of $1,701,000. For the three months ended October 31, 1997, the Company had
a net loss of $96,000. Further losses are anticipated as a result of planned
increases in the executive and general management staff of the Company to
support the Company's expansion plans, additional advertising and public
relations costs, amortization of goodwill related to past and future
acquisitions, and the continued development of an information management system.
There can be no assurance that the Company will achieve profitability in the
near or long term.
EXPANSION PROGRAM
Much of the Company's future success is dependent upon acquiring
hearing care clinics in new markets in which the Company has no previous
presence. There can be no assurance that the Company will be able to complete
acquisitions consistent with its expansion plans, that such acquisitions will be
on terms sufficiently favorable to enable the Company to operate profitably or
that the Company will be able to successfully integrate the hearing care clinics
that it acquires into its business. Successful integration of purchased clinics
will be dependent upon maintaining payor and customer relationships and
converting the information management systems of the clinics the Company
acquires to the Company's systems. Significant expansion could place a strain on
the Company's managerial and other resources and could necessitate the hiring of
a number of new managerial and administrative personnel. Unforeseen problems
with future acquisitions or failure to manage expansion effectively may have a
material adverse effect on the business, financial condition, and results of
operations of the Company.
The Company intends to issue additional Common Shares in payment of all
or a portion of the purchase price of certain acquisitions. There can be no
assurance that fluctuations in the market price of the Common Shares will not
adversely affect the Company's ability to use its Common Shares for
acquisitions. The Company also uses cash to fund acquisitions pursuant to its
business strategy. The Company's ability to use cash to make acquisitions is
dependent upon having available cash balances. Inadequate access to cash could
result in delays and have a negative effect on the Company's acquisition
strategy.
IMPACT OF POLICY CHANGES BY THIRD-PARTY INSURERS
A portion of the hearing instruments sold by the Company are paid for
by third-party insurers. Many of such insurers impose restrictions in their
health insurance policies on the frequency with which hearing instruments may be
upgraded or replaced on a reimbursable basis. Such restrictions have a negative
impact on hearing instrument sales volume. There can be no guarantee that such
insurers will not implement other policy restrictions
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in the future in order to further minimize reimbursement for hearing care. Such
restrictions could have a material adverse effect on the Company's business,
financial condition, and results of operations.
MANAGED CARE
Managed care arrangements typically shift some of the economic risk of
providing patient care from the person who pays for the care to the provider of
the care by capping fees, requiring reduced fees, or paying a set fee per
patient irrespective of the amount of care delivered. With respect to hearing
care, such limits could result in reduced payments for services or restrictions
on the types of services for which reimbursement is available or the frequency
of replacements or upgrades of equipment. If managed care arrangements become
more prevalent in the hearing care field in the future, or the downward
pressures on fees associated with managed care increase, the Company's business,
financial condition, and results of operations may be materially adversely
affected.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent to a significant degree on the
services of Brandon M. Dawson, president and chief executive officer of the
Company, and on the other members of its executive management team. The loss of
the services of any of these key personnel could have a material adverse effect
on the Company's business, financial condition, and results of operations.
The Company's success is also substantially dependent upon its ability
to identify, attract and retain qualified employees, particularly audiologists,
who are primarily responsible for clinic profitability as well as for attracting
and retaining customers. The Company recruits such personnel from a limited pool
of available applicants. Although the Company attempts to enter into employment
contracts with its audiologists that contain covenants not to compete, such
audiologists may become competitors of the Company. The Company's failure to
attract and retain audiologists and other key employees would have a material
adverse effect on the business, financial condition, and results of operations
of the Company.
CONCENTRATION OF SHARE OWNERSHIP
Warburg, by virtue of its ownership of 13,333,333 Convertible Shares,
holds approximately 33% of the outstanding voting securities of the Company.
Including the shares issuable upon exercise of the Warrants to purchase
2,000,000 Common Shares, Warburg "beneficially owns" approximately 46% of the
voting securities of the Company. See "Principal Shareholders." As a result of
Warburg's significant percentage share ownership, as well as its right to
designate two nominees for director, Warburg will be able to exercise
substantial influence and control over the Company's affairs, including the
election of directors and any significant corporate transactions.
Furthermore, under the Securities Purchase Agreement dated December 24,
1997, between Warburg and the Company, certain corporate transactions by the
Company require Warburg's prior consent. For as long as Warburg beneficially
owns at least 666,667 outstanding Common Shares (including for this purpose
Convertible Shares convertible into such number of Common Shares), the Company
may not, without Warburg's consent, (i) sell, lease, exchange, or transfer all
or substantially all of its assets to any third party, (ii) amalgamate the
Company with another corporation such that the then existing shareholders of the
Company hold less than 51% of the combined voting power of the amalgamated
corporation, (iii) materially change the nature of the Company's business, (iv)
effect a liquidation, amalgamation, or sale of the Company or sell substantially
all of its or its subsidiaries' assets, or (v) with certain exceptions, redeem
or pay a dividend or distribution on its Common Shares. See "Acquisition of
Securities by Warburg."
In addition, at December 31, 1997, the executive officers and directors
of the Company beneficially owned 1.5 million Common Shares (not including
Common Shares subject to options). Consequently, officers and directors retain
voting power with respect to approximately 27% of the voting securities
presently outstanding. Accordingly, these individuals, acting in concert, have
substantial influence over most matters requiring shareholder approval.
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Such concentration of ownership could also enable management to delay or hinder
a change in control of the Company and may discourage third parties from
attempting to acquire such control.
PUBLIC MARKET; VOLATILITY OF STOCK PRICE
The Common Shares began trading on AMEX on February 10, 1998. Prior to
listing on AMEX, there was no public market for the Company's Common Shares in
the United States. The Common Shares were traded on the ASE in Canada until
their delisting on February 11, 1998. In order to maintain the listing of the
Common Shares on AMEX, the Company will be required to comply with certain
minimum listing standards imposed by AMEX. There can be no assurance that the
Company will continue to meet such standards or that an active trading market in
Common Shares will be sustained.
The market price of the Company's Common Shares may be significantly
affected by such factors as the Company's operating results and seasonality
therein, changes in any earnings estimates publicly announced by the Company or
by analysts, announcements of technological or surgical innovations affecting
hearing care, the introduction of new hearing care products or changes in
existing hearing care products, the entry of competitors into the hearing care
markets or into retail hearing instrument sales, and various factors affecting
the economy in general. In addition, the U.S. stock market has experienced a
high level of price and volume volatility and market prices for the stock of
many companies have experienced wide price fluctuations not necessarily related
to the operating performance of such companies.
POTENTIAL FOR FUTURE SALES OF SHARES
This Prospectus relates to the offering for sale of a total of
3,744,492 Shares from time to time by one or more persons identified under the
caption "Selling Shareholders" (the "Selling Shareholders"), of which (i) 2.2
million Shares are presently outstanding, (ii) 1.1 million Shares are issuable
upon the exercise of purchase warrants, and (iii) 400,000 Shares are issuable
upon the exercise of convertible notes. See "Selling Shareholders," "Principal
Shareholders," and "Plan of Distribution." Of the 3.7 million Shares being
offered hereunder, approximately 540,000 Shares are held by executive officers,
directors or founding shareholders of the Company. Each such person intends to
offer his or her shares for sale from time to time during the next 18 months as
his or her individual circumstances dictate.
An additional 6.1 million Common Shares which are not covered by this
Prospectus are issuable upon the exercise of options, purchase warrants, and
convertible securities, of which 5.1 million were exercisable at December 31,
1997. Also, 2.2 million outstanding Common Shares which are not covered by this
Prospectus are freely transferable under the Canadian and U.S. federal
securities laws. Sales of any significant number of Common Shares, or the
potential for such sales, in the public market could adversely affect the
prevailing market price of the Common Shares. See "Price Range of Common
Shares."
Warburg holds Convertible Shares immediately convertible into 2,666,666
Common Shares. Although there are certain restrictions on the sale of shares by
Warburg, the sale of such shares or the threat of such sale could adversely
affect the market price of the Common Shares. See "Acquisition of Securities by
Warburg."
COMPETITION
The market in which the Company operates is intensely competitive,
highly fragmented, and characterized by intense price competition and an
increasing number of new audiologists entering the market. The Company has
numerous competitors in each of the markets in which it operates hearing care
clinics. Some of its competitors are better known and have substantially greater
financial and marketing resources than the Company. In addition, other persons
or entities may seek to acquire hearing care clinics in the markets in which the
Company hopes to operate, thereby creating competitive pressures in connection
with the acquisition of hearing care clinics by the Company.
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LABOR UNIONS
Although there are no collective bargaining agreements in place with
respect to the Company's operations, there can be no assurance that the
Company's employees will not attempt to unionize. Certain individuals have
attempted to unionize the employees of Sonus-Canada, the Company's primary
Canadian operating subsidiary, in the past. Any unionization of the Company's
employees could have a material adverse effect on the business, financial
condition, and results of operations of the Company.
ADDITIONAL FINANCING
The Company's strategy to acquire additional hearing care clinics will
require substantial additional funding. The Company recently completed the
Warburg Sale for an aggregate purchase price of $18,000,000 in cash. See
"Acquisition of Securities by Warburg." This funding is expected to be
sufficient to finance operations and the Company's acquisition strategy over the
next 12 months. Funding will, however, continue to be needed to finance future
acquisitions, for the continued development of information management systems
that will link each clinic with the Company's corporate headquarters, and as
additional working capital. These funding requirements may result in the Company
incurring long-term and short-term indebtedness and in the public or private
issuance, from time to time, of additional equity or debt securities. Any such
issuance of equity may be dilutive to current shareholders and debt financing
may impose significant restrictive covenants on the Company. There can be no
assurance that financing will be available to the Company or will be available
on terms acceptable to the Company.
REPUTATION OF THE INDUSTRY
Certain segments of the hearing care industry, in particular the sale
and fitting of hearing instruments, have been the subject of governmental
investigation and adverse publicity due to unscrupulous sales practices by
certain organizations. Adverse publicity concerning the hearing care industry
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
REGULATION
The sale of hearing aid devices is regulated at the federal level in
the United States by the United States Food and Drug Administration ("FDA"),
which has been granted broad authority to regulate the hearing care industry.
Under federal law, hearing instruments may only be sold to individuals who have
first obtained a medical evaluation from a licensed physician, although a fully
informed adult may waive a medical evaluation in certain instances. Regulations
promulgated by the FDA also presently require that dispensers of hearing
instruments provide customers with certain warning statements and notices in
connection with the sale of hearing instruments and that dispensers meet certain
labeling requirements.
Most states in the United States and many provinces in Canada have
established formal licensing procedures that require the certification of
audiologists and/or hearing instrument specialists ("HISs"). Although the extent
of regulation varies by jurisdiction, almost all states and provinces engage in
some degree of oversight of the industry. The Company operates its hearing care
clinics through its wholly owned subsidiaries, Sonus-USA, which is a Washington
general business corporation, and Sonus-Canada, a British Columbia corporation.
The subsidiary corporations employ licensed audiologists who offer and perform
audiology services on behalf of the Company.
In certain states in the United States, business corporations such as
Sonus-USA may not be authorized to employ audiologists and offer audiology
services. For example, in California, where the Company operates 27 clinics,
although the performance of audiology services by professional corporations
owned solely by licensed audiologists is expressly authorized under California
law, it is unclear whether general business corporations such as Sonus-USA may
employ licensed audiologists to perform audiology services. However, the
California Department of Consumer Affairs has indicated by memorandum that
speech-language pathologists, which are regulated under statutes and regulations
similar to those governing audiologists, may practice in a general business
corporation and that a general business corporation may provide speech-language
pathology services through licensed
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speech pathologists. In Illinois, where the Company has six hearing care
clinics, it is also unclear whether general business corporations may employ
licensed audiologists to perform audiology services. Under Illinois law, only
professional corporations and individuals are authorized to obtain licenses to
practice audiology.
The laws and regulations governing the practice of audiology are
enforced by regulatory agencies with broad discretion. If the Company were found
to be in violation of such laws and regulations in one or more states, the
consequences could include the imposition of fines and penalties upon the
Company and its audiologists as well as the issuance of orders prohibiting the
Company from operating its clinics under its present structure. In that event,
among the solutions the Company might consider would be the restructuring of all
or a portion of its operations in a manner similar to that used by certain
medical and dental clinic networks. Under such a structure, professional
corporations owned by licensed audiologists would contract with the Company to
perform professional services and the Company would contract with the
professional corporations to provide management services. A restructuring of
this nature would result in material additional costs to the Company.
No assurance can be given that the Company's activities will be found
to be in compliance with laws and regulations governing the corporate practice
of audiology or, if its activities are not in compliance, that the operational
structure of the Company can be modified to permit compliance. In addition, no
assurance can be given that other states or provinces in which the Company
presently operates will not enact prohibitions on the corporate practice of
audiology or that the regulatory framework of certain jurisdictions will not
limit the ability of the Company to expand into such jurisdictions if the
Company is unable to modify its operational structure to comply with such
prohibitions or to conform with such regulatory framework. Additional laws and
regulations may be adopted in the future at the federal, state, or province
level that could have a material adverse effect on the business, financial
condition, and results of operations of the Company.
A small percentage of the revenues of the hearing care clinics operated
by the Company comes from Medicare and Medicaid programs. Federal law prohibits
the offer, payment, solicitation or receipt of any form of remuneration in
return for, or in order to induce, (i) the referral of a Medicare or Medicaid
patient, (ii) the furnishing or arranging for the furnishing of items or
services reimbursable under Medicare or Medicaid programs or (iii) the purchase,
lease or order of any item or service reimbursable under Medicare or Medicaid.
Noncompliance with the federal anti-kickback legislation can result in exclusion
from Medicare and Medicaid programs and civil and criminal penalties.
ISSUANCE OF PREFERRED SHARES AND ADDITIONAL COMMON SHARES
The Board of Directors of the Company (the "Board") has the authority to issue
an unlimited number of preferred shares of the Company ("Preferred Shares") in
one or more series and to fix the number of shares of any such series and the
designations, rights, privileges, restrictions, and conditions attaching
thereto, without any further vote or action by the shareholders of the Company
other than as may be necessary to comply with the AMEX listing requirements. The
Board recently designated the Convertible Shares for issuance in connection with
the Warburg Sale. See "Description of Capital Stock--Convertible Shares." The
future issuance of other series of Preferred Shares could adversely affect the
rights of holders of Common Shares. For example, the designation and issuance of
additional series of Preferred Shares could result in securities, similar to the
Convertible Shares, that would have preference over the Common Shares with
respect to dividends and in liquidation and that could (upon conversion or
otherwise) have all of the rights of the Common Shares. The Board also has the
authority to issue an unlimited number of additional Common Shares without any
further vote or action by the Company's shareholders, except as required by
AMEX, possibly causing the interests of the existing shareholders to suffer
substantial dilution. See "Description of Capital Stock--Common Shares." The
issuance of additional series of Preferred Shares or additional Common Shares
could potentially be used to discourage attempts by others to obtain control of
the Company through merger, tender offer, proxy or consent solicitation, or
otherwise by making such attempts more costly or more difficult to achieve.
- 8 -
<PAGE>
SERVICE AND ENFORCEMENT OF LEGAL PROCESS
The Company is incorporated under the laws of the Province of Alberta,
Canada. Some of the directors, controlling persons and officers of the Company,
as well as certain of the experts named herein and 10 of the Selling
Shareholders, are residents of Canada and all or a portion of the assets of such
persons and of the Company are located outside of the United States. As a
result, it may be difficult for holders of the Common Shares to effect service
within the United States upon those directors, controlling persons, officers,
experts and Selling Shareholders hereunder who are not residents of the United
States, or to realize in the United States upon judgments of courts of the
United States predicated upon the civil liability provisions of the United
States federal securities laws to the extent such judgments exceed such person's
United States assets. The Company has been advised by its Canadian counsel,
Ballem MacInnes, that there is doubt as to the enforceability in Canada against
the Company or against any of its directors, controlling persons, officers or
experts or any Selling Shareholders hereunder who are not residents of the
United States, in original actions or in actions for enforcement of judgments of
United States courts, of liabilities predicated solely upon United States
federal securities laws. The Company's agent for service of process in the
United States is MN Service Corp. (Oregon), 111 S.W. Fifth Avenue, Suite 3500,
Portland, Oregon 97204, telephone (503) 224-5858.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Prospectus, to the extent they are not based on
historical events, are 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 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 governmental 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. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update or to publicly announce the result of
any revisions to any of the forward-looking statements contained herein to
reflect future events or developments. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business."
- 9 -
<PAGE>
PRICE RANGE OF COMMON SHARES
The Common Shares were traded on the ASE until February 10, 1998, at
which time they began trading on AMEX. The following table sets forth the
reported high and low sales prices in Canadian and United States dollars for the
Common Shares for the periods indicated:
CANADIAN $ UNITED STATES $(1)
FISCAL YEAR PERIOD HIGH LOW HIGH LOW
1996 First Quarter 1.50 0.70 1.10 0.55
Second Quarter 3.50 1.40 2.55 1.05
Third Quarter 20.00 3.10 14.75 2.25
Fourth Quarter 20.00 10.00 14.70 7.25
1997 First Quarter 14.25 10.00 10.40 7.30
Second Quarter 12.90 9.30 9.45 7.00
Third Quarter 12.25 6.25 8.95 4.45
Fourth Quarter 9.85 6.25 7.10 4.50
1998 First Quarter 10.75 7.75 7.75 5.60
Second Quarter 13.00 8.50 9.05 6.00
(1) The high and low sales prices were converted to United States dollars as of
the date of sale.
As of December 31, 1997, there were 84 holders of record of Common
Shares.
DIVIDEND POLICY
The payment of dividends on the Common Shares is solely within the
discretion of the Board, subject to the right of Warburg, for as long as it
beneficially owns at least 666,667 outstanding Common Shares (including for this
purpose Convertible Shares convertible into such number of Common Shares), to
veto any proposed payment of dividends on the Common Shares. Since its inception
the Company has not paid cash dividends on its Common Shares. The Company
intends to retain any future earnings for further development and growth of its
business and does not anticipate paying cash dividends on the Common Shares in
the foreseeable future.
- 10 -
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and the
capitalization of the Company at October 31, 1997, and as adjusted to reflect
the sale of 13,333,333 Convertible Shares and Warrants to purchase 2,000,000
Common Shares in connection with the Warburg Sale.
<TABLE>
As of October 31, 1997
----------------------
Actual As Adjusted
------ -----------
(in thousands)
Short-term debt and capital lease obligations:
<S> <C> <C>
Bank overdraft, bank loans, and short-term notes payable $ 785 $ 785
Convertible notes payable (1) 2,600 2,600
Current portion of long-term debt and capital lease obligations 458 458
----------- -----------
Total short-term debt and capital lease obligations $ 3,843 $ 3,843
Long-term debt and capital lease obligations:
Long-term debt and capital lease obligations, non-current
portion $ 1,002 $ 1,002
Shareholders' equity:
Preferred shares, without nominal or par value,
unlimited number of shares authorized;
Convertible Preferred Shares, actual none;
as adjusted 13,333,333 shares (2) -- 15,786
Common shares, without nominal or par value,
unlimited number of shares authorized;
5,451,903 shares issued and outstanding (3) 11,259 11,259
Notes receivable from shareholders (124) (124)
Accumulated deficit (2,213)
(2,213)
Treasury shares, 5,640 shares at cost (47 (47)
Cumulative translation adjustment (72) (72)
----------- ----------
Total shareholders' equity 8,803 24,589
--------- ----------
Total capitalization $ 13,648 $ 29,434
========== ===========
</TABLE>
(1) Convertible debt consists of $2,600,000 principal amount of convertible
subordinated notes, of which $1,170,000 principal amount is due on April 30,
1998, and $1,430,000 principal amount is due on July 31, 1998. The notes do not
bear interest and are immediately convertible into Common Shares at the
conversion price of $6.50 principal amount per share.
(2) The Convertible Shares and Warrants to purchase 2,000,000 Common Shares at a
price of $12 per share were assumed to have been issued for gross proceeds of
$18,000,000 less offering expenses of $2,214,000.
(3) Shares issued and outstanding do not include the following: (i) 1,566,661
Common Shares issuable upon the exercise of share purchase warrants outstanding
at October 31, 1997; (ii) 400,000 Common Shares issuable upon the conversion of
convertible subordinated notes; and (iii) 540,400 Common Shares issuable upon
the exercise of stock options held by employees, directors, and officers of, and
consultants to, the Company.
- 11 -
<PAGE>
ACQUISITION OF SECURITIES BY WARBURG
On December 24, 1997, the Company completed the Warburg Sale. The
Convertible Shares issued in the Warburg Sale are entitled to one-fifth of a
vote per share (or such other number of votes equal to the number of Common
Shares into which a 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 action or consideration. See "Description of Capital
Stock--Convertible Shares." Warburg's Convertible Shares represent approximately
33% of the outstanding voting securities of the Company. Including the Common
Shares issuable upon exercise of the Warburg Warrants, Warburg "beneficially
owns" approximately 46% of the voting securities of the Company. See "Risk
Factors--Concentration of Share Ownership."
The Convertible Shares may be converted at any time, in whole or in
part, into Common Shares. The conversion rate is currently one Common Share for
every five Convertible Shares surrendered for conversion, subject to further
adjustment for stock dividends, stock splits, reverse stock splits,
recapitalizations, and other anti-dilution adjustments.
As long as Warburg beneficially owns a number of outstanding Common
Shares constituting at least 10% of the outstanding Common Shares (including for
this purpose the Common Shares issuable upon conversion of the Convertible
Shares (the "Conversion Common Shares") but not the Common Shares issuable upon
exercise of the Warrants), the Company will be required to nominate and use its
reasonable best efforts to cause to be elected and to remain as directors two
persons, reasonably satisfactory to the Company, designated by Warburg. On
December 24, 1997, in partial satisfaction of this requirement, the Board
elected Joel Ackerman, a managing director of E. M. Warburg, Pincus & Co., as a
director of the Company, filling the vacancy created by the resignation of Gene
K. Balzer, Ph.D. See "Management." A second nominee designated by Warburg has
not yet been appointed as a director. Warburg, Pincus & Co. is the general
partner of Warburg.
The number of directors as to which Warburg has the right to designate
nominees will increase to three if and for so long as the number of positions on
the Board exceeds eight. Such number will decrease by one if Warburg
beneficially owns a number of outstanding Common Shares constituting less than
10% of the outstanding Common Shares (including Conversion Common Shares) and
will further decrease to none if Warburg beneficially owns less than 666,667
outstanding Common Shares (including Conversion Common Shares). As long as
Warburg beneficially owns at least 666,667 outstanding Common Shares (including
Conversion Common Shares), the number of positions on the Board may not exceed
11. The right to designate one nominee for director may be transferred by
Warburg to a single purchaser of at least 6,666,667 Convertible Shares or the
Common Shares issued upon conversion thereof.
Prior to consummation of the transaction with Warburg, control of the
Company was effectively in the hands of the Company's directors, particularly
Douglas F. Good, Chairman of the Board, and Brandon M. Dawson, President, Chief
Executive Officer, and Director who together owned 20% of the outstanding Common
Shares. Messrs. Good and Dawson now hold a total of 13% of the voting securities
of the Company.
As a result of Warburg's significant percentage share ownership, as
well as its right to designate nominees for director as discussed above, Warburg
will be able to exercise substantial influence and control over the Company's
affairs. See "Risk Factors--Concentration of Share Ownership." For as long as
Warburg beneficially owns at least 666,667 outstanding Common Shares (including
Conversion Common Shares), the Company may not, without Warburg's consent, (i)
sell, lease, exchange or transfer all or substantially all of its assets to any
third party, (ii) amalgamate the Company with another corporation such that the
then existing shareholders of the Company hold less than 51% of the combined
voting power of the amalgamated corporation, (iii) materially change the nature
of the Company's business, (iv) effect a liquidation, amalgamation or sale of
the Company or sell substantially all of its or its subsidiaries' assets, or (v)
with certain exceptions, redeem or pay a dividend or distribution on its Common
Shares.
- 12 -
<PAGE>
The net proceeds of the Warburg Sale totaled approximately $15.8
million and will be used to make acquisitions of additional audiology-related
businesses and for working capital. In the event that Warburg exercises the
Warrants in full, the Company will receive additional net proceeds of up to
$23.5 million.
SELLING SHAREHOLDERS
The following table sets forth the name of each Selling Shareholder,
any position, office or other material relationship of such Selling Shareholder
with the Company within the past three years, the number of Common Shares owned
by such Selling Shareholder at December 31, 1997, the number of shares to be
offered by the Selling Shareholder and the amount of Common Shares to be owned
by such Selling Shareholder after completion of the offering assuming all the
offered shares are sold. Figures representing the number of shares owned by each
Selling Shareholder are based on records available to the Company and in some
cases, representations made by such Shareholders, and the Company makes no
representations as to the accuracy of such figures.
Of the 5,834,582 Common Shares outstanding at March 1, 1998, 2.2
million, or 38%, have been registered for resale pursuant to this Prospectus. In
addition, 1.5 million Common Shares issuable upon the exercise of purchase
warrants or convertible notes have been registered for resale, representing 24%
of the approximately 6.3 million Common Shares issuable upon the exercise of all
options, purchase warrants, and other convertible securities outstanding at
March 1, 1998.
Virtually all of the shares held by Selling Shareholders are restricted
securities within the meaning of Rule 144 under the Securities Act of 1933 (the
"Securities Act"). Restricted securities may not be sold under Rule 144 until a
one-year holding period has been satisfied. In addition, shares held by
executive officers or directors of the Company are "control shares" subject to
the provisions of Rule 144 other than the holding period requirements. Sales
under Rule 144 are, among other matters, subject to manner of sale requirements
and provisions limiting the number of shares which may be sold during any
three-month period. Restricted or control shares may also be sold in private
transactions outside the requirements of Rule 144 or pursuant to a registration
statement.
NUMBER OF SHARES
OWNED PRIOR TO SHARES TO BE OWNED
NAME OF SELLING SHAREHOLDER OFFERING SHARES OFFERED AFTER OFFERING
- --------------------------- ---------------- -------------- -------------
Abbingdon Venture Partners 148,720(1) 148,720 --
Limited Partnership
Abbingdon Venture Partners 14,256(2) 14,256 --
Limited Partnership II
Aho, Donald J 3,200(3) 3,200 --
Alfa Life Insurance Co. 80,000(3) 80,000 --
Alfa Mutual Fire Insurance 120,000(3) 120,000 --
Co.
Alfa Mutual Insurance Co. 120,000(3) 120,000 --
Angus, Richard(4) 14,300 14,300 --
Art, Barbara Holley V Trust 8,000(3) 8,000 --
Art, Barbara Holley VII Trust 19,200(3) 19,200 --
Aspen Limited Partnership(5) 152,060(6) 136,600 15,460
Aspen Partners, Inc. (7) 29,260 29,260
- 13 -
<PAGE>
NUMBER OF SHARES
OWNED PRIOR TO SHARES TO BE OWNED
NAME OF SELLING SHAREHOLDER OFFERING SHARES OFFERED AFTER OFFERING
- --------------------------- ---------------- -------------- -------------
Bennett, Carissa(8) 50,618 50,618 --(8)
Bickford, Michael D. & 16,000(3) 16,000 --
Lisbeth H
Business Development Capital 57,024(9) 57,024 --
Limited Partnership III
Caldwell, Derek(10) 17,840(11) 17,840 --
Campbell, Murray T.A.(12) 6,340 6,340 --
Cass, Baron & Darlene 8,000(3) 8,000 --
"Family Foundation"
Cass, A. Baron III "Childrens 32,000(3) 32,000 --
Trust"
Cass, A. Baron III 278,902(13) 173,532 105,370
Clark, Dr. Jim & Valerie 200 200 --
Cohen, Barton J 112,000(14) 32,000 80,000
Cohen, Barton J. "Family 8,000(3) 8,000 --
Foundation"
Collins, William 30,000(3) 30,000 --
Cross, Deborah Law(15) 81,600 81,600 --
Dawson, James W.(16) 1,320 1,320 --
Dawson, Brandon M.(17) 850,000 100,000 750,000(17)
DeJong, William(18) 16,440 16,440 --(18)
Downey, Gary B 3,200(3) 3,200 --
Drullinger, Randall E.(19) 50,000 50,000 --(19)
Feinberg, Hill A 8,000(3) 8,000 --
Ferrer, Christine 32,000(3) 32,000
Finney, Stanford C., Jr 129,200(20) 32,000 97,200
Frazer, Gregory(21) 243,093 149,381 93,712(21)
Friedman, Theodore 16,000(3) 16,000 --
Gabbert, Jerome 9,600 9,600 --
Good, Douglas F.(22) 241,912 100,000 141,912(22)
Gross Foundation Inc. 80,000(3) 80,000 --
Hill, Mark W 20,000(3) 20,000 --
- 14 -
<PAGE>
NUMBER OF SHARES
OWNED PRIOR TO SHARES TO BE OWNED
NAME OF SELLING SHAREHOLDER OFFERING SHARES OFFERED AFTER OFFERING
- --------------------------- ---------------- -------------- -------------
Holley, John W. and Wilson, 11,200(3) 11,200 --
Barbara
Holley, John W. Grantor 48,000(3) 48,000 --
Trust
Jacobson, Eli 12,800(3) 12,800 --
Judge, James P. 16,000(3) 16,000 --
Kanuk, Alan R. 14,400(3) 14,400 --
Kaplan, Howard 16,000(3) 16,000 --
Kawasaki, Edwin J.(23) 20,000 20,000 --(23)
Kigler, Marvin 1,600(3) 1,600 --
King, Gail 8,000(3) 8,000 --
King, Netta Sue Q-Tip Trust 8,000(3) 8,000 --
Lappetito, Paul 4,000(3) 4,000 --
Lemak, John 16,000(3) 16,000 --
Lieberman, John R. 1,600(3) 1,600 --
Low, Nathan(24) 53,827(25) 53,827 --
Mabry, Philip H. 8,000(3) 8,000 --
Marshall, Marilyn E.(26) 270,007 100,000 170,007(26)
Mathis, James T. 2,000(3) 2,000 --
McKnight, Charles 3,200(3) 3,200 --
McNight, Netta Sue King 3,200(3) 3,200 --
Miller, Dwight(24) 45,545(27) 45,545 --
Milstein, Edward 32,000(3) 32,000 --
Milstein, Howard 32,000(3) 32,000 --
Mutz, Marcus R. 16,000(3) 16,000 --
C. M. Oliver & Company 61,720(29) 61,720 --
Limited(28)
Pinnacle Hotel Associates 90,000(30) 90,000 --
Limited Liability Company
Pretlow, Joe 8,000(3) 8,000 --
Rachofsky, Howard E. 169,000(31) 160,000 9,000
- 15 -
<PAGE>
NUMBER OF SHARES
OWNED PRIOR TO SHARES TO BE OWNED
NAME OF SELLING SHAREHOLDER OFFERING SHARES OFFERED AFTER OFFERING
- --------------------------- ---------------- -------------- -------------
Rainbow Trading Partners, 42,000(32) 32,000 10,000
Ltd.
Rainbow Trading Venture 45,200(33) 35,200 10,000
Partners, L.P.
Ramsay, Bruce A.(34) 6,680 6,680 --
Reik, William J. III 16,000(3) 16,000 --
Riggs, Leonard M., Jr., 26,666(3) 26,666 --
M.D.
Riggs, Peggy A. 13,333(3) 13,333 --
Rutledge, Stephen 2,000(3) 2,000 --
Sagit Investment Management 286,000 286,000 --
Ltd.
Saito, Karen D. 1,320 1,320 --
Saito, Kenneth O. 400 400 --
Saito, Linda N. 1,320 1,320 --
Saito, Stephanie N. 200 200 --
Sands Partnership No. 1 53,532 53,532 --
Money Purchase Pension Plan
Scharfer, Paul(35) 8,920(36) 8,920 --
Schlosberg, Paul E. 7,592(37) 7,592 --
State Capital Partners 16,000(3) 16,000 --
Still, Marc R. IRA(38) 30,420(39) 27,200 3,220
Stinson, John C. 10,000(3) 10,000 --
Stone, David 32,000(3) 32,000 --
Stone, Richard(24) 14,536(40) 14,536 --
Strauss, John L. 253,147(41) 213,147 40,000
Swerdoff, Alan(24) 3,675(42) 3,675 --
Tanihana, Jami(43) 179,875 181,195 --(43)
Thau, Andrea, Money 1,600(3) 1,600 --
Purchase Plan
Thau, Andrea P., Profit 3,200(3) 3,200 --
Sharing Plan
The Curran Companies, Inc. 93,533(44) 93,533 --
- 16 -
<PAGE>
NUMBER OF SHARES
OWNED PRIOR TO SHARES TO BE OWNED
NAME OF SELLING SHAREHOLDER OFFERING SHARES OFFERED AFTER OFFERING
- --------------------------- ---------------- -------------- -------------
Thomson, Craig R.(45) 13,780 13,780 --
Thomson, Michael G.(46) 25,740 25,740 --
- -------------------------
(1) Consists of shares issuable upon the conversion of a convertible
subordinated promissory note issued by the Company in the amount of
$966,680 in connection with its acquisition of the Midwest Division on
October 31, 1996.
(2) Consists of shares issuable upon the conversion of a convertible
subordinated promissory note issued by the Company in the amount of
$92,664 in connection with its acquisition of the Midwest Division on
October 31, 1996.
(3) One-half of the number of shares shown are issuable to the Selling
Shareholder upon the exercise of the Company's September Warrants (as
defined below). Each September Warrant is exercisable for one Common
Share at an exercise price of $10.00 until August 31, 1998. See
"Description of Capital Stock-- Warrants."
(4) Richard Angus, through Wood Gundy, Inc., assisted in the private
placement of the Company's special warrants issued in February 1996,
and received 7,150 shares and 7,150 February Warrants (as defined
below) in partial payment for such placement services. See "Description
of Capital Stock--Warrants."
(5) Aspen Limited Partnership received 92,800 of the shares shown as the
designee of Dallas Research & Trading, Inc. ("Dallas Research"), which
acted as a placement agent in connection with the private placement of
the Company's special warrants in the United States in December 1996.
Dallas Research received a selling commission equal to 9% of the gross
proceeds of the offering that was paid through the issuance of 36,000
September Warrants. Dallas Research also received an additional 4,000
September Warrants in payment of its corporate finance fee and an
option to acquire 40,000 share purchase warrants. See "Description of
Capital Stock--Warrants."
(6) The number of shares shown includes 43,800 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 33,600 shares issuable upon the exercise of share
purchase warrants at an exercise price of $6.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(7) Consists of shares issuable upon the conversion of a convertible
subordinated promissory note issued to Brown's Creek, Inc., by the
Company in the amount of $1,170,000 (the "Brown's Creek Note") in
connection with its acquisition of the Midwest Division on October 31,
1996. Aspen Partners, Inc., purchased a portion of the Brown's Creek
Note in December 1997.
(8) Ms. Bennett has entered into a five-year employment contract with the
Company as an area administrator. She is married to Gregory Frazer, an
officer and director of the Company. She acquired her Common Shares in
connection with the acquisition by the Company of 11 clinics operated
by HCA on October 1, 1996. The shares to be owned by Ms. Bennett after
the offering do not include Mr. Frazer's shares or 20,000 shares which
Ms. Bennett will have the right to acquire upon the exercise of stock
options, half of which are currently vested. See note 21 below and
"Management," "Principal Shareholders," and "Certain Transactions."
- 17 -
<PAGE>
(9) Consists of shares issuable upon the conversion of a convertible
subordinated promissory note issued by the Company in the amount of
$370,656 in connection with its acquisition of the Midwest Division on
October 31, 1996.
(10) Mr. Caldwell received 1,840 of the shares shown as the designee of
Sunrise Securities Corporation ("Sunrise"), which acted as a placement
agent in connection with the private placement of the Company's special
warrants in the United States in December 1996. Sunrise received a
selling commission equal to 9% of the gross proceeds of the offering
that was paid through the issuance of 38,682 September Warrants.
Sunrise also received a $25,000 corporate finance fee and an option to
acquire 42,980 share purchase warrants. See "Description of Capital
Stock--Warrants."
(11) The number of shares shown includes 8,560 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 720 shares issuable upon the exercise of share
purchase warrants at an exercise price of $6.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(12) Mr. Campbell was one of the Company's original shareholders and a
former director of the Company.
(13) The number of shares shown includes 60,000 shares issuable upon the
exercise of the Company's September Warrants. See "Description of
Capital Stock--Warrants."
(14) The number of shares shown includes 16,000 shares issuable upon the
exercise of the Company's September Warrants. See "Description of
Capital Stock--Warrants."
(15) Ms. Cross has entered into a three-year employment contract with the
Company as an area administrator. She acquired her Common Shares in
connection with the acquisition by the Company of Hearing Dynamics in
December 1996. Of the shares shown, a total of 15,732 shares are
subject to restrictions on sale or transfer. Such restrictions will
lapse as to one-half of such shares on November 30 in each of 1998 and
1999. In addition, 16,000 of the shares are being held by the Company
(the "Contingent Shares"). If for any of the 12-month periods ending on
November 30, 1997, 1998 or 1999, the income of Hearing Dynamics before
interest, taxes, depreciation and amortization and after a corporate
overhead allocation falls below 20% of the net revenues of the business
for such year, Ms. Cross may elect to pay the Company $1.00 for each
$1.00 of shortfall or cancel one-fifth of a Contingent Share for each
$1.72 of shortfall.
(16) James W. Dawson is the father of Brandon M. Dawson, who is president,
chief executive officer, and a director of the Company.
(17) Brandon M. Dawson is president, chief executive officer, and a director
of the Company. The number of shares to be owned by Mr. Dawson after
the offering, which represents 13.7% of the Common Shares presently
outstanding, does not include 590,000 shares which Mr. Dawson has the
right to acquire pursuant to the exercise of stock options, 60,000 of
which are currently vested. See "Management," "Principal Shareholders,"
and "Certain Transactions."
(18) Mr. DeJong is a director of the Company. The shares to be owned by Mr.
DeJong after the offering do not include 15,000 shares which Mr. DeJong
has the right to acquire pursuant to the exercise of stock options. See
"Management," "Principal Shareholders," and "Certain Transactions."
(19) Mr. Drullinger is an officer of the Company. The shares to be owned by
Mr. Drullinger after the offering do not include 120,000 shares which
Mr. Drullinger has the right to acquire pursuant to the exercise of
stock options, 40,000 of which are currently vested. See "Management."
(20) Includes 16,000 shares issuable upon the exercise of the Company's
September Warrants.
- 18 -
<PAGE>
(21) Mr. Frazer is an officer and director of the Company and acquired his
shares in connection with the acquisition by the Company of 11 clinics
operated by HCA on October 1, 1996. The number of shares to be owned by
Mr. Frazer after the offering, which represents 1.7% of the Common
Shares presently outstanding, does not include 80,000 shares which Mr.
Frazer will have the right to acquire pursuant to the exercise of stock
options, half of which are currently vested. See note 8 above and
"Management," "Principal Shareholders," and "Certain Transactions."
(22) Mr. Good is a director of the Company. The number of shares to be owned
by Mr. Good after the offering represent 2.6% of the Common Shares
presently outstanding. See "Management," "Principal Shareholders," and
"Certain Transactions."
(23) Mr. Kawasaki is an officer of the Company. The shares to be owned by
Mr. Kawasaki after the offering do not include 230,000 shares which Mr.
Kawasaki will have the right to acquire pursuant to the exercise of
stock options, 20,000 of which are currently vested. See "Management."
(24) The Selling Shareholder received the shares shown as the designee of
Sunrise. See note 10 above.
(25) The number of shares shown includes 17,958 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 17,911 shares issuable upon the exercise of share
purchase warrants at an exercise price of $6.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(26) The number of shares to be owned by Ms. Marshall after the offering
represents approximately 3% of the Common Shares presently outstanding.
(27) The number of shares shown includes 14,067 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 17,411 shares issuable upon the exercise of share
purchase warrants at an exercise price of $6.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(28) C.M. Oliver & Company Limited acted as placement agent in connection
with the private placement of the Company's September Warrants in
Canada in September 1996 and received a selling commission that
included $48,625 in cash and 6,800 September Warrants. C.M. Oliver &
Company Limited also received a $61,987 syndication fee, a $37,097
corporate finance fee, and an option to acquire 16,200 share purchase
warrants. See "Description of Capital Stock--Warrants."
(29) The number of shares shown includes 6,800 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 16,200 shares issuable upon the exercise of share
purchase warrants at an exercise price of $6.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(30) Consists of shares issuable upon the conversion of the Brown's Creek
Note issued by the Company in connection with its acquisition of the
Midwest Division on October 31, 1996. Pinnacle Hotel Associates Limited
Liability Company purchased a portion of the Brown's Creek Note in
December 1997.
(31) Includes 80,000 shares issuable upon the exercise of the Company's
September Warrants.
(32) Includes 16,000 shares issuable upon the exercise of the Company's
September Warrants.
(33) Includes 17,600 shares issuable upon the exercise of the Company's
September Warrants.
(34) Mr. Ramsay was one of the Company's original shareholders.
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(35) Mr. Scharfer received 920 of the shares shown as the designee of
Sunrise. See note 10 above.
(36) The number of shares shown includes 4,280 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 360 shares issuable upon the exercise of share
purchase warrants at an exercise price of $6.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(37) Consists of shares issuable upon the conversion of the Brown's Creek
Note issued by the Company in connection with its acquisition of the
Midwest Division on October 31, 1996. Mr. Schlosberg purchased a
portion of the Brown's Creek Note in December 1997.
(38) Mr. Still was president of Dallas Research and received the shares
shown as the designee of Dallas Research. See note 5 above.
(39) The number of shares shown includes 10,400 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 6,400 shares issuable upon the exercise of share
purchase warrants at an exercise price of $6.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(40) The number of shares shown includes 4,424 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 5,688 shares issuable upon the exercise of share
purchase warrants at an exercise price of $6.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(41) Includes 80,000 shares issuable upon the exercise of the Company's
September Warrants as well as 53,747 shares issuable upon the
conversion of the Brown's Creek Note issued by the Company in
connection with its acquisition of the Midwest Division on October 31,
1996. Mr. Strauss purchased a portion of the Brown's Creek Note in
December 1997.
(42) The number of shares shown includes 1,392 shares issuable upon the
exercise of the Company's September Warrants. The number of shares
shown also includes 890 shares issuable upon the exercise of share
purchase warrants at an exercise price of $6.25 per share until August
31, 1998. See "Description of Capital Stock--Warrants."
(43) Ms. Tanihana has entered into a five-year employment contract with the
Company as an area administrator. She acquired her shares in connection
with the acquisition by the Company of 11 clinics operated by HCA on
October 1, 1996. The shares to be owned by Ms. Tanihana after the
offering do not include 20,000 shares which Ms. Tanihana will have the
right to acquire upon the exercise of stock options, half of which are
currently vested. See "Certain Transactions."
(44) The number of shares shown includes 20,000 shares issuable upon the
exercise of the Company's September Warrants. See "Description of
Capital Stock--Warrants."
(45) Craig R. Thomson was one of the Company's original shareholders and a
former officer and director of the Company.
(46) Michael G. Thomson is employed by and a member of the capital markets
group of C.M. Oliver & Company Limited, which acted as placement agent
in connection with the private placement of the Company's September
Warrants in Canada in September 1996, and is a wholly owned subsidiary
of C.M. Oliver, Inc. See note 28 above. In addition, Mr. Thomson was
one of the Company's original shareholders and a former officer and
director of the Company. See "Certain Transactions."
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since 1996, the Company has achieved significant growth in revenues,
primarily due to the acquisition and operation of additional hearing care
clinics. For the fiscal year ended July 31, 1997, and the quarter ended October
31, 1997, the Company generated total revenues of $13.5 million and $5.0
million, respectively. As of October 31, 1997, the Company's cumulative deficit
was $2.2 million and its total shareholders' equity was $8.8 million. For the
fiscal year ended July 31, 1997, and the three months ended October 31, 1997,
the Company incurred net losses of $1.7 million and $96,000, respectively.
RECENT ACQUISITIONS
On August 1, 1996, Sonus-USA acquired the assets of Santa Maria Hearing
Associates. Consideration for acquisition of the single clinic consisted of
$50,000 in cash paid at closing and $25,000 for a covenant not to compete which
was paid on January 5, 1997. The intangible assets recorded in the acquisition
of the single clinic, including the covenant not to compete, amounted to
$76,000.
On October 1, 1996, HCA, consisting of 11 hearing care clinics located
in Los Angeles, California, merged with Sonus-USA. The consideration paid by the
Company consisted of $314,724 in cash and 477,907 Common Shares. An additional
$350,861 in cash was paid for covenants not to compete. The intangible assets
recorded in the transaction, including the covenants not to compete, amounted to
$2,831,000.
On October 31, 1996, Sonus-USA acquired the assets of the Midwest
Division, consisting of 14 hearing care clinics located in the Chicago,
Illinois, and Lansing, Michigan metropolitan areas. The consideration paid by
the Company consisted of a subordinated convertible note in the principal amount
of $2,600,000, which is convertible into 400,000 Common Shares at $6.50 per
share, and the assumption of certain liabilities in the amount of $360,000. The
intangible assets recorded in the transaction, including a covenant not to
compete, amounted to $2,441,500.
On December 6, 1996, Sonus-USA completed a merger with Hearing Dynamics
("HD"), which operated four hearing care clinics in the San Diego, California,
area. Cash in the amount of $102,600 and 81,600 Common Shares were exchanged for
all of the issued and outstanding shares of HD in connection with the merger. An
additional $25,000 was paid to the seller for a covenant not to compete. The
intangible assets recorded in the transaction, including the covenant not to
compete, amounted to $840,000.
On December 17, 1996, Sonus-USA acquired all of the Common Shares of
FHC, Inc., doing business as Family Hearing Centers ("FHC"). Consideration for
acquisition of the single clinic consisted of cash in the amount of $150,000,
the issuance of a promissory note in the amount of $150,000 and the assumption
and repayment of $100,000 in FHC corporate debt. An additional $112,223 was paid
to the sellers for a covenant not to compete. The intangible assets recorded in
the transaction, including the covenant not to compete, amounted to $472,000.
On January 9, 1997, Sonus-USA purchased all of the outstanding shares
of Hearing Care Associates-Los Angeles, Inc., for $301,000 in cash. An
additional $112,500 was paid to the sellers for a covenant not to compete. The
intangible assets recorded in the acquisition of the single clinic, including
the covenant not to compete, amounted to $466,000.
On February 28, 1997, Sonus-USA acquired all of the outstanding shares
of Hearing Care Associates- Arcadia, Inc., for $410,338 in cash. An additional
$130,170 was paid to the sellers for a covenant not to compete. The intangible
assets recorded in the acquisition of the single clinic, including the covenant
not to compete, amounted to $404,000.
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On March 6, 1997, Sonus-USA acquired all of the outstanding shares of
Hearing Care Associates-Sherman Oaks, Inc., for $26,568 in cash. An additional
$33,783 was paid to the sellers for a covenant not to compete. The intangible
assets recorded in the acquisition of the single clinic, including the covenant
not to compete, amounted to $103,000.
On March 14, 1997, Sonus-USA acquired all of the outstanding shares of
Auditory Vestibular Center, Inc., for $84,306 in cash. An additional $28,580 was
paid to the sellers for a covenant not to compete. The intangible assets
recorded in the acquisition of the single clinic, including the covenant not to
compete, amounted to $67,000.
On April 8, 1997, Sonus-USA acquired all of the outstanding shares of
Hearing Care Associates-Lancaster, Inc., for $136,751 in cash. An additional
$61,877 was paid to the sellers for a covenant not to compete. The intangible
assets recorded in the acquisition of the single clinic, including the covenant
not to compete, amounted to $140,000.
On June 6, 1997, Sonus-USA acquired all the outstanding shares of
Hearing Improvement Center, Inc., a California corporation operating two hearing
care clinics, in exchange for $500,000 in cash, 28,368 Common Shares, a two-year
promissory note in the amount of $132,624 payable in equal quarterly
installments including interest at 6% per annum, and a three-year promissory
note in the amount of $282,036 with accrued interest at the rate of 6% per annum
payable at the end of the first year and the balance of the note, including
interest, payable in equal monthly installments over the remaining term. An
additional $50,000 was paid to the sellers for covenants not to compete. The
intangible assets recorded in the acquisition of the two clinics, including
covenants not to compete, amounted to $1,108,000.
On July 8, 1997, Sonus-USA acquired certain assets of Dakota Hearing
Aid Service for $40,000 in cash. An additional $10,000 was paid to the seller
for a covenant not to compete. The intangible assets recorded in the
acquisition, including the covenant not to compete, amounted to $31,000.
On August 27, 1997, Sonus-USA acquired all the outstanding shares of
Hearing Care Associates-Santa Monica, Inc., for $258,268 in cash. An additional
$114,135 was paid to the sellers for covenants not to compete. The intangible
assets recorded in the acquisition of the clinic, including covenants not to
compete, amounted to $260,000.
On January 5, 1998, Sonus-USA acquired all the outstanding shares of
Hearing Care Associates-Inglewood, Inc., for $100,000 in cash and a three-year
promissory note in the amount of $97,000 which bears interest at the rate of 6
percent per annum and is payable in 12 equal quarterly installments. An
additional $23,040 is payable in 12 equal quarterly installments to the sellers
for covenants not to compete. The intangible assets recorded in the acquisition
of the clinic, including covenants not to compete, amounted to $60,000.
On January 30, 1998, Sonus-USA acquired certain assets of HearCare
Corp. for $90,000 in cash and the assumption and repayment of $138,120 in debt.
An additional $25,000 was paid to the seller for a covenant not to compete. The
intangible assets recorded in the acquisition of the clinic, including the
covenant not to compete, amounted to $200,000.
On February 12, 1998, Sonus-USA acquired all of the outstanding shares
of Hearing Care Associates- Montclair, Inc., for $50,000 in cash, the issuance
of a three-year promissory note in the amount of $26,000 and the assumption and
repayment of $15,000 in debt. An additional $15,000 was paid to the sellers for
covenants not to compete. The intangible assets recorded in the acquisition of
the clinic, including the covenant not to compete, amounted to $50,000.
On February 27, 1998, Sonus-USA acquired certain assets of Metropolitan
Hearing Clinics, Inc., consisting of five hearing care clinics in the Portland
and Eugene, Oregon, metropolitan areas. Consideration for the
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acquisition consisted of $500,000 in cash, the issuance of a five-year
promissory note in the amount of $560,000 and the assumption of debt. An
additional $190,000 is payable to the seller in 12 equal quarterly installments
for a covenant not to compete.
On February 27, 1998, Sonus-USA acquired certain assets of Tucson
Audiology Institute, Inc., consisting of one hearing care clinic in Tucson,
Arizona. Consideration for the acquisition consisted of $294,000 in cash, the
issuance of a three-year promissory note in the amount of $120,000, contingent
payments of $100,000 payable over three years and the assumption of debt. An
additional $50,000 is payable to the seller in 12 equal quarterly installments
for a covenant not to compete.
On February 27, 1998, Sonus-USA acquired certain assets of Katz Hearing
Aid & Audiology, Inc., consisting of three hearing care clinics in the Tucson,
Arizona metropolitan area. Consideration for the acquisition consisted of
$250,000 in cash, the issuance of a three-year promissory note in the amount of
$85,000, contingent payments of $115,000 payable over four years and the
assumption of debt. An additional $75,000 is payable to the seller in 12 equal
quarterly installments for a covenant not to compete.
Acquisition Summary
As of December 31, 1997, the Company had recorded $10,178,000 in
intangible assets, including $1,069,000 in covenants not to compete, which
represented 30% of the Company's total assets. The amortization of the
unamortized balance of $9,631,000 at December 31, 1997 will result in an annual
non-cash charge to earnings of approximately $509,000 in each of the next 20
years. If all of the covenants not to compete referred to above were currently
in effect, an additional non-cash charge to earnings of approximately $356,000
in each of the current and next two fiscal years would also be incurred.
RESULTS OF OPERATIONS
Three Months Ended October 31, 1997, compared to Three Months Ended October 31,
1996
Revenues. Total revenues for the three months ended October 31, 1997,
were $5,307,000, representing a 319% increase over revenues of $1,268,000 for
the comparable period in fiscal 1996. The increase was primarily attributable to
the 39 clinics acquired by the Company since October 1, 1996.
Product sales revenues were $4,601,000 for the three months ended
October 31, 1997, up 295% from $1,165,000 for the same period in 1996.
Audiological service revenues of $706,000 represented 13% of total revenues for
the three months ended October 31, 1997, as compared to $103,000 or 8% of total
revenues for the comparable period in 1996. 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. The Company's policy in the past was to waive the fee if a hearing
instrument was purchased.
Gross Profit. Gross profit for the three months ended October 31, 1997,
was $3,554,000 or 67% of revenues, compared to $776,000 or 61% of revenues for
the comparable period in fiscal 1996. The increase in gross profit percentage
was primarily due to higher volume discounts and improved product sales
management.
Operating Expenses. Operating expenses for the three months ended
October 31, 1997, were $3,633,000 representing an increase of 238% over
operating expenses of $1,075,000 for the comparable period in fiscal 1996. This
increase was attributable to the clinics acquired by the Company since October
1, 1996, and to planned increases in corporate staff, increases in amortization
of intangibles, and other corporate expenses related to the operation of a
significantly larger organization. As a percentage of total revenues, operating
expenses decreased to 69% for the three months ended October 31, 1997, from 85%
for the comparable period in 1996. The Company expects that operating expenses
as a percentage of revenues will continue to decrease during the current fiscal
year
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as the Company acquires new clinics, increasing the revenue base over which to
allocate its fixed general and administrative expenses.
Year Ended July 31, 1997, Compared to Year Ended July 31, 1996
Accounts Receivable Turnover. The Company's accounts receivable
turnover increased to 74 days for the fiscal year ended July 31, 1997 from 61
days in the prior fiscal year. The Company's accounts receivable balances
consisted primarily of insurance proceeds to be received from managed care and
third party insurance providers.
Revenues. Total revenues for the fiscal year ended July 31, 1997, were
$13,462,000, representing a 463% increase over revenues of $2,389,000 for the
prior fiscal year. Of this increase, $10,015,000 was attributable to the 39
clinics acquired during fiscal 1997. Product sales revenues were $11,627,000 for
the 1997 fiscal year, up 395% from the $2,345,000 for fiscal 1996. Audiological
service revenues increased from $44,000, or 2% of total revenues in fiscal 1996,
to $1,835,000, or 14% of total revenues, for the 1997 fiscal year. Substantially
all of the clinics acquired in the United States separately charge for the
performance of audiological services when a hearing instrument is purchased. The
Company's policy in the past was to waive the fee if a hearing instrument was
purchased.
Gross Profit on Product Sales. Product gross profit for the fiscal year
ended July 31, 1997, was $6,617,000 compared to $1,328,000 for the prior fiscal
year. Gross profit percentage was 58% for both fiscal 1997 and fiscal 1996. The
Company expects its gross profit percentage to improve in fiscal 1998 due to
higher volume discounts and improved product sales management.
Operating Expenses. Operating expenses for the fiscal year ended July
31, 1997, were $10,185,000, representing an increase of 419% over operating
expenses of $1,961,000 for the prior fiscal year. As a percentage of total
revenues, operating expenses decreased to 76% for the fiscal year ended July 31,
1997, from 82% for fiscal 1996, primarily due to fixed costs being spread over a
larger revenue base.
LIQUIDITY AND CASH RESERVES
During September 1996, the Company issued special warrants for 178,200
Common Shares in a private placement in Canada at a price of $5.68 per share for
gross proceeds of $1,012,500. In December 1996, the Company issued special
warrants for 829,800 Common Shares in a private placement in the United States
at a price of $6.25 per share for gross proceeds of $5,186,250. The special
warrants issued in Canada were accompanied by share purchase warrants to acquire
a total of 178,200 additional Common Shares at a price of $10.00 per share. The
special warrants issued in the United States were accompanied by share purchase
warrants to acquire a total of 829,800 additional Common Shares at a price of
$10.00 per share. The share purchase warrants expire on August 31, 1998.
However, if the closing bid for the Common Shares is in excess of $15 per share
for a period 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 share purchase warrants. The actual uses of the proceeds of the September
and December 1996 private placements are as follows (in thousands):
Working capital $1,500
Capital expenditures 600
Acquisitions 3,400
Offering and registration costs 700
------
$6,200
======
During the fiscal year ended July 31, 1997, the Company acquired 39
hearing care clinics located in California, Illinois, Michigan, New Mexico and
North Dakota. The acquisitions were funded primarily through the issuance of
Common Shares valued at $3.3 million, the issuance of convertible subordinated
notes in an aggregate principal amount of $2.6 million, the issuance of $565,000
in promissory notes, cash payments totaling
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$2.1 million, and the assumption of debt totaling $460,000. Consideration paid
for covenants not to compete amounted to $955,000.
During the fiscal year ended July 31, 1996, the Company acquired four
hearing care clinics in Canada and two clinics in the United States. The
acquisitions were funded through the issuance of a convertible note in the
amount of $127,000, the issuance of $77,000 in promissory notes, and cash
payments totaling $196,000. Consideration paid for covenants not to compete
amounted to $15,000.
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 $177,000 at October 31, 1997. As of October 31, 1997, $7,000 was outstanding
against this line, compared to no advances outstanding as of July 31, 1997.
Advances under the line of credit bear interest at 1% above the Royal Bank of
Canada prime rate. Advances under the revolving line of credit are secured by
all the assets of Sonus-Canada Ltd., and personally guaranteed by a shareholder.
Sonus-USA has a $500,000 line of credit with a hearing instrument manufacturer,
none of which is currently outstanding.
During fiscal 1997, the Company expended approximately $800,000 to
develop a management information system to link each clinic with the Company's
headquarters. Approximately $500,000 of this amount was financed by means of a
four-year capital lease, requiring payments of approximately $10,000 per month.
On December 24, 1997, the Company closed the Warburg Sale. The Company
believes that the $15.8 million in net proceeds from the Warburg Sale will
provide it with sufficient capital to fund its operations and planned
acquisitions over the next 12 months.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
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 stock or
potential common stock. 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. SFAS No. 128
is effective for financial statements for both interim and annual periods ending
after December 15, 1997. The Company is adopting SFAS No. 128 as of January 31,
1998, for the quarter then ended. All prior period EPS data will be restated to
conform with SFAS No. 128. The Company does not expect SFAS No. 128 to have a
significant impact on its EPS calculations.
In June 1997, the FASB also issued SFAS No. 130, "Reporting
Comprehensive Income," which established requirements for disclosure of
comprehensive income. The objective of SFAS No. 130 is to report all changes in
equity that result from transactions and economic events other than transactions
with owners. Comprehensive income is the total of net income and all other
non-owner changes in equity. The Company does not anticipate any significant
impact on reported results of operations due to the adoption of SFAS No. 130.
The Company is adopting SFAS No. 130 as of January 31, 1998, for the quarter
then ended; earlier financial statements will be reclassified for comparative
purposes.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," which changes the way segment
information is reported for public companies and requires those companies to
report selected segment information in interim financial reports to
shareholders. The statement is
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effective for financial statements for fiscal years beginning after December 15,
1997. Although the Company has not fully determined its complete impact, the
Company does not foresee any material change due to adoption of this statement
on its financial presentation to shareholders. The Company is adopting SFAS No.
131 as of January 31, 1998, for the quarter then ended; earlier financial
statements will be reclassified for comparative purposes if necessary.
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BUSINESS
OVERVIEW
The Company, through its primary operating subsidiaries Sonus-USA and
Sonus-Canada, currently owns and operates a network of 62 hearing care clinics
in the United States and Western Canada. In September 1997, Sonus-USA and
Sonus-Canada changed their names from HealthCare Hearing Clinics, Inc., and HC
HealthCare Hearing Clinics Ltd., respectively. By vote of the shareholders, the
Company changed its name to Sonus Corp. on February 9, 1998. Clinics owned by
the Company are located primarily in the metropolitan areas of Tucson, Arizona;
Los Angeles, California; San Diego, California; Chicago, Illinois; Lansing,
Michigan; Albuquerque, New Mexico; Portland, Oregon; Vancouver, British
Columbia; and Calgary, Alberta. The Company intends to expand its network of
hearing care clinics by acquiring clinics in its existing as well as new
geographic markets.
Each of the Company's hearing care clinics provides its hearing
impaired patients with a full range of audiological products and services.
During the fiscal year ended July 31, 1997, approximately 86% of the Company's
revenues were derived from product sales, including hearing instruments,
batteries, and accessories, while the remaining 14% of the Company's revenues
were derived from audiological services. Substantially all of the Company's
hearing care clinics are staffed by audiologists. The Company's operating
strategy is to provide patients with high quality and cost-effective hearing
care while at the same time increasing its operating margins by attracting and
retaining patients, recruiting qualified and productive audiologists, achieving
economies of scale and administrative efficiencies, and pursuing large group and
managed care contracts. The Company believes that it is well positioned to
provide retail hearing rehabilitative services to consumers while simultaneously
serving the diagnostic needs of referring physicians and meeting the access and
cost concerns of managed care providers and insurance companies.
INDUSTRY BACKGROUND
Professionals and Clinics. Hearing instruments may be dispensed by
either a dispensing audiologist or an HIS. Although both audiologists and HISs
may be licensed to dispense hearing instruments, audiologists have advanced
training in audiology and hold either a masters or Ph.D. degree.
Overall, dispensing audiologists are much younger than HISs. The March
1997 issue of The Hearing Review, a hearing industry trade journal, indicates
that approximately 27% of HISs in the U.S. are at least 61 years of age, 37% are
51-60 years of age, 25% are 41-50 years of age and only 11% are age 42 or under,
compared to 8%, 19%, 43% and 30%, respectively, for dispensing audiologists. The
Company believes that many HISs are facing retirement with no formal
"exit-strategy," a situation that creates an attractive investment opportunity
for the Company.
The typical hearing care practice wields little purchasing power with
manufacturers, and must spread overhead over a relatively small revenue base. In
addition, a typical hearing care practice often has insufficient capital to
purchase new technologies and lacks the systems and size necessary to develop
economies of scale. As a result, the Company believes that dispensing
audiologists and HISs will find it increasingly attractive to sell their
practices to or affiliate with larger organizations, such as the Company.
Another factor that may favor the consolidation of hearing care
practices is managed care. As managed care becomes more pervasive, hearing care
professionals will have an even greater need for the information resources,
management expertise, economies of scale, and access to managed care group
contracts that larger organizations such as the Company may be better able to
provide. However, managed care is not presently a large part of the hearing care
market and hearing care products and services are likely to continue to be
provided predominantly on a private pay basis for the next several years.
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Notwithstanding the factors favoring consolidation of hearing care
practices, there are currently only a few multiple clinic networks operating in
more than one state or province in the United States or Canada with combined
annual revenues in excess of $5 million.
Hearing Impaired Population. According to the 1996 edition of
Communication Facts, published by the American Speech-Language Hearing
Association, the number of persons in the United States who have hearing loss is
estimated to be approximately 28 million and the percentage of individuals with
a hearing loss relative to the general population is approximately 2% for those
under 18 years of age, 5% for those between 18 and 44 years of age, 14% for
those between 45 and 64 years of age, 23% for those between 65 and 74 years of
age and 32% for those over 75 years of age. In addition, the American Tinnitus
Association estimates that approximately 12 million American adults have
tinnitus (a ringing sensation in the ears) that is severe enough to seek medical
help.
The Company believes that the widely recognized demographic trend
toward an aging population will increase the demand for hearing instrument sales
and audiological services and that the demand for hearing instruments that are
less visible and for newer and superior hearing instrument technology, such as
digital and programmable hearing instruments, will also contribute to market
growth. In addition, the Company believes that some individuals forgo hearing
care because of the stigma of aging that can be associated with wearing a
hearing instrument and that the demand for hearing instrument sales and hearing
care services can be increased by marketing and education designed to reduce
that stigma.
Hearing Health Care Industry Segments. The hearing health care industry
serving patients with hearing and balance disorders is comprised of four
distinct service segments:
o hearing rehabilitation services, including the evaluation and
rehabilitation of persons with hearing impairments by assessing
communicative impairment and providing amplification;
o advanced audio-diagnostic services, including the neuro-audiologic
evaluation and non-medical diagnosis of hearing and balance
disorders;
o industrial and preventative audiological services, including noise
level measurements, dosimetry, and hearing screenings; and
o otolaryngologic services, including surgery and other medical
treatment.
The Company's clinics primarily provide hearing rehabilitation services. The
Company has one facility, the Rockyview Hearing and Balance Clinic located in
Calgary, Alberta, that provides advanced audio-diagnostic services and one
clinic located in San Diego, California, that provides evaluation and treatment
for patients with tinnitus.
Hearing rehabilitation services include the assessment and
rehabilitation of persons with hearing impairments through the use of hearing
instruments and counseling. Rehabilitation services, including amplification
systems, are provided by audiologists and HISs. The services offered include the
diagnostic audiological testing, fitting and dispensing of hearing instruments,
follow-up rehabilitative assistance, the sale of hearing instrument batteries,
hearing instrument repairs, and the sale of swim plugs, custom ear plugs, and
assistive listening devices.
Advanced audio-diagnostic services include the assessment and
non-medical treatment of vestibular and balance disorders and the evaluation of
patients with specific symptoms of an auditory or vestibular disorder, including
hearing loss, tinnitus, and balance problems. In order to make a differential
diagnosis of hearing disorders, an ear, nose and throat physician may employ or
refer patients to an audiologist to conduct special diagnostic hearing tests to
differentiate between conductive, sensory, and neural pathology. If the cause of
the hearing loss is a medical disorder in either the nervous system (neural) or
the middle ear (conductive), the physician proceeds with medical treatment.
However, if a non-treatable conductive or sensory loss is found, the physician
will generally refer the patient to an audiologist for rehabilitation.
- 28 -
<PAGE>
GROWTH STRATEGY
The Company's growth strategy is to expand its operations through the
selective acquisition of hearing clinics located in existing as well as new
geographic markets. The Company believes that the fragmented nature of the
hearing care industry, the absence of industry-wide standards, and the
inexperience and limited capital resources of many hearing care providers,
combine to provide an opportunity to build an expanding network of hearing care
clinics devoted to providing high-quality hearing health care services. See
"Risk Factors--Expansion Program."
The Company plans to expand its network of clinics in each new market
by initially targeting for acquisition a significant hearing care practice in
order to secure a solid foundation upon which to build a regional network of
audiology practices. The Company will then seek to acquire additional individual
or group practices in order to realize economies of scale in management,
marketing, and administration, and hopes that its initial purchase in the region
will attract other practitioners interested in selling their businesses. Due to
the contacts of management with audiologists in the industry, the Company is
frequently presented with opportunities to acquire hearing care clinics. Since
August 1, 1996, the Company has acquired 52 clinics, all located in the United
States.
The Company looks at the following factors before acquiring clinics in
a particular geographic market: (a) population size and distribution; (b)
audiology practice density, saturation and average group size; (c) local
competitors; (d) level of managed care penetration; and (e) local industry and
economy. In acquiring particular clinics within a geographic market, the Company
seeks clinics with the following characteristics: (a) an established patient
base drawing from a substantial metropolitan population; (b) significant revenue
and profitability prior to acquisition; (c) above-average potential to enhance
clinic profitability after acquisition; and (d) if a clinic has an audiologist,
a willingness by the audiologist to enter into an employment agreement with the
Company in order to retain continuity in patient service and relationships and
maintain the identity of the clinic in the community where it is located.
Prior to acquiring a hearing care clinic, the Company conducts a due
diligence investigation of the clinic's operations that includes an analytical
review of the clinic's financial statements, tax returns, and other operating
data, a review of patient files on a random sample basis, a review of credit
reports, contracts, bank deposits, and other documents and information that the
Company deems significant, and the preparation of financial projections. Based
on the information collected and analyzed during the due diligence review, the
Company determines an appropriate purchase price for the acquisition.
The Company generally uses cash, Common Shares, promissory notes,
assumption of debt, or a combination of the foregoing to fund acquisitions. See
"Risk Factors--Additional Financing." The amount paid for each practice varies
on a case-by-case basis according to historical revenues, projected earnings
after integration into the Company, and transaction structure. In connection
with each acquisition, the Company acquires substantially all of the assets of
the practice, including its audiological equipment and supplies, office lease
and improvements, receivables and patient files.
At the time a practice is acquired, the audiologist associated with the
practice typically becomes an employee of the Company and enters into an
employment agreement with the Company with an initial term of three years and
annual renewals thereafter. The employment agreement usually includes a
three-year noncompete provision following termination of employment. If the
office of a retiring HIS is acquired, a six- to 12-month transition plan is
usually negotiated with the HIS. See "Risk Factors--Dependence on Key Personnel"
and "Risk Factors--Expansion Program."
There can be no assurance that the Company will be able to complete
acquisitions consistent with its expansion plans, that such acquisitions will be
on terms favorable to the Company, or that the Company will be able to
successfully integrate the hearing care clinics that it acquires into its
business. Successful integration will be dependent upon maintaining payor and
customer relationships and converting the management information systems
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<PAGE>
of the clinics the Company acquires to the Company's systems. Significant
expansion could place a strain on the Company's managerial and other resources
and could necessitate the hiring of a number of new managerial and
administrative personnel. Unforeseen problems with future acquisitions or
failure to manage expansion effectively may have a material adverse effect on
the business, financial condition, and results of operations of the Company.
OPERATING STRATEGY
The Company's operating strategy is to provide its patients with high
quality and cost effective hearing care products and services while at the same
time increasing its operating margins by attracting and retaining patients,
recruiting qualified and productive audiologists, achieving economies of scale
and administrative efficiencies, and pursuing large group and managed care
contracts.
Attracting and Retaining Patients. The Company seeks to attract new
patients and retain existing patients at each clinic by providing patients with
friendly, comprehensive, and cost-effective hearing care at convenient times and
locations. In addition, by educating patients about hearing health issues and by
providing quality service during office visits and consistent patient follow-up
and support, the Company hopes to foster patient loyalty and increase the
likelihood of obtaining referrals and repeat visits for examinations and product
purchases. See "Risk Factors-- Competition" and "Risk Factors--Impact of Policy
Changes by Third-Party Insurers."
Recruiting Qualified and Productive Audiologists. Audiologists employed
by the Company are primarily responsible for clinic profitability as well as for
attracting and retaining customers. The Company seeks to employ audiologists who
share the Company's goal of delivering high-quality hearing care service and who
are also dedicated to expanding and enhancing their practices. The Company
believes that it can offer significant benefits to audiologists by providing
assistance in administrative tasks associated with operating an audiology
practice, thereby allowing them to focus on serving patients and increasing
productivity. The Company also believes that its size and structure enable it to
offer financial resources for practice development and enhancement that solo and
small group practitioners find difficult to obtain independently. See "Risk
Factors--Dependence on Key Personnel."
Achieving Economies of Scale and Administrative Efficiencies. A key
operating strategy of the Company is to achieve increased economies of scale and
administrative efficiencies at each of its clinics. When a clinic is acquired by
the Company, it immediately has available to it terms and discounts with hearing
instrument manufacturers that are generally more favorable than it could
negotiate independently. In addition, the Company believes that by centralizing
certain management and administrative functions such as marketing, billing,
collections, human resources, risk management, payroll, and general accounting
services, the profitability of a clinic can be improved by spreading the cost of
such functions over a larger revenue base. The Company has developed an on-line
management information system that links a substantial number of the Company's
clinics with the Company's corporate headquarters in order to provide management
with the ability to collect and analyze clinic data, control overhead expenses,
allow detailed budgeting at the clinic level, and permit effective resource
management. See "Risk Factors--Expansion Program" and "Risk Factors--Additional
Financing."
Pursue Large Group and Managed Care Contracts. Although the Company
intends to continue to aggressively pursue private-payor business because it is
presently more pervasive and profitable than managed care business, the Company
believes that by providing comprehensive geographic coverage in a particular
market, it will be strongly positioned to offer services to group hearing care
plans in that market. Managed care arrangements typically shift some of the
economic risk of providing patient care from the person who pays for the care to
the provider of the care by capping fees, requiring reduced fees, or paying a
set fee per patient irrespective of the amount of care delivered. With respect
to hearing care, such limits could result in reduced payments for services or
restrictions on the types of services for which reimbursement is available or
the frequency of replacements or upgrades of equipment. At the present time,
managed care penetration of the hearing care market is limited. However, if
managed care begins to play a larger role in hearing care, the Company plans to
develop information systems to improve productivity, manage complex
reimbursement methodologies, measure patient satisfaction and outcomes of care,
and integrate information from multiple sources.
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<PAGE>
Many third-party insurers impose restrictions in their health insurance
policies on the frequency with which hearing instruments may be upgraded or
replaced on a reimbursable basis. Such restrictions have a negative impact on
hearing instrument sales volume. There can be no guarantee that such insurers
will not implement other policy restrictions in the future in order to further
minimize reimbursement for hearing care. Such restrictions could have a material
adverse effect on the Company's business, financial condition, and results of
operations. See "Risk Factors--Competition" and "Risk Factors--Managed Care."
CLINIC STAFFING AND FACILITIES
Typically, each Company hearing clinic is staffed with at least one
audiologist and one patient care coordinator, who handles reception, clerical,
and most bookkeeping functions. The Company currently employs approximately 90
audiologists. Where volume warrants, a clinic may also be staffed with
additional audiologists and patient care coordinators. An audiologist employed
by the Company has a masters or Ph.D. degree in audiology. The audiologist is
licensed by the appropriate state or province to dispense hearing instruments
and is a member of the Canadian Association of Speech/Language Pathologists and
Audiologists or the American Speech-- Language Hearing Association.
Each of the Company's hearing clinics operates in leased space that
ranges in size from 800 to 3,000 square feet depending on patient volume and the
extent of services provided by the clinic. Clinics generally have a reception
seating area, a reception work and filing area, an office for the audiologist, a
laboratory for hearing instrument repairs and modifications, a technology
demonstration room and an evaluation room. A properly equipped office offering
only hearing rehabilitation services requires equipment that costs $50,000 to
$75,000. The cost of equipment for a clinic offering advanced audio-diagnostic
services is much greater and ranges from $225,000 to $250,000.
The table below shows the location of each of the Company's hearing
care clinics at January 31, 1997, the date the clinic was acquired by the
Company, and the revenues generated by each clinic for the periods indicated:
- 31 -
<PAGE>
<TABLE>
Revenues Revenues Revenues Revenues
Date for 3 months for 3 months for fiscal year as of latest
Clinic and Location Purchased/Opened ended 1/31/98 ended 1/31/97 ended 7/31/97 fiscal year
- ------------------- ---------------- ------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Alberta
- -------
Rockyview, Calgary(3) April 1996 $106,352 $ 96,796 $503,789 $ -
T.H. Moore, Calgary April 1995 60,019 51,113 199,173 383,423
British Columbia
- ----------------
Fraserview, Abbotsford October 1994 19,672 19,292 127,076 91,343
Fraserview, Chilliwack October 1994 52,878 66,485 286,428 228,405
Kamloops, Kamloops October 1994 74,638 58,504 283,699 205,394
Langley, Langley January 1996 58,767 77,207 369,943 285,611
Fraserview, Maple Ridge October 1994 37,315 45,801 170,661 145,742
Fraserview, New Westminster October 1994 51,143 87,139 276,017 288,459
Pacific, North Vancouver(6) April 1996 39,757 45,027 218,465 -
Fraserview, Richmond October 1994 35,669 47,684 169,075 152,771
Fraserview (2 clinics), Vancouver October 1994 107,428 122,049 570,306 653,590
California
- ----------
HCA, Alhambra October 1996 153,511 175,896 872,677 515,144
Hearing Dynamics, Alvarado December 1996 144,116 117,331 664,677 597,221
HCA, Arcadia February 1997 130,028 105,128 544,870 508,329
Allied, Arroyo Grande(1) July 1996 18,359 39,232 84,297 119,647
HCA, Burbank October 1996 45,379 73,107 262,314 280,643
Hearing Dynamics, Chula Vista December 1996 57,522 53,600 309,374 284,335
Hearing Dynamics, Coronado(1) December 1996 63,466 21,154 159,417 106,160
HCA, Fountain Valley(1)(5) December 1996 10,165 1,107 71,631 -
HCA, Glendale October 1996 122,499 197,437 950,491 837,293
HCA, Glendora October 1996 58,440 91,969 343,885 267,568
HCA, Inglewood January 1998 43,882 37,568 400,999 323,854
HCA, Lancaster March 1997 108,969 67,255 390,353 453,939
HCA, Long Beach October 1996 154,011 140,469 604,692 393,353
HIC, Long Beach June 1997 246,589 220,950 1,267,750 1,208,117
HCA, Los Angeles(4)(6) January 1997 211,111 - - 618,207
HCA, Mission Hills October 1996 95,514 92,253 425,625 341,935
HCA, Montrose(1) October 1996 17,720 16,120 54,964 105,861
HCA, Northridge October 1996 240,466 284,627 1,054,132 1,176,386
HCA, Oxnard October 1996 97,689 74,226 358,989 115,882
Hearing Dynamics, San Diego December 1996 140,555 71,666 709,438 619,755
HCA, Santa Clarita Valley October 1996 64,005 52,030 249,253 256,149
HCA, Santa Monica August 1997 138,932 104,260 417,144 415,559
Allied, Santa Maria July 1996 27,554 47,113 235,003 201,137
Santa Maria, Santa Maria(4)(6) August 1996 100,579 85,555 228,385 157,714
HIC, Seal Beach(7) June 1997 - - - -
HCA, Sherman Oaks March 1997 48,818 69,643 320,071 384,551
Illinois
- --------
SONUS, Berwyn October 1996 88,596 118,696 569,652 736,632
SONUS, Chicago October 1996 34,957 33,716 170,901 244,355
SONUS, Hinsdale October 1996 59,618 86,650 319,287 240,647
SONUS, Lombard(1) October 1996 30,655 35,217 128,005 177,660
SONUS, North Cicero(1)(8) October 1996 - - - -
SONUS, Oak Lawn October 1996 102,261 113,429 558,765 667,515
SONUS, Oak Park October 1996 24,413 48,570 236,452 247,589
Michigan
- --------
SONUS, Carson City(1)(2) October 1996 - - - -
SONUS, Charlotte(6) October 1996 26,170 21,739 71,181 -
SONUS, Hayes Green Beach(1)(2) October 1996 - - - -
SONUS, Kalamazoo(4)(6) January 1998 - - - -
SONUS, Grand Ledge October 1996 82,896 69,603 414,689 437,636
SONUS, Lansing October 1996 95,594 86,295 365,011 310,851
SONUS, Okemos October 1996 79,344 74,737 301,993 241,558
New Mexico
- ----------
Family Hearing Centers, Albuquerque December 1996 194,806 95,973 969,930 991,923
North Dakota
- ------------
Dakota Hearing Aid Service(4)(6) July 1997 19,644 - - -
</TABLE>
- 32 -
<PAGE>
- ----------------------------
(1) Designates satellite clinic. Satellite clinics operate less than five
days per week and are generally located in doctors' offices or hospitals.
(2) Information combined with SONUS, Grand Ledge.
(3) Opened April 1996.
(4) Quarterly comparative information unavailable.
(5) Opened December 1996.
(6) Annual comparative information unavailable.
(7) Information combined with Hearing Improvement Center, Long Beach
(8) Information combined with SONUS, Oak Lawn.
"Revenues for fiscal year ended 7-31-97" represents clinic revenues for
the full 12-month period ended July 31, 1997, and may include revenues prior to
the date of acquisition by the Company. "Revenues as of latest fiscal year"
represents clinic revenues for the most recently completed fiscal year prior to
acquisition by the Company. The fiscal year-ends from which these revenues were
derived vary from clinic to clinic depending on the acquisition date and the
fiscal year ending date.
PRODUCTS AND SUPPLIERS
The hearing instrument manufacturing industry is highly competitive
with approximately 40 manufacturers serving the worldwide market. Few
manufacturers offer significant product differentiation. The Company currently
purchases hearing instruments from a number of manufacturers based upon criteria
that include quality, price, and service. Over time, the Company intends to
reduce the number of manufacturers from whom it purchases hearing instruments in
order to achieve greater volume discounts. In addition to hearing instruments,
the Company's clinics also offer a limited selection of other assistive
listening devices and hearing instrument accessories.
MARKETING
The Company's marketing program is designed to help its hearing care
clinics retain existing patients and expand the services they receive, attract
new patients, and develop contracts to serve large groups of patients.
The Company believes that patient satisfaction is the key to retaining
and expanding services to existing patients. The Company also believes that
delivering comfortable, high quality hearing care at times and locations that
are convenient for the patient will motivate patients to return to the Company's
clinics for their future hearing care needs. Educating patients about hearing
health, prescribing only necessary hearing enhancing products, ensuring that
each patient leaves a clinic with a future visit already scheduled, and
maintaining consistent patient follow-up and support are key elements of the
Company's plan to build patient loyalty and patronage.
After a patient has obtained a hearing instrument, ongoing revenues are
generated from battery purchases and routine maintenance of the instruments. The
Company believes that repeat revenues are attributable to the length of time
that a clinic has been established and the effectiveness of its patient
retention programs.
The Company believes that the same aspects of the Company's approach
that earn the loyalty of current patients will also generate new patients. The
Company's new patient marketing programs are designed to help the Company
generate referrals from physicians and existing patients and increase the
Company's visibility in the community. The Company seeks to foster such
visibility by developing marketing materials and information sources that
communicate the Company's philosophy of high quality patient-oriented hearing
care.
The Company's large group marketing approach is designed to enable the
Company to develop contacts with self-insured employers and with health plans in
the metropolitan areas it serves and emphasizes the convenience, quality of
care, and wide range of services offered by the Company. The economies of scale
available to the Company may also allow health plans and self-insured employers
served by the Company to reduce
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<PAGE>
administrative burdens they might otherwise face. The Company believes that it
is well positioned to respond to challenges presented by the growth of managed
care arrangements as they arise.
COMPETITION
The hearing care industry in the United States and Canada is highly
fragmented and intensely competitive. Many of the Company's competitors are
small retailers that focus primarily on the sale of hearing instruments.
However, the Company also competes with other networks of hearing care clinics
and with large distributors of hearing instruments such as Bausch & Lomb, a
hearing instrument manufacturer that distributes its products through a national
network of over 1,000 franchised stores (Miracle Ear), and Beltone Electronic
Corp., a privately-owned hearing instrument manufacturer that distributes its
products primarily through its nationwide network of approximately 600
franchised dealers. These competitors are in many cases better known and owned
by companies having far greater financial and other resources than the Company.
There can be no assurance that one or more of these competitors will not seek to
compete directly in the markets targeted by the Company, nor can there be any
assurance that the largely fragmented hearing care market cannot be successfully
consolidated by other companies or through the establishment of co-operatives,
alliances, confederations or the like. See "Risk Factors--Competition."
REGULATION
The sale of hearing instrument devices is regulated at the federal
level in the United States by the United States Food and Drug Administration
("FDA"), which has been granted broad authority to regulate the hearing care
industry. Under federal law, hearing instruments may only be sold to individuals
who have first obtained a medical evaluation from a licensed physician, although
a fully informed adult may waive a medical evaluation in certain instances.
Regulations promulgated by the FDA also presently require that dispensers of
hearing instruments provide customers with certain warning statements and
notices in connection with the sale of hearing instruments and that such sales
be made in compliance with certain labeling requirements.
Most states in the United States and many provinces in Canada have
established formal licensing procedures that require the certification of
audiologists and/or HISs. Although the extent of regulation varies by
jurisdiction, almost all states and provinces engage in some degree of oversight
of the industry. The Company operates its hearing care clinics through its
wholly owned subsidiaries, Sonus-USA and Sonus-Canada. These subsidiary
corporations employ licensed audiologists who offer and perform audiology
services on behalf of the Company.
In certain states in the United States, business corporations such as
Sonus-USA may not be authorized to employ audiologists and offer audiology
services. For example, in California, where the Company operates 27 clinics,
although the performance of audiology services by professional corporations
owned solely by licensed audiologists is expressly authorized under California
law, it is unclear whether general business corporations such as Sonus-USA may
employ licensed audiologists to perform audiology services. However, the
California Department of Consumer Affairs has indicated by memorandum that
speech-language pathologists, which are regulated under statutes and regulations
similar to those governing audiologists, may practice in a general business
corporation and that a general business corporation may provide speech-language
pathology services through licensed speech pathologists. In Illinois, where the
Company has eight hearing care clinics, it is also unclear whether general
business corporations may employ licensed audiologists to perform audiology
services. Under Illinois law, only professional corporations and individuals are
authorized to obtain licenses to practice audiology.
The laws and regulations governing the practice of audiology are
enforced by regulatory agencies with broad discretion. If the Company were found
to be in violation of such laws and regulations in one or more states, the
consequences could include the imposition of fines and penalties upon the
Company and its audiologists as well as the issuance of orders prohibiting the
Company from operating its clinics under its present structure. In that event,
among the solutions the Company might consider would be the restructuring of all
or a portion of its operations in a manner similar to that used by certain
medical and dental clinic networks. Under such a structure,
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<PAGE>
professional corporations owned by licensed audiologists would contract with the
Company to perform professional services and the Company would contract with the
professional corporations to provide management services.
No assurance can be given that the Company's activities will be found
to be in compliance with laws and regulations governing the corporate practice
of audiology or, if its activities are not in compliance, that the operational
structure of the Company can be modified to permit compliance. In addition, no
assurance can be given that other states or provinces in which the Company
presently operates will not enact prohibitions on the corporate practice of
audiology or that the regulatory framework of certain jurisdictions will not
limit the ability of the Company to expand into such jurisdictions if the
Company is unable to modify its operational structure to comply with such
prohibitions or to conform with such regulatory framework. Additional laws and
regulations may be adopted in the future at the federal, state, or province
level that could have a material adverse effect on the business, financial
condition, and results of operations of the Company.
A small percentage of the revenues of the hearing care clinics operated
by the Company comes from Medicare and Medicaid programs. Federal law prohibits
the offer, payment, solicitation or receipt of any form of remuneration in
return for, or in order to induce, (i) the referral of a Medicare or Medicaid
patient, (ii) the furnishing or arranging for the furnishing of items or
services reimbursable under Medicare or Medicaid programs or (iii) the purchase,
lease or order of any item or service reimbursable under Medicare or Medicaid.
Noncompliance with the federal anti-kickback legislation can result in exclusion
from Medicare and Medicaid programs and civil and criminal penalties.
PRODUCT AND PROFESSIONAL LIABILITY; PRODUCT RETURNS
In the ordinary course of its business, the Company may be subject to
product and professional liability claims alleging the failure of, or adverse
effects claimed to have been caused by, products sold or services provided by
the Company. The Company maintains insurance against such claims at a level that
the Company believes is adequate. A customer may return a hearing instrument to
the Company and obtain a full refund up to 30 days after the date of purchase.
Some of the Company's clinics offer a 60-day refund period. In general, the
Company can return hearing instruments returned by customers within 30 to 60
days to the manufacturer for a full refund. The Company maintains a reserve
based on estimated returns to account for returns that cannot be passed through
to the manufacturers and must be absorbed by the Company.
EMPLOYEES
At January 1, 1998, the Company had 163 full-time and 54 part-time
employees, of which 68 are audiologists practicing full time and 21 practicing
part-time. None of the Company's employees are represented by a labor union.
Management believes it maintains good relationships with its employees. See
"Risk Factors--Labor Unions."
PROPERTIES
The Company's principal executive offices are located in approximately
5,600 square feet of leased office space in downtown Portland, Oregon. The lease
covering 2,600 square feet of such space expires in August 1998 and requires
remaining rental payments totaling $20,736. The lease on the remaining 3,000
square feet expires in August 1999 and provides for an annual rent of $57,072.
Each of the Company's hearing clinics operates in leased space that ranges in
size from 800 to 3,000 square feet. All of the locations are leased for one to
six-year terms pursuant to generally non-cancelable leases (with renewal options
in some cases). The aggregate committed rental expense as of July 31, 1997, for
the subsequent five-year period is approximately $2.1 million.
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<PAGE>
MANAGEMENT
Information with respect to the directors and executive officers of the
Company, including their age at January 31, 1998, position with the Company, and
principal business experience during the previous five years, is set forth
below:
NAME AGE POSITION
Brandon M. Dawson 29 President, Chief Executive Officer and Director
Douglas F. Good 56 Chairman of the Board and Director
Gregory J. Frazer, Ph.D. 45 Vice President, Business Development and Director
William DeJong 39 Director
Hugh T. Hornibrook 48 Director
Joel Ackerman 32 Director
Randall E. Drullinger 34 Vice President, Marketing
Edwin J. Kawasaki 39 Vice President, Finance and Chief Financial Officer
Kathy A. Foltner 44 Vice President, Operations
BRANDON M. DAWSON. Mr. Dawson has served as President and Chief
Executive Officer and as a director of the Company since December 1995. From May
1992 to December 1995, he was director of U.S. sales for Starkey Laboratories
Inc. ("Starkey"), the largest custom "in-the-ear" hearing instrument
manufacturer in the world. Prior to May 1992, Mr. Dawson held a number of
positions with Starkey, including Assistant Sales Manager from December 1988 to
October 1990 and National Sales Manager from November 1990 to April 1992.
DOUGLAS F. GOOD. Mr. Good has served as a director of the Company since
1994, and as Chairman of the Board since August 1996. From December 1995 to July
1996, he served as the Company's chief financial officer and as President of the
Company from October 1994 to December 1995. Prior to becoming President of the
Company, Mr. Good was chief financial officer and a director of International
Retail Systems Inc. of Dallas, Texas, a software and point of sale systems
company.
GREGORY J. FRAZER, PH.D. Mr. Frazer has served as Vice President -
Business Development and as a director of the Company since October 1996, when
the Company acquired 11 audiology based hearing clinics which were among 22
clinics in Southern California of which Mr. Frazer was part owner and operator.
The Company has since acquired eight of the remaining 11 clinics. Mr. Frazer has
spent his entire career as a hearing care professional since receiving his
doctoral degree in audiology from Wayne State School of Medicine in 1981.
WILLIAM DEJONG. Mr. DeJong is a partner in the Calgary, Alberta, law
firm of Ballem MacInnes, which he joined in September 1987. He served as
Secretary of the Company from shortly after its incorporation in 1993 until
December 1997. He has been a director of the Company since 1994.
HUGH T. HORNIBROOK. Mr. Hornibrook has been a director of the Company
since April 1996. From April 1996 to January 1997, he was Vice President,
Corporate Development of the Company, and from July 1994 to April 1996, he was
an independent business consultant. He served as director of corporate
development for The Loewen Group Inc., a large funeral home and cemetery
operator with operations throughout North America, from 1988 to June 1994.
JOEL ACKERMAN. Mr. Ackerman is a Managing Director of E.M. Warburg,
Pincus & Co., L.L.C. From 1990 to 1993, Mr. Ackerman served as an associate at
Mercer Consulting, a strategic management consulting company. Mr. Ackerman was
appointed to the Board in December 1997 at the request of Warburg, the holder of
all the outstanding Convertible Shares.
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<PAGE>
RANDALL E. DRULLINGER. Mr. Drullinger has served as Vice President,
Marketing of the Company since April 1996. From August 1990 to April 1996, he
was director of financial management services at Starkey.
EDWIN J. KAWASAKI. Mr. Kawasaki has served as Vice President, Finance
of the Company since August 1996. Mr. Kawasaki was a principal of Stafford
Capital Corp., an investment buy-out firm, from September 1995 to July 1996, and
was a senior vice president at Peregrine Holdings Ltd., an investment banking
boutique firm, from January 1994 to September 1995. From 1987 to 1993, he was
the controller of Lewis and Clark College. Prior to 1987, Mr. Kawasaki was a
supervising senior accountant with KPMG Peat Marwick LLP.
KATHY A. FOLTNER. Ms. Foltner was appointed Vice President, Operations
of the Company in November 1996, when the Company acquired substantially all of
the assets of the Midwest Division from Hearing Health Services, Inc. Ms.
Foltner had served as vice president of Hearing Health Services, Inc., since
January 1995 and as director of Michigan operations, from July 1994 to December
1994. Prior to July 1994, Ms. Foltner was the owner and president of
Audio-Vestibular Testing Center, Inc.
TERM OF DIRECTORS AND BOARD COMMITTEES
The Company's articles of incorporation provide for six directors until
the directors of the Company increase or decrease that number in accordance with
the articles of incorporation. Directors are elected annually. The board of
directors maintains an audit committee, consisting of Messrs. Good and
Hornibrook, which reviews services provided by the Company's independent
auditors, makes recommendations concerning their engagement or discharge, and
reviews with management and the independent auditors the annual financial
statements of the Corporation, the results of the audit, the adequacy of
internal accounting controls, and the quality of financial reporting.
COMPENSATION OF DIRECTORS
The directors of the Company do not receive any fees for attending
board meetings but are reimbursed for out-of-pocket and travel expenses incurred
in attending board meetings. The Company has no other standard arrangement
pursuant to which directors are compensated by the Company for their services in
their capacity as directors. The Company may from time to time, as it has in the
past, grant stock options to directors in accordance with the policies of AMEX,
the Securities and Exchange Commission, and the securities laws and regulations
of the jurisdictions where the directors reside. Options granted during the
fiscal year ended July 31, 1997, are included in the table titled "Option Grants
in Last Fiscal Year" under the caption "Executive Compensation."
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth for the years indicated the compensation
awarded or paid to, or earned by, the Company's chief executive officer and the
Company's other executive officers whose salary level and regular bonus for the
fiscal year ended July 31, 1997, exceeded $100,000.
Annual Long-Term
Compensation Compensation Awards
------------ -------------------
Number of Shares
Name and Principal Position Year Salary Underlying Options
- --------------------------- ---- ------ ------------------
Brandon M. Dawson 1997 $130,000 --
President and Chief 1996 86,667 130,000
Executive Officer
Gregory J. Frazer, Ph.D. 1997 110,000 80,000
Vice President-Business
Development
In addition, three other executive officers of the Company were paid an
aggregate of $317,289 in cash compensation, including incentive compensation of
$67,454 relating to acquisitions, during the 1997 fiscal year.
OPTION GRANTS
During the fiscal year ended July 31, 1997, the Company granted stock
options to employees and directors under its Stock Option Plan adopted effective
November 18, 1993, and its Stock Award Plan adopted effective December 10, 1996.
The Second Amended and Restated Stock Award Plan was approved by the
shareholders at the annual meeting held December 5, 1997. Options are granted at
the discretion of the Board of Directors. Options granted to date have terms of
five to ten years and generally vest in two or more equal annual installments.
The options are not transferable or assignable.
The following table sets forth certain information concerning grants of
options to purchase Common Shares to individuals who were directors or executive
officers of the Company during the fiscal year ended July 31, 1997:
- 38 -
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
Number of Percentage of
Shares Total Options Market
Underlying Granted to Exercise Price on
Options Employees in Price Grant Date
Name Granted Fiscal Year ($/share) ($/share) Expiration Date
- ---- ------- ----------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Gene K. Balzer, Ph.D. -- -- -- -- --
Brandon M. Dawson -- -- -- -- --
William DeJong -- -- -- -- --
Randall E. Drullinger -- -- -- -- --
Kathy A. Foltner 25,000(1) 8.2% $7.25 $7.25 Feb. 5, 2002
Gregory J. Frazer, Ph.D. 80,000(2) 26.4 6.50 8.80 Oct. 1, 2001
Douglas F. Good -- -- -- -- --
Hugh T. Hornibrook -- -- -- -- --
Edwin J. Kawasaki 34,000(3) 11.2 5.60 5.60 May 8, 2002
</TABLE>
- --------------
(1) One-half of Ms. Foltner's options became exercisable on November 1,
1997, with the balance becoming exercisable on November 1, 1998.
(2) One-half of Mr. Frazer's options became exercisable on October 1, 1997,
with the balance becoming exercisable on October 1, 1998.
(3) One-half of Mr. Kawasaki's options became exercisable on August 12,
1997, with the balance becoming exercisable on August 12, 1998.
- 39 -
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth certain information regarding option
exercises during the fiscal year ended July 31, 1997, and the fiscal year-end
value of unexercised options held by individuals who were directors or executive
officers of the Company during the 1997 fiscal year:
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Securities
Underlying
Unexercised Value of Unexercised
Options at In-the-Money Options
July 31, 1997 at July 31, 1997(2)
---------------------- -------------------
Shares
Acquired on Value Unexer-
Name Exercise Realized(1) Exercisable Unexercisable Exercisable cisable
- ----------------------- ---------- ----------- ----------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C>
Gene K. Balzer, Ph.D. 40,000 $ 170,741 -- -- -- --
Brandon M. Dawson 50,000 211,420 60,000 -- $275,687 --
William DeJong -- -- 15,000 -- 35,275 --
Randall E. Drullinger -- -- 40,000 -- -- --
Kathy A. Foltner -- -- -- 25,000 -- --
Gregory J. Frazer, Ph.D. -- -- -- 80,000 -- --
Ph.D.
Douglas F. Good 45,000 180,118 -- -- -- --
Hugh T. Hornibrook -- -- 40,000 -- -- --
Edwin J. Kawasaki -- -- -- 34,000 -- $11,900
</TABLE>
- --------------
(1) The value realized was calculated based on the excess of the closing
sale price of the Common Shares reported on the ASE on the date of
exercise over the exercise price.
(2) The value shown was calculated based on the excess of the closing sale
price of the Common Shares reported on the ASE on July 31, 1997, over
the per share exercise price of the unexercised in-the-money options.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into employment agreements with Brandon M. Dawson, its
President and Chief Executive Officer, Edwin J. Kawasaki, its Vice
President-Finance and Chief Financial Officer, and Randall E. Drullinger, its
Vice President-Marketing, effective December 24, 1997. The term of each
agreement expires on December 24, 2001, subject to automatic one-year extensions
annually unless either party gives six months' prior written notice of
non-extension. The agreements provide for annual base salaries of $195,000,
$115,000, and $104,000 to Messrs. Dawson, Kawasaki, and Drullinger,
respectively, subject to such increases (but not decreases) as are determined
from time to time by the Board or a compensation committee designated by the
Board. Each executive will be eligible to receive an annual incentive bonus
beginning with the 1998 fiscal year in an amount to be determined by the Board
up to a specified percentage of the executive's base salary as follows: Mr.
Dawson, 100%; Mr. Kawasaki, 50%; and Mr. Drullinger, 50%. In addition, upon
execution of his agreement, Mr. Kawasaki received a bonus for services performed
in the 1997 fiscal year in the amount of $42,500. The agreements provide that
the executives will be entitled to participate in all of the Company's
compensation plans covering key executive and managerial employees, including,
without limitation, medical, disability and life
- 40 -
<PAGE>
insurance benefits and vacation pay, as well as reimbursement for the lease of
an automobile up to $12,000 per year for Mr. Dawson and $6,000 per year for each
of Messrs. Kawasaki and Drullinger. The Company will also provide Mr. Dawson
with an equity split-dollar life insurance policy with a face amount of
$2,000,000, provided that the premiums paid by the Company per year will not
exceed $20,000, to be recovered from the death benefits, surrender value or loan
proceeds payable on the policy.
In February 1998, the Company granted nonqualified stock options to the
executives as contemplated by the employment agreements as follows:
(a) Mr. Dawson--353,600 shares at an exercise price of $6.75, 78,400
shares at an exercise price of $10.00, and 98,000 shares at an exercise price of
$12.00;
(b) Mr. Kawasaki--121,600 shares at an exercise price of $6.75, 30,400
shares at an exercise price of $10.00, and 38,000 shares at an exercise price of
$12.00;
(c) Mr. Drullinger--44,000 shares at an exercise price of $6.75, 16,000
shares at an exercise price of $10.00, and 20,000 shares at an exercise price of
$12.00.
Each of the options will vest in four equal annual installments beginning one
year following the date of grant and will expire 10 years after the date of
grant. The options will become exercisable in full in the event that, within one
year (two years in the case of Mr. Dawson) following a change in control of the
Company, the executive's employment is terminated by the Company without cause,
or the executive experiences a material demotion in status or position or a
material change in his duties that is inconsistent with his position at the
Company, his base salary is reduced, or his participation in the Company's
compensation plans is not continued on a level comparable with other key
executives (each of the foregoing events constitutes "good reason"). A change in
control of the Company will be deemed to occur if (i) a person acquires
beneficial ownership of 50% or more of the combined voting power of the Company,
with certain exceptions, (ii) the incumbent directors (or nominees approved by a
majority of the incumbent directors, including subsequently approved directors)
cease to constitute at least a majority of the directors of the Company, or
(iii) a reorganization, amalgamation or sale of all or substantially all the
assets of the Company, with certain exceptions, is consummated. A portion of Mr.
Dawson's options will also become exercisable based on the time elapsed
following the date of grant in the event that his employment is terminated by
the Company without cause or by Mr. Dawson for "good reason."
The agreements with Messrs. Dawson, Kawasaki, and Drullinger include an
agreement on the part of each executive not to compete with the Company for a
period of two years (three years with respect to Mr. Dawson) after the
executive's employment with the Company is terminated. If the executive's
employment is terminated by reason of death, the Company will pay to the
executive's personal representative his base salary through the date of death,
together with any accrued benefits (including death benefits) to which the
executive is entitled under the terms of the Company's compensation plans. In
the event of the executive's termination due to disability, the executive will
be entitled to receive his base salary reduced by any benefits paid under the
Company's group long-term disability insurance plan for the remaining term of
the agreement and the portion of his annual bonus relating to the period before
his disability. If the executive's employment is terminated by the Company for
cause or the executive terminates his employment voluntarily without good
reason, the Company will pay the executive his base salary through the effective
date of termination, together with any accrued benefits to which the executive
is entitled under the terms of the Company's compensation plans. Cause includes
a material act of fraud, dishonesty or moral turpitude, gross negligence or
intentional misconduct. Good reason includes a material demotion in the
executive's status or position, a material change in his duties that is
inconsistent with his position, a reduction in his base salary, or a failure to
continue his participation in the Company's compensation plans on terms
comparable to other key executives. If the executive's employment is terminated
by the Company without cause or by the executive with good reason, the Company
will pay the executive's base salary through the termination date, plus an
amount of severance pay equal to, with respect to Messrs. Kawasaki and
Drullinger, one times the executive's base salary payable in 12 monthly
installments and, with respect to Mr. Dawson, two times the sum of his base
salary and his
- 41 -
<PAGE>
average annual bonus for the prior two fiscal years payable in 24 monthly
installments. In addition, upon such termination without cause or with good
reason, the Company will afford continued participation in the Company's
compensation plans (or, if not permitted under the general provisions of any
such plan, will provide a substantially equivalent benefit) for two additional
years in the case of Mr. Dawson and for one year in the case of Messrs. Kawasaki
and Drullinger.
Effective January 1, 1997, the Company entered into a five-year
consulting agreement with Hugh T. Hornibrook, a director of the Company, under
which the Company pays Mr. Hornibrook a retainer of $70 per month and $88 per
hour (each converted from Canadian dollars at February 20, 1998) for consulting
services on an as-needed basis.
Since January 1, 1997, the Company has retained NeuroDynamic Systems,
Inc., at the rate of $6,000 per month, to provide consulting services in
connection with the Company's Canadian operations and the development of a
training program for audiologists. The consulting arrangement may be canceled at
any time by the Company. Gene K. Balzer, Ph.D., a former director of the
Company, is president and sole shareholder of NeuroDynamic Systems, Inc.
On October 31, 1996, the Company entered into a three-year employment
agreement with Kathy A. Foltner, its Vice President-Operations, that provides
for a salary of $85,000 per year. The employment agreement also provides for
certain employee benefits and options to purchase up to 25,000 Common Shares at
$7.25 per share included in the table under "Option Grants" above. The agreement
contains covenants not to compete with and not to solicit employees, clients, or
customers of the Company during her period of employment and for 36 full
calendar months following termination of her employment.
On October 1, 1996, the Company entered into a five-year employment
agreement with Gregory J. Frazer, its Vice President-Business Development, that
provides for a base salary of $110,000 per year and for a bonus based on the
aggregate net income of the hearing clinics acquired by the Company that were
previously owned, in part, by Mr. Frazer. The employment agreement provides Mr.
Frazer with certain fringe benefits such as medical and dental insurance,
vacation, professional liability insurance, an automobile allowance,
reimbursement of certain expenses, and options to purchase up to 40,000 Common
Shares at $6.50 per share. Mr. Frazer also received an additional 40,000 options
to purchase Common Shares at $6.50 per share upon his election as a director of
the Company. Mr. Frazer has also entered into an agreement with the Company
which contains covenants not to compete with and not to solicit employees,
clients or customers of the Company on behalf of a competitor during his period
of employment and for three years following termination of his employment.
OPTION PLANS
Effective November 18, 1993, the Board adopted and the shareholders of
the Company approved a stock option plan (the "1993 Plan"). Options to purchase
320,000 Common Shares were outstanding under the 1993 Plan at December 31, 1997.
No additional stock options will be granted under the 1993 Plan.
Effective December 10, 1996, the Board adopted a Stock Award Plan
providing for the grant of options to employees of the Company. The Board
subsequently amended and restated the Stock Award Plan effective February 5,
1997, and adopted a second amendment and restatement effective October 15, 1997,
which was approved by the shareholders of the Company on December 5, 1997. On
February 9, 1998, shareholders approved an amendment to the Stock Award Plan to
increase the number of Common Shares which may be made the subject of awards
from 600,000 to 1,800,000 Common Shares. At February 10, 1998, no options
granted under the Stock Award Plan had been exercised, options to purchase a
total of 1,167,400 Common Shares were outstanding, and 632,600 Common Shares
were available for future grants of awards.
- 42 -
<PAGE>
CERTAIN TRANSACTIONS
On October 1, 1996, the Company acquired 11 hearing care clinics in
Southern California through the acquisition of all of the outstanding shares of
three companies owned by Gregory J. Frazer, Ph.D., who was subsequently
appointed Vice President-Business Development and a director of the Company, his
wife, Carissa Bennett, and Jami Tanihana (the "HCA Shareholders"). The
consideration paid by the Company consisted of $314,724 in cash and 474,907
Common Shares of which Mr. Frazer and Ms. Bennett received a total of 294,071
shares. Mr. Frazer and Ms. Bennett also received a total of $196,294 in payment
for covenants not to compete.
The HCA Shareholders have the right, until September 30, 2001, to
require the Company to redeem an aggregate of 3,000 of their Common Shares as of
the last day of each calendar quarter at a price of $8.35 per share. The
redemption rights are noncumulative and expire if not exercised as of the end of
any calendar quarter as to such quarter. Pursuant to such redemption rights, the
Company has redeemed a total of 5,280 Common Shares from Ms. Tanihana, 1,320
Common Shares from Ms. Bennett and 360 Common Shares from Mr. Frazer for
consideration of $44,089, $11,022, and $3,006, respectively.
During 1997, the Company acquired six additional hearing clinics in
Southern California in which Mr. Frazer was part-owner. Of the aggregate cash
purchase price of $1,217,231 for the six clinics, Mr. Frazer and Ms. Bennett
received a total of $560,377. Mr. Frazer and Ms. Bennett also received the sum
of $147,654 in payment for covenants not to compete in connection with the
acquisitions. During 1998, the Company acquired two additional clinics in
California in which Mr. Frazer was part-owner. Mr. Frazer received $136,500 of
the total purchase price of $237,000. He also received $19,020 in payment for
covenants not to compete.
On October 31, 1996, the Company acquired the Midwest Division in
exchange for convertible subordinated notes made payable to certain affiliates
of the seller, Hearing Health Services, Inc., in the aggregate amount of
$2,600,000, convertible into 400,000 Common Shares, and the assumption of a
promissory note with a balance of $360,000 payable to Kathy A. Foltner, Vice
President-Operations of the Company. The promissory note is payable in equal
annual installments of $120,000 that began on July 1, 1997, and bears interest
at 6% per annum. The balance of the promissory note at December 31, 1997, was
$240,000. In addition to the promissory note, the Company also agreed to assume
an obligation of the Midwest Division to pay Ms. Foltner $50,000 in each of
1997, 1998, and 1999, if specified production goals are met. The Company paid
Ms. Foltner $50,000 for the period from October 1, 1996 to December 31, 1997.
The Company also agreed to register the shares issuable upon conversion of the
convertible subordinated notes under the Securities Act. Such shares are covered
by this Prospectus.
From 1994 through July 31, 1996, Douglas F. Good, a shareholder and
director of the Company and its former chief executive officer, advanced funds
to the Company for short-term working capital and acquisitions. Interest on the
advances accrued at 9% per annum. The Company paid Mr. Good aggregate interest
of $43,001 for the three-year period ended July 31, 1996 and the highest
outstanding balance during such period was $240,167 during January 1995. As of
July 31, 1996, the total of the advances and all accrued interest had been
repaid.
William DeJong is a partner in the Calgary, Alberta law firm of Ballem
MacInnes. Mr. DeJong was among the group of individuals that founded the Company
("Founding Shareholders") and currently serves as a director of the Company.
During the period from October 15, 1994, to December 31, 1997, total fees,
disbursements and government sales tax paid to Ballem MacInnes by the Company
for legal services were approximately $320,000. Mr. DeJong was granted options
to purchase 10,000 Common Shares at $0.35 per share in November 1993, which he
exercised on February 22, 1996.
On May 19, 1997, Gene K. Balzer, a former director of the Company,
exercised options to purchase 40,000 shares of Common Stock at $1.40 per share
(converted from Canadian dollars on May 19, 1997). In connection with such
exercise, the Company loaned Mr. Balzer $56,000 to pay the aggregate exercise
price of the options. Interest on the loan accrues at 10% per annum.
- 43 -
<PAGE>
Under a settlement agreement between the Company and Roger W. Larose,
formerly the Company's chief operating officer, the Company agreed to pay the
exercise price of 40,000 options to purchase Common Shares held by Mr. Larose.
On April 1, 1996, Mr. Larose exercised options for 20,000 Common Shares at $1.40
per share and Douglas F. Good, as an advance to and on behalf of the Company,
paid the exercise price of $28,048 to the Company. On September 30, 1996, Mr.
Larose exercised options for an additional 20,000 Common Shares at $1.40 per
share and Mr. Good, as an advance to and on behalf of the Company, paid the
exercise price of $27,900 to the Company.
Brandon M. Dawson subsequently executed promissory notes in favor of
Mr. Good equal to the amounts advanced by Mr. Good in connection with the
options exercised by Mr. Larose, and Mr. Dawson was substituted for Mr. Good as
the obligee with respect to such advances. Interest on the advances accrued at
the rate of 9% per annum. The advances were repaid to Mr. Good by the Company on
December 26, 1997, along with interest in the amount of $7,147, thereby
satisfying Mr. Dawson's obligations to Mr. Good.
On October 5, 1997, the Company loaned Mr. Dawson $85,000 in connection
with the purchase of his residence. The loan accrues interest at 10% per annum
and is due on August 6, 1998. On December 26, 1997, the Company loaned Mr.
Dawson $30,639 in order to allow Mr. Dawson to repay an advance from Mr. Good
in connection with the exercise by Mr. Dawson of options to purchase 20,000
Common Shares. The loan accrues interest at 10% per annum and is due on August
6, 1998. The loans are secured by a pledge of 30,000 Common Shares.
On April 1, 1996, Brandon M. Dawson exercised options for 20,000 Common
Shares at $1.40 per share. In connection with such exercise, Mr. Dawson paid the
Company $28,048. On May 8, 1997, Mr. Dawson exercised options for 50,000 Common
Shares at $1.35 per share. In connection with such exercise, the Company loaned
Mr. Dawson $67,500 to pay the aggregate exercise price of the options. The loan,
which accrues interest at 10% per annum, is due May 8, 1998.
On August 16, 1996, Douglas F. Good, a director of the Company,
exercised options for 45,000 Common Shares at $3.65 per share (converted from
Canadian dollars at August 16, 1996). In connection with such exercise, Mr. Good
paid the Company $163,744.
On January 11, 1996, Michael G. Thomson, a Founding Shareholder,
exercised options for 40,000 Common Shares at $0.35 per share (converted from
Canadian dollars at January 11, 1996). In connection with such exercise, Mr.
Thomson paid the Company $14,657.
- 44 -
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table gives information regarding the beneficial
ownership of Common Shares as of February 20, 1998, by each of the Company's
directors, by certain of the Company's executive officers, and by the Company's
present directors and executive officers as a group. In addition, it gives
information, including addresses, regarding each person or group known to the
Company to own beneficially more than 5% of the outstanding Common Shares or
Convertible Shares. Information as to beneficial stock ownership is based on
data furnished by the persons concerning whom such information is given. Unless
otherwise indicated, all shares listed as beneficially owned are held with sole
voting and investment power. The numbers in the table include Common Shares as
to which a person has the right to acquire beneficial ownership through the
exercise or conversion of options, purchase warrants or convertible securities
within 60 days after February 20, 1998.
<TABLE>
=============================================================================================================================
Amount and
Class Nature % of % of
of of "Beneficial Common Preferred
Name Shares Ownership"(1)(2) Shares(1)(2) Shares
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Joel Ackerman Common -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
A. Baron Cass III Common 326,702(3) 5.9% --
5005 LBJ Freeway, Ste. 1130
Dallas, Texas 75244
- -----------------------------------------------------------------------------------------------------------------------------
Brandon M. Dawson Common 910,000 16.5% --
111 S.W. Fifth Ave., Ste. 2390
Portland, Oregon 97204
- -----------------------------------------------------------------------------------------------------------------------------
William DeJong Common 31,440 * --
- -----------------------------------------------------------------------------------------------------------------------------
Kathy A. Foltner Common 13,800 * --
- -----------------------------------------------------------------------------------------------------------------------------
Gregory J. Frazer, Ph.D. Common 342,391(4) 6.2% --
18531 Roscoe Blvd., Ste. 201
Northridge, California 91324
- -----------------------------------------------------------------------------------------------------------------------------
Douglas F. Good Common 241,912 4.4 --
- -----------------------------------------------------------------------------------------------------------------------------
Hugh T. Hornibrook Common 40,000 * --
- -----------------------------------------------------------------------------------------------------------------------------
Warburg, Pincus & Co.(5) Common 4,666,666(5) 46.1% --
466 Lexington Avenue Preferred 13,333,333(5) -- 100%
New York, New York 10017-3147
- -----------------------------------------------------------------------------------------------------------------------------
All directors and executive officers as a Common 1,709,544 30.1% --
group (9 persons)
=============================================================================================================================
</TABLE>
- --------------
*Less than 1% of the outstanding Common Shares.
(1) "Beneficial ownership" includes Common Shares that the person has the
right to acquire through the exercise or conversion of options,
purchase warrants or convertible securities within 60 days after
January 2, 1998, as follows: A. Baron Cass III, 106,766 shares; Brandon
M. Dawson, 60,000 shares; William DeJong, 15,000 shares; Kathy A.
Foltner, 12,500 shares; Gregory J. Frazer, Ph.D., 50,000
- 45 -
<PAGE>
shares; Hugh T. Hornibrook, 40,000 shares; Warburg, Pincus & Co.,
4,666,666 shares; and all directors and executive officers as a group,
237,500 shares.
(2) Calculated in accordance with Rule 13d-3(d)(1) under the Securities
Exchange Act of 1934, pursuant to which Common Shares as to which a
person has the right to acquire beneficial ownership through the
exercise or conversion of options, purchase warrants or convertible
securities within 60 days after February 20, 1998, have been included
in shares deemed to be outstanding for purposes of computing percentage
ownership by such person.
(3) Includes Common Shares beneficially owned by the Cass Family
Foundation, the Cass Childrens Trust, and the Prime Petroleum Profit
Sharing Trust.
(4) Includes 49,298 Common Shares held by Carissa Bennett, Mr. Frazer's
wife.
(5) Warburg, Pincus & Co. is the general partner of Warburg, Pincus
Ventures, L.P., the record owner of 13,333,333 Convertible Shares,
together with warrants to purchase 2,000,000 Common Shares. Each
Convertible Share is entitled to one-fifth of a vote. The Convertible
Shares vote together with the Common Shares as a single class. The
Convertible Shares held by Warburg represent approximately 33% of the
combined voting power of the Shares. Of the 4,666,666 Common Shares
shown as beneficially owned by Warburg, 2,666,666 shares represent the
Common Shares issuable upon conversion of the 13,333,333 Convertible
Shares outstanding.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of an unlimited
number of Common Shares and an unlimited number of Preferred Shares. As of March
1, 1998, the Company had outstanding 5,834,582 Common Shares, 13,333,333
Convertible Shares, and certain options and warrants for the purchase of Common
Shares and Convertible Securities, convertible into Common Shares as set forth
in detail below. The Company is incorporated under the laws of Alberta, Canada.
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 the Convertible Shares, consisting of 13,333,333
Preferred Shares issued to Warburg on December 24, 1997. A summary of certain of
the preferences, limitations and relative rights of the Convertible 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
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
of incorporation ("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
- 46 -
<PAGE>
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.
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.
CONVERTIBLE SHARES
Certain of the preferences, limitations and relative rights of 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. 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).
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.
- 47 -
<PAGE>
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 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, 1997, the Company had outstanding share purchase
warrants as follows:
(1) Share purchase warrants (the "September Warrants")
governed by an indenture dated September 17, 1996 (the "September
Warrants"), between the Company and the Trustee, as trustee and warrant
agent, to purchase 1,093,482 Common Shares at an exercise price of
$10.00 per share until
- 48 -
<PAGE>
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 on AMEX 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 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 CONSIDERATIONS
Following is a summary of the principal Canadian federal income tax
considerations by Felesky Flynn, Barristers and Solicitors, tax counsel to the
Company, under the Income Tax Act (Canada) (the "Tax Act") and the regulations
thereunder generally applicable to a holder who acquires Common Shares pursuant
to this offering and who, for purposes of the Tax Act, holds such shares as
capital property and deals at arm's length with the Company. Generally, Common
Shares will be considered to be capital property to a holder provided the holder
does not hold the Common Shares in the course of carrying on a business and has
not acquired them 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 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 the date hereof (the "Proposed Amendments") and
counsel's understanding of 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, nor
does it take into account provincial, territorial or foreign tax considerations,
which may differ significantly from those discussed herein. This summary is not
applicable to subscribers who are traders or dealers in securities, 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 which would be a "tax
shelter investment" as defined in the Proposed Amendments.
- 49 -
<PAGE>
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.
The following applies to holders who acquire Common Shares pursuant to
this offering, 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 shares are "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 comments set out below in respect of 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 the 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 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 shares of the Company.
- 50 -
<PAGE>
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. The ICA will have no effect on the acquisition of Shares
covered by this Prospectus.
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 Company's Common Shares, except as discussed
elsewhere herein.
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.
TRANSFER AGENT
CIBC Mellon Trust Company and ChaseMellon Shareholder Services L.L.C.
are co-transfer agents and co-registrars for the Common Shares.
PLAN OF DISTRIBUTION
The Shares offered hereby may be offered and sold from time to time by
the Selling Shareholders. Such offers and sales may be made at prices and on
terms then prevailing or at prices related to the then-current market price, or
in negotiated transactions. The methods by which such Shares may be sold may
include, but not be limited to, the following: (a) a block trade in which the
broker or dealer so engaged will attempt to sell the Shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account; (c) an exchange distribution in accordance
with the rules of such exchange; (d) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; (e) privately negotiated
transactions; (f) short sales; and (g) a combination of any such methods of
sale. In effecting sales, brokers or dealers engaged by the Selling Shareholders
may receive commissions or discounts from the Selling Shareholders or from the
purchasers in amounts to be negotiated immediately prior to the sale. The
Selling Shareholders may also sell Shares in accordance with Rule 144 under the
Securities Act. The Company reserves the right to suspend transfers of the
Shares offered hereby if, in its reasonable judgment, such suspension is
necessary to ensure that all material information about the Company has been
properly disseminated to the public.
The Company has advised each Selling Shareholder that he or she and any
such brokers, dealers or agents who effect a sale of the Shares offered hereby
are subject to the prospectus delivery requirements under the Securities Act.
The Company also has advised each Selling Shareholder that in the event of a
"distribution" of his shares, such Selling Shareholder and any broker, dealer or
agent who participates in such distribution may be subject to applicable
provisions of the Securities Exchange Act of 1934 (the "Exchange Act") and the
rules and regulations thereunder, including, without limitation, the
anti-manipulation rules under the Exchange Act.
The Selling Shareholders and any brokers participating in such sales
may be deemed to be underwriters within the meaning of the Securities Act. There
can be no assurance that the Selling Shareholders will sell any or all of the
Shares offered hereby.
- 51 -
<PAGE>
Any commission paid or any discounts or concessions allowed to any
broker, dealer, underwriter, agent or market maker and, if any such broker,
dealer, underwriter, agent or market maker purchases any of the Shares offered
hereby as principal, any profits received on the resale of such Shares, may be
deemed to be underwriting commissions or discounts under the Securities Act.
The Company agreed to register the shares of certain Selling
Shareholders under the Securities Act pursuant to various agreements. The
Company is bearing substantially all of the costs relating to the registration
of the Shares offered hereby, except commissions, discounts or other fees
payable to a broker, dealer, underwriter, agent or market maker in connection
with the sale of any of such Shares and the legal fees incurred by the Selling
Shareholders, all of which will be borne by the Selling Shareholders. The
Company will not receive any of the proceeds from the sale of the Shares offered
hereby.
LEGAL MATTERS
The legality of the shares offered hereby has been passed upon for the
Company by Ballem MacInnes, Calgary, Alberta. William DeJong, a partner in
Ballem MacInnes, is a director of the Company.
EXPERTS
The consolidated financial statements of the Company as of July 31,
1997, and for the year then ended have been included in this Prospectus in
reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
appearing elsewhere herein and upon the authority of said firm as experts in
accounting and auditing.
The consolidated statement of operations of the Company for the year
ended July 31, 1996, has been included in this Prospectus in reliance upon the
report of Shikaze Ralston, Chartered Accountants, appearing elsewhere herein and
upon the authority of such firm as experts in accounting and auditing.
The financial statements of the Hearing Care Associates Group as of
July 31, 1996, and July 31, 1995, and the financial statements of the Midwest
Division of Hearing Health Services, Inc., as of June 30, 1996, and June 30,
1995, have been included in this Prospectus in reliance upon the reports of KPMG
Peat Marwick LLP, independent auditors, appearing elsewhere herein and upon the
authority of said firm as experts in accounting and auditing.
Effective December 20, 1996, upon the recommendation of the board of
directors and approval by the shareholders, the Company retained KPMG Peat
Marwick LLP as its independent auditors, replacing Shikaze Ralston. The Company
made the change in independent auditors due to its significant and growing
operations in the United States and its need to draw upon the services and
expertise of a large international accounting and auditing firm. The report of
Shikaze Ralston on the consolidated financial statements of the Company referred
to above does not contain an adverse opinion or disclaimer of opinion and is not
qualified as to uncertainty, audit scope, or accounting principles. In addition,
there were no disagreements with Shikaze Ralston on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Shikaze
Ralston, would have caused them to make reference to the subject matter of the
disagreements in connection with their report. Before engaging KPMG Peat Marwick
LLP as its new independent certified public accountants, the Company did not
consult with them regarding any matters related to the application of accounting
principles, the type of audit opinion that might be rendered on the Company's
financial statements or any other such matters.
ADDITIONAL INFORMATION
A Registration Statement on Form SB-2 relating to the shares offered
hereby has been filed by the Company with the Securities and Exchange Commission
(the "Commission"). This Prospectus does not contain all of the
- 52 -
<PAGE>
information set forth in such Registration Statement and the exhibits thereto.
For further information with respect to the Company and the Shares offered
hereby, reference is made to such Registration Statement and exhibits.
The Company is also subject to the periodic reporting requirements of
the Exchange Act, and in accordance therewith files reports, proxy statements,
and other information with the Commission. A copy of the Registration Statement
and other reports, proxy statements, or other information filed by the Company
may found at the Commission's site on the World Wide Web. The address of such
site is http://www.sec.gov. All such reports may also be inspected and copied at
the offices of the Commission at 450 Fifth Street, N. W., Washington, D. C.
20549 and at regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of the
Registration Statement may be obtained from the Public Reference Section of the
Commission, Washington, D. C., upon the payment of the fees prescribed by the
Commission.
The Company intends to furnish to its shareholders annual reports
containing financial statements audited by an independent public accounting
firm.
- 53 -
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The "Sonus Combined" column set forth in the unaudited pro forma
condensed combined statement of operations for the year ended July 31, 1997,
assumes that the acquisition of the Hearing Care Associates Group on October 1,
1996, and the acquisition of the Midwest Division of Hearing Health Services,
Inc., on October 31, 1996 (the "Acquisitions"), had occurred on August 1, 1996.
The unaudited pro forma combined financial information includes all of the
operations of the 25 clinics acquired in the Acquisitions.
The unaudited pro forma condensed combined financial information set
forth below is not necessarily indicative of the Company's combined financial
position or the results of operations that actually would have occurred if the
transactions had been consummated on such dates. In addition, such information
is not intended to be a projection of results of operations that may be obtained
by the Company in the future. The unaudited pro forma combined financial
information should be read in conjunction with the consolidated financial
statements and related notes thereto included elsewhere in this Prospectus.
<TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1997
ACQUIRED PRO FORMA SONUS
SONUS CLINICS(A) ADJUSTMENTS COMBINED
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net revenues $ 13,462 $ 1,565 $ - $ 15,027
Costs and expenses:
Product cost of sales 5,010 517 - 5,527
Operational expenses 9,395 1,265 (276)(b) 10,384
Depreciation and amortization 790 53 52(c) 895
Total operating expenses 15,195 1,835 (224) 16,806
------ ----- ---- ------
Loss from operations (1,733) (270) (224) (1,779)
Other income 32 81 - 40
Loss before income taxes (1,701) (262) (224) (1,789)
Income tax expense - (31) - (31)
------ ----- ---- ------
Net loss $ (1,701) $ (231) $ (224) $ (1,708)
======== ========== ========= =========
Pro forma:
Net loss per common share (0.42)
=========
Weighted average number
of shares outstanding
4,091
=========
</TABLE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(1) BASIS OF PRESENTATION
The "Sonus Combined" column set forth in the unaudited pro forma
condensed combined statements of operations for the year ended July 31, 1997,
gives effect to the Acquisitions as if such transactions had occurred on August
1, 1996.
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<PAGE>
(2) PRO FORMA ADJUSTMENTS
(a) Reflects the historical operations of the acquired clinics prior
to their acquisition by the Company.
(b) To record the elimination of non-recurring acquisition bonuses in
the amount of $276,000 paid to certain employees of acquired
clinics immediately prior to the closing date.
(c) To record amortization of goodwill for the Acquisitions in the
amount of $52,000 for the year ended July 31, 1997, as if the
Acquisitions had occurred on August 1, 1996.
ACQUISITIONS (FOR PERIODS FROM AUGUST 1,1996 TO DATE OF ACQUISITION) (IN
THOUSANDS)
<TABLE>
Hearing Care Associates Midwest Division
August 1, 1996 through August 1, 1996 through
September 30, 1996 October 31, 1996 Total
---------------------- ---------------------- -----
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Net patient service revenues $ 789 $ 776 $ 1,565
Costs and expenses:
Product cost of sales 248 269 517
Operational expenses 697 568 1,265
Depreciation and amortization 20 33 53
------ ------ ------
Total operating expenses 965 870 1,835
------ ------ ------
Losses from operations (176) (94) (270)
Other income, net 8 - 8
------ ------ ------
Net loss before income taxes (168) (94) (262)
Income tax benefit - (31) (31)
------ ------ ------
Net loss $ (168) (63) $ (231)
======= ====== ========
</TABLE>
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
SONUS CORP.
<TABLE>
<S> <C>
Report of KPMG, Independent Auditors ...........................................................................F-2
Auditor's Report................................................................................................F-3
Consolidated Balance Sheets as of July 31, 1997 and October 31, 1997 (unaudited)................................F-4
Consolidated Statements of Operations for the years ended July 31, 1997 and 1996,
and for the three-month periods ended October 31, 1997 and 1996 (unaudited)...................................F-5
Consolidated Statements of Shareholders' Equity for the years ended July 31, 1997
and 1996 and the three-month period ended October 31, 1997 (unaudited)........................................F-6
Consolidated Statements of Cash Flows for the years ended July 31, 1997 and 1996
and the three-month periods ended October 31, 1997 and 1996 (unaudited).......................................F-7
Notes to Consolidated Financial Statements......................................................................F-9
HEARING CARE ASSOCIATES GROUP
Independent Auditors' Report...................................................................................F-24
Balance Sheet as of July 31, 1996..............................................................................F-25
Statements of Operations for the years ended July 31, 1996 and 1995............................................F-26
Statements of Stockholders' Equity (Deficit) for the years ended July 31, 1996 and 1995........................F-27
Statements of Cash Flows for the years ended July 31, 1996 and 1995............................................F-28
Notes to Financial Statements..................................................................................F-29
THE MIDWEST DIVISION OF HEARING HEALTH SERVICES, INC.
Independent Auditors' Report...................................................................................F-33
Balance Sheets as of June 30, 1996 and October 31, 1996 (unaudited)............................................F-34
Statements of Operations and Accumulated Earnings for the years ended June 30,
1996 and 1995, and the four months ended October 31, 1996 and 1995 (unaudited)...............................F-35
Statements of Cash Flows for the years ended June 30, 1996 and 1995, and the
four months ended October 31, 1996 and 1995 (unaudited)......................................................F-36
Notes to Financial Statements..................................................................................F-37
</TABLE>
- F-1 -
<PAGE>
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS
SONUS CORP.:
We have audited the accompanying consolidated balance sheet of Sonus
Corp. (previously HealthCare Capital Corp.) and subsidiaries as of July 31,
1997, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sonus Corp. and subsidiaries as of July 31, 1997, and the consolidated results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Portland, Oregon
October 24, 1997, except for note 15, as to which the date is February 9, 1998
- F-2 -
<PAGE>
AUDITORS' REPORT
To the Shareholders of
HealthCare Capital Corp.
We have audited the consolidated balance sheet of HealthCare Capital Corp. and
subsidiaries as of July 31, 1996, and the related statements of operations and
retained earnings (deficit), cash flows and shareholders' equity for the year
then ended. These consolidated financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of the consolidated financial
position of HealthCare Capital Corp. and subsidiaries as of July 31, 1996, and
the consolidated results of their operations, and their cash flows for the year
then ended in accordance with generally accepted accounting principles as
adopted in the United States of America.
Vancouver, Canada Shikaze Ralston
October 24, 1996 Chartered Accountants
- F-3 -
<PAGE>
SONUS CORP.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
July 31, October 31,
1997 1997
------------ -----------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,099 $ -
Accounts receivable, net of allowance
for doubtful accounts and contractual
write downs of $361 and $393, respectively 2,514 2,714
Other receivables 314 410
Inventory 425 626
Prepaid expenses 260 491
------- -------
Total current assets 4,612 4,241
Property and equipment, net 2,277 2,490
Other assets 136 189
Goodwill and covenants not to compete, net 9,519 9,726
-------- --------
$ 16,544 $ 16,646
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ - $ 275
Bank loans and short-term notes payable 59 510
Accounts payable and accrued liabilities 3,395 2,998
Convertible notes payable 2,600 2,600
Capital lease obligation, current portion 101 101
Long term debt, current portion 357 357
------- -------
Total current liabilities 6,512 6,841
Capital lease obligation, non-current position 305 280
Long term debt, non-current portion 765 722
Convertible notes payable 127 -
-------- --------
Total liabilities 7,709 7,843
Shareholders' equity
Common stock, no par value per share,
unlimited number of shares authorized,
5,451,903 and 5,427,657 shares, respectively,
issued and outstanding 11,131 11,259
Notes receivable from shareholders (124) (124)
Accumulated deficit (2,117) (2,213)
Treasury stock, 3,960 and 5,640 shares,
respectively, at cost (33) (47)
Cumulative translation adjustment (22) (72)
-------- --------
Total shareholders' equity 8,835 8,803
-------- --------
$ 16,544 $ 16,646
======== ========
See accompanying notes to financial statements
</TABLE>
- F-4 -
<PAGE>
SONUS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
Year ended Three months ended
July 31, October 31,
--------------------------------------------------------------------------------------
1997 1996 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 13,462 $ 2,389 $ 5,307 $ 1,268
Costs and expenses:
Cost of products sold 5,010 1,017 1,753 492
Clinical expenses 5,985 1,197 2,244 646
General and administrative expenses 3,410 639 1,112 377
Depreciation and amortization 790 125 277 52
---------- -------- --------- -------
Total costs and expenses 15,195 2,978 5,386 1,567
---------- -------- --------- -------
Loss from operations (1,733) (589) (79) (299)
Other income (expense):
Interest income 76 8 9 1
Interest expense (47) - (26) -
Other, net 3 - - -
--------- -------- --------- -------
Net loss $ (1,701) $ (581) $ (96) $ (298)
========== ======== ========= =======
Weighted average outstanding shares 4,010 2,120 4,583 3,030
========== ======== ========= =======
Net loss per share $ (0.42) $ (0.27) $ (0.02) $ (0.10)
========== ======== ========= =======
See accompanying notes to consolidated financial statements.
</TABLE>
- F-5 -
<PAGE>
<TABLE>
SONUS CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
Shareholder Cumulative Total
Common Notes Accumulated Treasury Translation Shareholders
Stock Receivable Deficit Stock Adjustment Equity
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1995 $ 175 $ - $ 165 $ - $ (2) $ 338
Issuance of 600,000 shares of
common stock under private
placement (net proceeds) 416 - - - - 416
Exercise of stock options for
120,000 shares of common stock 102 - - - - 102
Issuance of 174,400 shares of
common stock upon conversion
of Company's promissory note 160 - - - - 160
Issuance of 239,149 shares of
common stock under private
placement (net proceeds) 1,072 - - - - 1,072
Translation adjustment - - - - 5 5
Net loss - - (581) - - (581)
------ ------ ----- ----- ----- ------
BALANCE AT JULY 31, 1996 1,925 - (416) - 3 1,512
Issuance of 22,560 shares of
common stock in connection
with receipt of tax credit 38 - - - - 38
Exercise of stock options for
155,000 shares of common stock 316 (124) - - - 192
Issuance of 587,876 shares of
common stock in connection
with acquisitions 3,291 - - - - 3,291
Issuance of 1,093,482 shares of
common stock under private
placement (net proceeds) 5,529 - - - - 5,529
Exercise of warrants for
7,150 shares of common 32 - - - - 32
Repurchase of 3,960 shares of
treasury stock - - - (33) - (33)
Translation adjustment - - - - (25) (25)
Net loss - - (1,701) - - (1,701)
------ ------ ----- ----- ----- ------
BALANCE AT JULY 31, 1997 $11,131 $ (124) $ (2,117) $ (33) $ (22) $8,835
Issuance of 25,925 shares of
common stock for conversion
of convertible note 128 - - - - 128
Repurchase of 1,680 shares of
treasury stock - - - (14) - (14)
Translation adjustment - - (50) - - (50)
Net (loss) - - (96) - - (96)
------ ------ ----- ----- ----- ------
BALANCE AT OCTOBER 31, 1997 $ 11,259 $ (124) $ (2,213) $ (47) $ (72) $ 8,803
====== ========= ========= ========= ======== ========
(UNAUDITED)
See accompanying notes to consolidated financial statements
</TABLE>
- F-6 -
<PAGE>
<TABLE>
SONUS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended Three months ended
July 31, October 31,
------------------------------------------------------------------------------
1997 1996 1997 1996
------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net loss $ (1,701) $ (581) $ (96) $ (298)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for bad debt expense 47 - 28 -
Depreciation and amortization 790 125 277 52
Changes in non-cash working capital:
Accounts receivable (2,158) (7) (228) (17)
Other receivables (314) - (96) -
Inventory (281) (16) (201) (72)
Prepaid expenses (219) (25) (231) 1
Income taxes recoverable 9 14 - -
Accounts payable and accrued liabilities 2,932 45 (396) 199
Deferred purchase discounts - (23) - (135)
------ ------ ----- ------
Net cash used in operating activities (895) (468) (943) (135)
------ ------ ----- ------
Cash flows from investing activities:
Incorporation and trademark costs - - - 3
Purchase of property and equipment (1,941) (293) (324) (111)
Deferred acquisition costs, net 132 (268) (53) 19
Net cash paid on business acquisitions (3,389) (238) (372) (616)
------ ------ ------ ------
Net cash used in investing activities (5,198) (799) (749) (705)
------ ------ ------ ------
Cash flows from financing activities:
Net proceeds (repayments) of long term debt
and capital lease obligations 1,382 (101) (69) 59
Deferred financing costs, net 42 (42) - (22)
Advances (repayments) of bank loans and
short-term notes payable 26 (75) 451 99
Advances from (repayments) to shareholders (124) (235) - -
Bank overdraft - - 275 -
Issuance (redemption) of convertible notes - (33) - -
Issuance of common stock for cash,
net of costs 5,915 1,750 1,151
Acquisition of treasury stock (33) - (14) -
------- ----- ------ ------
Net cash provided by financing activities 7,208 1,264 643 1,287
------- ----- ------ ------
Net increase (decrease) in cash and cash equivalents 1,115 (3) (1,049) 447
Effect on cash and cash equivalents of changes
in foreign translation rate (27) (2) (50) 14
------- ----- ------ ------
Cash and cash equivalents at the beginning of the
period 11 16 1,099 11
------- ------ ----- ------
Cash and cash equivalents at the end of the period $ 1,099 $ 11 - 472
======= ====== ===== ======
- F-7 -
<PAGE>
Years ended Three months ended
July 31, October 31,
------------------------------------------------------------------------------
1997 1996 1997 1996
------------------------------------------------------------------------------
Required supplemental disclosures:
Interest paid during period $ 41 $ 14 $ 26 -
Non-cash financing activities:
Issuance and assumption of long-term debt $ 1,025 $ 206 - $ 360
in acquisitions
Issuance of convertible notes in acquisitions $ 2,600 $ - - $ 2,602
Issuance of common stock in acquisitions $ 3,291 $ - - $ 2,390
Conversion of convertible note - - $ (128) -
Issuance of common stock upon conversion - - $ 128 -
See accompanying notes to consolidated financial statements
</TABLE>
- F-8 -
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Company
----------------------
Sonus Corp. (previously HealthCare Capital Corp.) (the "Company"), an
Alberta, Canada corporation, through its primary operating subsidiaries,
Sonus-Canada Ltd. (formerly HC HealthCare Hearing Clinics Ltd.), a British
Columbia, Canada corporation, and Sonus-USA, Inc. (formerly HealthCare Hearing
Clinics, Inc.), a Washington corporation, currently owns and operates a network
of 52 hearing care clinics in the United States and Western Canada. The clinics
are located primarily in the metropolitan areas of Los Angeles, California; San
Diego, California; Chicago, Illinois; Lansing, Michigan; Albuquerque, New
Mexico; Vancouver, British Columbia; and Calgary, Alberta. Each of the Company's
hearing care clinics provides its hearing impaired patients with a full range of
audiological products and services. The Company intends to expand its network of
hearing care clinics by acquiring clinics in its existing, as well as new,
geographic markets.
Principles of Consolidation
---------------------------
The consolidated financial statements include the Company's wholly
owned subsidiaries. All significant intercompany accounts have been eliminated.
The functional currency of all of the Company's Canadian operations is the
Canadian dollar while the functional currency of the Company's U.S. operations
is the U.S. dollar. In accordance with Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation", assets and liabilities
recorded in Canadian dollars are remeasured at current rates in existence on
July 31, 1997. Exchange gains and losses from remeasurement of assets and
liabilities recorded in Canadian dollars are treated as unrealized gains and
losses and reported as a separate component of stockholders' equity.
Revenue Recognition
-------------------
Revenues from the sale of hearing instrument products are recognized at
the time of delivery. Revenues from the provision of hearing care diagnostic
services are recognized at the time that such services are performed. As of July
31, 1997 and 1996, net revenues consisted of the following (in thousands):
1997 1996
-------- ------
Product revenue $11,627 $2,345
Service revenue 1,835 44
------- ------
$13,462 $2,389
======= ======
Income Taxes
------------
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Cash and Cash Equivalents
-------------------------
Cash equivalents consist of short-term, highly liquid investments with
original maturities of 90 days or less.
- F-9 -
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventory
---------
Inventories are stated at the lower of cost (first in, first out) or
net realizable value.
Property and Equipment
----------------------
Property and equipment are recorded at cost and depreciated as follows:
Professional equipment 20% declining balance
Office equipment 30% declining balance
Automotive equipment 30% declining balance
Leasehold improvements Straight line over five years
Computer equipment 30% declining balance
In the year of acquisition, depreciation is calculated at one-half the
above noted rates. Property and equipment purchased under capitalized leases are
amortized over the shorter of the lease term or their estimated useful life and
such depreciation is included with depreciation expense. Property and equipment
at July 31, 1997 consists of the following (in thousands):
Professional equipment $ 930
Office equipment 481
Automotive equipment 16
Leasehold improvements 405
Computer equipment 1,144
---------
2,976
Less accumulated depreciation $ (699)
---------
$ 2,277
Advertising Expenses
--------------------
The Company defers its advertising costs until the advertisement is
actually run, at which time the full expense is recognized. Deferred advertising
costs were $89,000 and $0 for the years ended July 31, 1997 and 1996,
respectively. Advertising expense was $786,000 and $207,000 for the years ended
July 31, 1997 and 1996, respectively.
Goodwill and Covenants not to Compete
-------------------------------------
The unallocated purchase costs in excess of the net assets acquired
(goodwill) is being amortized on the straight-line basis over twenty years.
Non-compete agreements are amortized on the straight-line basis upon termination
of the contracted employee for any reason. Goodwill and covenants not to compete
as of July 31, 1997 are as follows (in thousands):
Goodwill $ 8,966
Covenants not to compete 955
Less: accumulated amortization (402)
---------
$ 9,519
=========
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through discounted projected future cash flows of the
acquired businesses from which the goodwill arose. Amortization charged to
operations was $364,000 and $17,000 for the years ended July 31, 1997 and 1996,
respectively.
- F-10 -
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Acquisition and Financing Costs
----------------------------------------
Costs related to the acquisition of clinics are deferred and, upon
successful completion of acquisitions, are allocated to the assets acquired and
are subject to the accounting policies outlined above. Costs related to
potential acquisitions that are unsuccessful are expensed in the periods in
which it is determined that such acquisitions are unlikely to be consummated.
Costs related to issuing shares are deferred and upon the issuance of the
related shares, are applied to reduce the net proceeds of the issue.
Earnings Per Share
------------------
Earnings per share is based on the weighted average number of common
shares outstanding in each period. Common share equivalents represented by
convertible debt and contingent shares held in escrow have not been included in
the calculation of earnings per share as the effect would be anti-dilutive.
Concentrations of Credit Risk
-----------------------------
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and trade receivables.
The Company places its cash with high credit quality institutions. At times,
such amounts may be in excess of the FDIC insurance limits. The Company's trade
accounts receivable are derived from numerous private payers, insurance
carriers, health maintenance organizations and government agencies.
Concentration of credit risk relating to trade accounts receivable is limited
due to the diversity and number of patients and payers.
Fair Value of Financial Instruments
-----------------------------------
The carrying value of financial instruments such as cash and cash
equivalents, trade receivables, notes receivable, trade payables and notes
payable, approximate their fair value.
Use of Estimates
----------------
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Reclassifications
-----------------
Certain amounts in the 1996 financial statements have been reclassified
in order to conform to the 1997 presentation.
Interim Financial Statements
----------------------------
The interim financial statements reflect all adjustments, consisting of
only 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.
NOTE 2. ACQUISITIONS
During the fiscal year ended July 31, 1997, the Company purchased 39
hearing care clinics based in the United States in 12 separate transactions. In
each transaction, the acquisitions were accounted for as purchase transactions.
The acquired assets and liabilities were recorded at their estimated fair values
at the date of acquisition,
- F-11 -
<PAGE>
NOTE 2. ACQUISITIONS (CONTINUED)
and the unallocated excess purchase price (goodwill) is being amortized on a
straight line basis over 20 years. Purchase price adjustments may arise in the
event working capital on the closing date deviates from the minimum working
capital requirement specified in the purchase agreement. The operating results
of each acquired clinic have been included in the consolidated statements of
operations from each respective acquisition date.
Certain acquisitions have been structured using the Company's common
shares or debt convertible into the Company's common shares as a portion of the
consideration of the transaction. The valuation of the Company's common shares
given in consideration is based on the market price for a reasonable period
before and after the date the terms of an acquisition are agreed to, announced
and approved by regulatory authorities.
Santa Maria Hearing Associates
------------------------------
On August 1, 1996, Sonus-USA, Inc. acquired for cash certain assets of
Santa Maria Hearing Associates at a cost of $50,000. The seller entered into a
three year covenant not to compete with Sonus-USA, Inc. for consideration of
$25,000 which was paid on January 5, 1997.
Hearing Care Associates Group
-----------------------------
On October 1, 1996, Sonus-USA, Inc. completed the merger of Hearing
Care Associates - Northridge, Inc., Hearing Care Associates - Glendora, Inc.,
and Hearing Care Associates - Glendale, Inc. (collectively "HCA") through a
merger of these HCA corporations at a cost of $2,704,260. As consideration for
this merger, the Company paid cash of $314,724 and issued 477,907 common shares
of the Company at a price of $5.00 per share. For cash consideration of $314,724
paid on closing plus $36,137 paid on November 1, 1996, the sellers entered into
covenants not to compete for a period of three years after their employment
terminates.
Hearing Health Services, Inc.
-----------------------------
On October 31, 1996, Sonus-USA, Inc. purchased substantially all of the
assets of the Midwest Division of Hearing Health Services, Inc. at a cost of
$2,960,000. Consideration for this acquisition was in the form of a secured
$2,600,000 convertible note payable due October 31, 1997 and assumption of a
$360,000 note payable. The former note is convertible into 400,000 common shares
of the Company at a rate of $6.50 per share.
Hearing Dynamics
----------------
On December 6, 1996, Sonus-USA, Inc. merged with Hearing Dynamics
("HD"), a California corporation. The merger of HD into Sonus-USA, Inc. was
consummated as a tax-free merger whereby common shares of the Company were
exchanged for all the issued and outstanding shares of HD at a cost of $804,360.
Consideration for this acquisition was $102,600 cash paid on closing and 81,600
common shares of the Company issued at a price of $8.60 per share. A total of
23,600 shares are subject to restrictions on sale or transfer. Such restrictions
will lapse as to one-third of such shares on November 30 in each of 1997, 1998,
and 1999. In addition, 16,000 of the shares are being held by the Company (the
"Contingent Shares"). If for any of the three years ending on November 30, 1997,
1998 or 1999, the income of HD before interest, taxes, depreciation and
amortization and after a corporate overhead allocation falls below 20% of the
net revenues of the business for such year, the seller may elect to pay the
Company $1.00 or cancel one-fifth of a Contingent Share for each $1.72 of
shortfall. One-fifth of a Contingent Share is also required to be canceled or a
dollar retained for each $1.72 of long-term liabilities of the business as of
the date of closing of the acquisition and for each $1.72 of net accounts
receivable that remains uncollected after a specified time period. For cash
consideration of $25,000 paid on closing, the seller entered into a covenant not
to compete for a period of one year after employment terminates.
- F-12 -
<PAGE>
NOTE 2. ACQUISITIONS (CONTINUED)
FHC, Inc.
---------
On December 17, 1996, Sonus-USA, Inc. acquired all of the outstanding
shares of FHC, Inc., a New Mexico corporation, at a cost of $400,000.
Consideration for this acquisition was $250,000 cash paid on closing and a
three-year promissory note of $150,000 bearing interest at 6 1/2% per annum. For
consideration of $112,233 payable over a three-year period, the sellers also
entered into covenants not to compete for a period of three years from the date
of closing.
Hearing Care Associates - Los Angeles, Inc.
-------------------------------------------
On January 9, 1997, Sonus-USA, Inc. purchased all of the outstanding
shares of Hearing Care Associates -Los Angeles, Inc. for total consideration of
$301,000. For cash consideration of $112,500, the sellers entered into covenants
not to compete for a period of three years after employment terminates.
Hearing Care Associates - Arcadia, Inc.
---------------------------------------
On February 28, 1997, Sonus-USA, Inc. purchased all of the outstanding
shares of Hearing Care Associates - Arcadia, Inc. at a cost of $410,338 cash
paid on closing. For cash consideration of $130,170, the sellers entered into
covenants not to compete for a period of three years after employment
terminates.
Hearing Care Associates - Sherman Oaks, Inc.
--------------------------------------------
On March 6, 1997, Sonus-USA, Inc. purchased all of the outstanding
shares of Hearing Care Associates -Sherman Oaks, Inc. at a cost of $26,568 cash
paid on closing. For cash consideration of $33,783, the sellers entered into
covenants not to compete for a period of three years after employment
terminates.
Auditory Vestibular Center, Inc.
--------------------------------
On March 14, 1997, Sonus-USA, Inc. purchased all of the outstanding
shares of Auditory Vestibular Center, Inc. for total consideration of $84,306.
For cash consideration of $28,580, the sellers entered into covenants not to
compete for a period of three years after employment terminates.
Hearing Care Associates - Lancaster, Inc.
-----------------------------------------
On April 8, 1997, Sonus-USA, Inc. purchased all of the outstanding
shares of Hearing Care Associates -Lancaster, Inc. for total consideration of
$136,751. For cash consideration of $61,877, the sellers entered into covenants
not to compete for a period of three years after employment terminates.
Hearing Improvement Center, Inc.
--------------------------------
On June 6, 1997, Sonus-USA, Inc. purchased all of the outstanding
shares of Hearing Improvement Center, Inc. for consideration of $500,000 cash
paid on closing, 28,368 common shares of the Company issued at a price of $7.05
per share, a two-year promissory note in the amount of $132,624 payable in
quarterly installments including interest at 6% per annum and a three-year
promissory note in the amount of $282,036 with accrued interest at a rate of 6%
per annum payable at the end of the first year and the balance of the note,
including interest, payable in equal monthly installments over the remaining
term. For cash consideration of $50,000, the sellers entered into covenants not
to compete for a period of three years after employment terminates.
- F-13 -
<PAGE>
NOTE 2. ACQUISITIONS (CONTINUED)
Dakota Hearing Aid Service
--------------------------
On July 8, 1997, Sonus-USA, Inc. acquired for cash certain assets of
Dakota Hearing Aid Service at a cost of $40,000. The seller entered into a
three-year covenant not to compete with Sonus-USA, Inc. for cash consideration
of $10,000.
NOTE 3. FINANCING ARRANGEMENTS
Bank Loan
---------
Sonus-Canada Ltd. maintains a revolving bank demand loan bearing
interest at the bank's prime rate plus 1% per annum (5.75% at July 31, 1997),
secured by a general security agreement covering all assets of Sonus-Canada
Ltd., the postponement of claim by the shareholders and the guarantee of a
shareholder. The loan provides for a maximum credit limit of $182,000. At July
31, 1997, no amounts were outstanding under the loan.
Line of Credit
--------------
In July 1997, Sonus-USA, Inc. obtained a $500,000 line of credit from
Phonak, Inc., a hearing instrument manufacturer. The line of credit is secured
by a portion of Sonus-USA, Inc.'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. At July 31, 1997, no amounts
were outstanding under the line of credit.
Short-term Notes Payable
------------------------
Sonus-USA, Inc. and Sonus-Canada Ltd. have entered into short-term,
non-interest bearing notes with certain hearing instrument manufacturers. The
outstanding balance of the notes as of July 31, 1997 was $59,000.
NOTE 4. LONG-TERM DEBT
Long-term debt consists of the following at July 31, 1997 (in thousands
except for installment amounts):
<TABLE>
<S> <C>
Secured bank loan payable in installments of $726 per month plus
interest calculated at the bank prime
rate plus 1-1/2% per annum.............................................................................. $ 7
Equipment loan from a supplier. The loan requires
fifty-two equal installments every four weeks of $2,124
including interest calculated at the rate of 10% per annum.............................................. 75
Unsecured note payable in annual installments of
$50,000 plus interest calculated at 6.5% per annum,
maturing on December 17, 1999........................................................................... 150
Unsecured, non-interest bearing note payable in
quarterly installments of $9,352, maturing on
December 31, 1999....................................................................................... 94
- F-14 -
<PAGE>
NOTE 4. LONG-TERM DEBT (CONTINUED)
Equipment loans from suppliers, with maturities ranging from October,
1999 to December, 2018 and monthly payments, including interest at
rates ranging
from 0% to 9% per annum aggregating $3,165.............................................................. 82
Unsecured note payable in monthly installments of
$1,357 including interest calculated at the rate of
8% per annum, maturing on February 1, 1999.............................................................. 23
Note payable requiring monthly installments of $351 including interest
calculated at 18% per annum, maturing on
April 15, 2002.......................................................................................... 13
Note payable requiring payment of accrued interest of $17,395 on June
6, 1998, and monthly installments thereafter of $12,500 including
interest calculated at 6%
per annum compounded monthly, maturing on June 6, 2000.................................................. 282
Note payable requiring quarterly installments of $17,716 including
interest calculated at 6% per annum, maturing on
June 6, 1999........................................................................................... 133
Secured note payable requiring monthly installments
of $1,000 including interest calculated at 6% per
annum, maturing February 1, 1999........................................................................ 23
Note payable requiring annual installments of $120,000 plus interest
calculated at 6% per annum, maturing on
July 1, 1999........................................................................................ 240
--------
1,122
Less current portion (357)
--------
$ 765
========
</TABLE>
The maturities of long-term debt are as follows (in thousands): 1998 -
$357; 1999 - $459; 2000 - $237; 2001 - $11; 2002 - $4; thereafter $54.
- F-15 -
<PAGE>
NOTE 5. CAPITAL LEASES
The following is a schedule by year of future minimum lease payments
under capital leases together with the present value of the net minimum lease
payments as of July 31, 1997 (in thousands):
1998................................................. $ 132
1999................................................. 127
2000................................................. 126
2001................................................. 88
----------
Total minimum lease payments......................... 473
Less: amount representing interest.................. (67)
----------
Present value of minimum lease payments.............. 406
Less current portion................................. (101)
----------
$ 305
Total assets under capitalized leases at July 31, 1997, were $305,000,
net of accumulated depreciation of $131,000.
NOTE 6. CONVERTIBLE NOTES PAYABLE
Convertible notes payable consist of the following at July 31, 1997 (in
thousands except for per share amounts):
Non-interest bearing note due on demand;
convertible into common shares of
the Company at a rate of $5.00 per share................ $ 127
Non-interest bearing note due October 31, 1997;
convertible into common shares of
the Company at a rate of $6.50 per share................ 2,600
----------
$ 2,727
NOTE 7. SHAREHOLDERS' EQUITY
Common Stock
------------
On February 28, 1996, the Company issued 340,000 special warrants at a
price of $3.70 for gross proceeds of $1,250,690. The special warrants provided
for the conversion of each February special warrant to 1.1 units. Each unit
consisted of one common share and one share purchase warrant. The February
special warrants were converted into common shares at no additional cost to the
holder on February 28, 1997. Each share purchase warrant represents the right to
purchase one common share at a price of $5.50 until expiration on February 28,
1998.
A private placement in Canada of 162,000 special warrants was
consummated by the Company in September 1996 and a private placement in the
United States of 829,800 special warrants was consummated by the Company in
December 1996. Such special warrants are collectively referred to as the
September special warrants. The aggregate offering price for the September
special warrants was $1,012,500 for those sold in Canada and $5,186,250 for
those sold in the United States. Each of the September special warrants placed
in Canada entitled the holder to receive 1.1 common shares and 1.1 share
purchase warrants, with each such warrant exercisable for one common share at a
price of $10.00 per share. Each of the September special warrants placed in the
United States entitled the holder thereof
- F-16 -
<PAGE>
NOTE 7. SHAREHOLDERS' EQUITY (CONTINUED)
to receive one common share and one share purchase warrant to purchase an
additional common share for $10.00 per share.
In connection with the offering of the September special warrants in
Canada, the Company's placement agent (the Canadian Agent) received a selling
commission consisting of $48,625 in cash and 6,800 September special warrants
exercisable for one common share and one share purchase warrant to purchase an
additional common share for $10.00 per share and was granted an option to
acquire 16,200 share purchase warrants, each exercisable for one common share at
a price of $6.25 per share. The Canadian Agent also received a $61,987
syndication fee and a $37,097 corporate finance fee.
In connection with the placement of the September special warrants in
the United States, the Company's two placement agents (the U.S. Agents) each
received a selling commission equal to 9 percent of the gross proceeds in the
form of September special warrants, or a total of 74,682 September special
warrants. One of the U.S. Agents also received 4,000 September special warrants
in payment of its corporate finance fee. Such September special warrants are
exercisable for one common share and a share purchase warrant to purchase one
additional common share for $10.00 per share. In addition, the U.S. Agents
received an option to acquire 42,980 and 40,000 share purchase warrants,
respectively, with each warrant exercisable for one common share at a price of
$6.25 per share. All of the share purchase warrants issued in September or
December 1996 are subject to certain rights of the Company to force exercise or
cancellation.
A total of 1,050,000 outstanding shares were held in escrow at July 31,
1997. All such shares are registered in the shareholders' respective names with
all voting rights attached and exercisable by the respective registered
shareholder. The escrowed shares are restricted as to transferability. The
release of 200,000 shares was subject to lapse of time provisions; the shares
were released on October 21, 1997. The release of the remaining 850,000 shares
is subject to the following provisions:
o One share will be released for each $0.40 of cash flow generated by
the Company;
o Release shall only be made pursuant to a written application to The
Alberta Stock Exchange; and
o The maximum number of shares to be released in any year to a
shareholder shall be one-third of the original number of shares held
in escrow on behalf of such shareholder.
Stock Option Plans
------------------
The Company has two stock option plans, the Stock Option Plan ("1993
Plan") and the Stock Award Plan ("1996 Plan") pursuant to which the Company may
grant to officers, directors, employees and consultants incentive and
non-qualified options to purchase up to 10% of the outstanding common shares
under the 1993 Plan and up to 600,000 common shares under the 1996 Plan, subject
to applicable regulatory limits. The 1996 Plan is subject to shareholder
approval at the Company's 1997 annual meeting. The exercise price of options
granted under the plans may not be less than 75% of the fair market value of the
Company's common shares at the date of grant (100% for tax-qualified incentive
stock options). Options become exercisable at the date of grant or in equal
annual installments over a period of one to four years from the date of grant.
The options generally expire five years after the date of grant.
The 1996 Plan also provides for the granting of stock appreciation
rights, restricted units, performance awards and other stock-based awards. The
Company had no such awards or rights outstanding at July 31, 1997 or 1996.
- F-17 -
<PAGE>
NOTE 7. SHAREHOLDERS' EQUITY (CONTINUED)
The activity during the years ended July 31, 1997 and 1996 was as
follows:
<TABLE>
1997 1996
------------ ------------
Weighted- Weighted-
Average Average
Options Exercise Price Options Exercise Price
------------------- ---------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Outstanding - beginning of year 340,000 $4.15 90,000 $1.40
Granted 368,400 $6.85 370,000 $3.95
Exercised (155,000) $2.05 (120,000) $ .85
Canceled (65,000) $7.50 - $ -
------------------- --------------------- ------------------- ----------------
Outstanding - end of year 488,400 $6.40 340,000 $4.15
=================== ===================== =================== ================
Exercisable at end of year 177,500 $5.95
-----
Weighted-average fair
value of options granted
during the year $4.45 $6.15
</TABLE>
The following table summarizes information about stock options
outstanding at July 31, 1997:
<TABLE>
Options Outstanding Options Exercisable
----------------------------------------------------------- ----------------------------------------
Weighted-
Number Average Weighted- Number Weighted -
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices as of Contractual Exercise as of Exercise
July 31, 1997 Life Price July 31, 1997 Price
- -------------------- -------------------- ------------------ ----------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
$0.25 -- $1.00 10,000 2.66 $0.90 10,000 $ 0.90
$1.25 -- $1.50 60,000 3.39 $1.40 60,000 $ 1.40
$3.50 -- $3.75 25,000 3.55 $3.60 17,500 $ 3.60
$5.50 -- $5.75 50,000 4.77 $5.60 - $ -
$6.25 -- $6.75 120,000 4.18 $6.50 - $ -
$7.00 -- $7.50 133,400 4.49 $7.30 - $ -
$9.75 -- $10.50 90,000 3.57 $10.00 90,000 $10.00
- -------------------- -------------------- ------------------ ----------------- --------------------- ------------------
$0.05 -- $2.10 488,400 4.05 $6.40 177,000 $5.95
</TABLE>
The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation cost has been recognized for its stock
option grants. Pro forma information regarding net income (loss) and net income
(loss) per share is required under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and has been
determined as if the Company had accounted for all 1997 and 1996 stock option
grants based on the fair value method. The pro forma information presented below
is not representative of the effect stock options will have on pro forma net
income (loss) or net income (loss) per share for future years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes multiple option-pricing model. The following weighted
average assumptions were used for grants in 1997 and 1996: risk-free interest
rates of 5.94% and 6.43%, respectively, an expected option life of 4.92 years
and 4.24 years, respectively, expected volatility of 96% and dividend yield of
zero.
The Black-Scholes method is one of many models used to calculate the
fair value of options that are freely tradable, fully transferable and that have
no vesting restrictions. These models also require highly subjective
assumptions, including future stock price volatility and expected time until
exercise, which greatly affect the calculated values.
- F-18 -
<PAGE>
NOTE 7. SHAREHOLDERS' EQUITY (CONTINUED)
Had compensation cost for these plans been determined based on the fair
value of awards at the grant date, as prescribed by SFAS 123, net loss or net
loss per share would have been as follows:
<TABLE>
1997 1996
---- ----
(in thousands, except
per share data)
Net loss applicable to common shareholders:
<S> <C> <C>
As reported $(1,701) $ (581)
Pro forma (1) $(2,121) $(1,172)
Net loss per share:
As reported $ (0.42) $ (0.27)
Pro forma (1) $ (0.55) $ (0.55)
</TABLE>
(1) SFAS 123 applies to awards granted in fiscal years that begin after December
15, 1994. Consequently, the effects of applying SFAS 123 shown here are not
likely to be representative of the effects in future years due to the exclusion
of awards granted in prior years but vesting (and therefore expensed) in 1996
and 1997.
NOTE 8. INCOME TAXES
HealthCare Capital Corp. and its Canadian subsidiaries file separate
corporate income tax returns on a stand-alone basis in Canada. Sonus-USA, Inc.
files separate corporate income tax returns in the United States.
There was no provision for income taxes for the years ended July 31,
1997 and 1996 as the Company incurred net operating losses.
The components of temporary differences that give rise to significant
portions of deferred income taxes at July 31, 1997 and 1996 are as follows (in
thousands):
<TABLE>
1997 1996
---- ----
Deferred tax assets:
<S> <C> <C>
Net operating losses carried forward $ 839 $ 344
Allowance for doubtful accounts 44 ---
Other -- 24
--------- ---------
883 368
Deferred tax liabilities:
Goodwill and start-up costs (54) ---
Other --- (21)
--------- ---------
829 347
Less valuation allowance (829) (347)
--------- ---------
$ --- $ ---
========= =========
</TABLE>
A reconciliation of the Company's expected tax expense using the
statutory income tax rate to the actual effective rate is as follows:
- F-19 -
<PAGE>
NOTE 8. INCOME TAXES (CONTINUED)
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Tax benefit at statutory rate (34)% (34)%
Adjustment for higher Canadian tax rate --- (11)
Capitalized costs deducted for tax purposes --- (6)
Expenses not deductible for tax purposes 5 10
Change in valuation allowance 29 41
--- ---
Tax rate per financial statements ---% ---%
==== ====
</TABLE>
At July 31, 1997, the Company had approximate net operating loss
carryforwards for tax purposes which, if not utilized, expire in the years ended
as follows (in thousands):
<TABLE>
UNITED
CANADA STATES TOTAL
------ ------ -----
<S> <C> <C> <C> <C>
2001 $ 18 $ --- $ 18
2002 35 --- 35
2003 711 --- 711
2004 45 --- 45
2011 --- 303 303
2012 --- 906 906
--------- ---------- --------
$ 809 $ 1,209 $ 2,018
========= ========== ========
</TABLE>
NOTE 9. RELATED PARTY TRANSACTIONS
William DeJong is a partner in the Calgary, Alberta law firm of Ballem
MacInnes and is a director of the Company. Total fees, disbursements and
government sales tax paid to Ballem MacInnes by the Company for legal services
as of July 31, 1997 and 1996 were $168,000 and $37,000, respectively (converted
from Canadian dollars at July 31, 1997 and 1996).
In connection with the acquisition of the Midwest Division of Hearing
Health Services, Inc., Sonus-USA, Inc. assumed a promissory note with a balance
of $360,000 payable to Kathy Foltner, an officer of the Company. The promissory
note is payable in equal annual installments of $120,000 beginning July 1, 1997,
and bears interest at 6% per annum.
Gregory J. Frazer, Ph.D., an officer and director of the Company, was a
shareholder in certain Hearing Care Associates corporations which the Company
acquired during the year ended July 31, 1997. Total consideration paid to Mr.
Frazer and his wife in connection with the acquisitions and related
noncompetition agreements totaled $933,000 in cash and 294,071 common shares of
the Company at a price of $5.00 per share.
Brandon M. Dawson, an officer and director of the Company, exercised
options for 50,000 shares of Common Stock at $1.35 per share (converted from
Canadian dollars at May 8, 1997). In connection with such exercise, the Company
loaned Mr. Dawson $67,500 to pay the aggregate exercise price of the options.
The loan is secured by the stock underlying the exercise of the options and
accrues interest at 10% per annum. Gene K. Balzer, Ph.D., a director of the
Company, exercised options for 40,000 common shares at $1.40 per share
(converted from Canadian dollars at May 19, 1997). In connection with such
exercise, the Company loaned Mr. Balzer $56,000 to pay the aggregate exercise
price of the options. The loan is secured by the stock underlying the exercise
of the options and accrues interest at 10% per annum.
- F-20 -
<PAGE>
NOTE 10. 401(K) PLAN
The Company sponsors a 401(k) plan for all employees who have satisfied
minimum service and age requirements. Employees may contribute up to 20% of
their compensation to the plan. The Company does not match employee
contributions.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Operating Leases
----------------
The following is a schedule by year of future minimum lease payments
for non-cancelable operating leases at July 31, 1997 (in thousands):
1998 $ 658
1999 531
2000 468
2001 229
2002 107
Thereafter 146
-------
Total minimum lease payments $ 2,139
=======
Rental expense under operating leases was $810,000 and $208,000 for the
years ended July 31, 1997 and 1996, respectively.
Insurance
---------
In the normal course of business, the Company may become a defendant or
plaintiff in various lawsuits. Although a successful claim for which the Company
is not fully insured could have a material effect on the Company's financial
condition, management is of the opinion that it maintains insurance at levels
sufficient to insure itself against the normal risk of operations.
NOTE 12. SUBSEQUENT EVENTS
On August 27, 1997, Sonus-USA, Inc. purchased all of the outstanding shares
of Hearing Care Associates -Santa Monica, Inc. at a cost of $258,268 cash paid
on closing. For cash consideration of $114,135, the sellers entered into
covenants not to compete for a period of three years after employment
terminates.
NOTE 13. CANADIAN VERSUS U.S. GAAP
As of July 31, 1997 and 1996, there were no material differences between
Canadian generally accepted accounting principles ("GAAP") and U.S. GAAP.
- F-21 -
<PAGE>
NOTE 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of
operations for the year ended July 31, 1997 (in thousands, except per share
data):
<TABLE>
Quarter ended
-----------------------------------------------------------------
October January April July
1996 1997 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue $ 1,268 $ 2,933 $ 4,355 $ 4,906
Operating loss (299) (672) (444) (318)
Net loss (298) (649) (432) (322)
Earnings before interest,
depreciation and amortization (1) (247) (454) (251) 9
Net loss per share $ (0.10) $ (0.15) $ (0.10) $ (0.05)
</TABLE>
(1) Earnings before interest, depreciation and amortization is provided because
it is a measure commonly used by acquisition companies. It is presented to
enhance an understanding of the Company's operating results and is not intended
to represent cash flow or results of operations in accordance with generally
accepted accounting principles for the periods indicated.
NOTE 15. REVERSE STOCK SPLIT
Effective February 9, 1997, the shareholders approved a one-for-five
reverse stock split of the Common Shares. All share and per share information
appearing in the accompanying financial statements and related notes has been
restated to give effect to the reverse stock split of the Common Shares.
- F-22 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
HealthCare Capital Corp.:
We have audited the accompanying balance sheet of Hearing Care Associates Group
as of July 31, 1996, and the related statements of operations, stockholders'
equity (deficit), and cash flows for each of the years in the two years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hearing Care Associates Group
as of July 31, 1996, and the results of its operations and its cash flows for
each of the years in the two year period then ended in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Portland, Oregon
February 14, 1997
- F-23 -
<PAGE>
HEARING CARE ASSOCIATES GROUP
BALANCE SHEET
July 31, 1996
ASSETS
Current assets:
<TABLE>
<S> <C>
Cash and cash equivalents $ 243,167
Trade accounts receivable, net of allowance for doubtful accounts of $22,130 711,028
Related party receivable 97,372
Prepaid expenses and other current assets 22,013
-----------
Total current assets 1,073,580
Equipment and fixtures, net 209,717
Intangible assets, at cost, less accumulated amortization 163,387
Deferred taxes 20,600
Other assets, net 9,678
-----------
Total assets $ 1,476,962
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 575,362
Notes payable 106,438
Related party payable 437,512
Accrued payroll and related costs 141,175
Other accrued expenses and current liabilities 261,719
-----------
Total current liabilities 1,522,206
Stockholders' equity (deficit):
Common stock; authorized 24,000 shares;
issued and outstanding 2,600 shares 70,000
Accumulated deficit (115,244)
-----------
Total stockholders' deficit (45,244)
$ 1,476,962
</TABLE>
See accompanying notes to financial statements.
- F-24 -
<PAGE>
HEARING CARE ASSOCIATES GROUP
STATEMENTS OF OPERATIONS
Years ended July 31, 1996 and 1995
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Product sales $ 3,480,056 $ 2,740,612
Product cost of sales 1,393,554 659,941
------------ ------------
2,086,502 2,080,671
Net patient service revenue 673,115 513,129
Expenses:
Selling expenses 2,949,340 2,147,185
General and administrative expenses 320,763 151,433
------------ ------------
3,270,103 2,298,618
------------ ------------
(Loss) income from operations (510,486) 295,182
Other income (expense) net 11,727 (9,817)
(Loss) income before income taxes (498,759) 285,365
------------- -------------
Income tax (benefit) expense (22,900) 108,883
------------- -------------
Net (loss) income $ (475,859) $ 176,482
============= =============
</TABLE>
See accompanying notes to financial statements.
- F-25 -
<PAGE>
HEARING CARE ASSOCIATES GROUP
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended July 31, 1996 and 1995
<TABLE>
Total
Stockholders'
Common Stock Accumulated Equity
Shares Par Value Deficit (Deficit)
------ --------- ------- ---------
<S> <C> <C> <C> <C>
Balances at July 31, 1994 2,600 $ 70,000 $ 184,133 $ 254,133
Net income - - 176,482 176,482
------------- ------------- -------------- ------------
Balances at July 31, 1995 2,600 70,000 360,615 430,615
Net loss - - (475,859) (475,859)
------------- ------------- -------------- ------------
Balances at July 31, 1996 2,600 $ 70,000 $ (115,244) $ (45,244)
============= ============= ============= ============
</TABLE>
See accompanying notes to financial statements.
- F-26 -
<PAGE>
HEARING CARE ASSOCIATES GROUP
STATEMENTS OF CASH FLOWS
Years ended July 31, 1996 and 1995
<TABLE>
1996 1995
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net (loss) income $ (475,859) $ 176,482
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operations:
Depreciation and amortization 68,091 61,422
Deferred income taxes 54,000 (34,178)
Changes in current assets and liabilities:
Increase in accounts receivable (147,794) (358,299)
Decrease (increase) in notes receivable - related party 57,067 (20,131)
(Increase) decrease in prepaid
expenses and other current assets (37,548) 13,568
Increase in accounts payable 173,483 56,197
Increase in accrued expenses and
other current liabilities 223,671 71,144
------------ -------------
Net cash used in operating activities (84,889) (33,795)
------------ -------------
Cash flows from investing activities:
Purchases of equipment and fixtures (66,597) (17,313)
Acquisition of intangible assets (17,493) (3,245)
------------ -------------
Net cash used in investing activities (84,090) (20,558)
------------ -------------
Cash flows from financing activities:
Net proceeds from related parties 248,578 255,095
Repayments on notes payable (85,176) (71,800)
------------ ------------
Net cash provided by financing activities 163,402 183,295
------------ ------------
Net increase (decrease) in cash and
cash equivalents (5,577) 128,942
Cash and cash equivalents at beginning of year 248,744 119,802
------------ ------------
Cash and cash equivalents at end of year $ 243,167 $ 248,744
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 21,104 $ 13,349
============ ============
Income taxes paid $ 0 $ 143,061
============ ============
</TABLE>
See accompanying notes to financial statements.
- F-27 -
<PAGE>
HEARING CARE ASSOCIATES GROUP
Notes to Financial Statements
July 31, 1996
(1) ORGANIZATION AND OPERATIONS
Hearing Care Associates Group (the "Company") consists of three California
corporations: Hearing Care Associates - Northridge, Inc., Hearing Care
Associates - Glendale, Inc., and Hearing Care Associates -Glendora, Inc. The
Company provides hearing rehabilitation services through a network of eleven
clinics located in the Los Angeles, California, metropolitan area.
The accompanying financial statements reflect the combined operations of
these three corporations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and short-term investments with original maturities of 90 days or
less.
(b) NET REVENUES
Revenues from the sale of hearing instrument products are recognized at the
time of delivery. Revenues from the provision of hearing care diagnostic
services are recognized at the time that such services are performed.
(c) EQUIPMENT AND FIXTURES
Equipment and fixtures are stated at cost less accumulated depreciation and
amortization. Additions and betterments are capitalized, and maintenance and
repairs are charged to current operations as incurred. The cost of assets
retired or otherwise disposed of and the related accumulated depreciation
and amortization are removed from the accounts, and the gain or loss on such
dispositions is reflected in current operations. Amortization of leasehold
improvements is provided on an accelerated basis over the term of the lease
or estimated useful lives of the assets, whichever is less. Depreciation is
provided on an accelerated basis. Estimated useful lives of the assets are:
Professional equipment 7 - 10 years
Furniture and fixtures 7 - 10 years
Office equipment 5 - 7 years
Leasehold improvements 7 years
(d) INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
- F-28 -
<PAGE>
(e) INTANGIBLE ASSETS
Intangible assets consist of non-compete agreements, purchased patient
listings and goodwill (the cost in excess of net assets acquired in a
purchase transaction). Goodwill and patient listings are being amortized on
a straight-line basis over 15 years. Non-compete agreements are amortized on
a straight-line basis over the life of the contract.
(f) CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and trade
receivables. The Company places its cash with high credit quality
institutions. At times such amounts may be in excess of the FDIC insurance
limits. The Company's trade accounts receivable are derived from numerous
private payors, insurance carriers, health maintenance organizations and
government agencies. Concentration of credit risk relating to trade accounts
receivable is limited due to the diversity and number of patients and
payors.
(g) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments such as cash and cash
equivalents, trade receivables, notes receivable, trade payables and notes
payable, approximate their fair value.
(h) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(3) EQUIPMENT AND FIXTURES
Equipment and fixtures consist of the following at July 31, 1996:
Professional equipment $ 254,431
Office equipment 193,736
Furniture and fixtures 143,921
Leasehold improvements 76,627
------------
668,715
Less accumulated depreciation 458,998
------------
$ 209,717
============
Depreciation expense for fiscal 1996 and 1995 was $57,172 and $49,236,
respectively.
(4) NOTES PAYABLE
Equipment loans payable to supplier.
The loans are due April 15, 1998,
and require total monthly
installments of $2,000, including
interest calculated at the rate of 9
percent per annum. $ 106,438
============
(5) INCOME TAXES
The components of the 1996 and 1995 provision (benefit) for income taxes are
as follows:
- F-29 -
<PAGE>
Year Ended July 31
------------------------------
1996 1995
------------- -------------
Current:
Federal $ (76,900) $ 120,449
State 0 22,612
------------- -------------
(76,900) 143,061
Deferred:
Federal 45,465 (28,776)
State 8,535 (5,402)
------------- -------------
54,000 (34,178)
------------- -------------
Total $ (22,900) $ 108,883
============= =============
At July 31, 1995, the difference between the total income tax expense and
the income tax expense computed using the statutory federal income tax rate
was due primarily to state tax expense, net of federal tax benefit. At July
31, 1996, the difference between the total income tax benefit and the income
tax benefit computed using the statutory federal income tax rate was due
primarily to state tax benefit, net of federal effect, as well as an
increase in the valuation allowance.
The net deferred tax asset of $20,600 at July 31, 1996, consists primarily
of net operating loss carryovers and differences resulting from using the
cash method of accounting for income tax purposes. No valuation allowance
was deemed necessary at July 31, 1995. An increase in the valuation
allowance during the year resulted in a valuation allowance at July 31, 1996
of approximately $156,000.
At July 31, 1996, the Company has a net operating loss carryforward for
federal income tax purposes of approximately $274,000.
(6) OPERATING LEASES
The Company leases offices and equipment under noncancelable operating
leases which require future minimum annual rentals as follows:
Year ending July 31:
1997 $ 241,139
1998 207,000
1999 208,908
2000 212,731
2001 216,665
Thereafter 376,956
-------------
$ 1,463,399
=============
- F-30 -
<PAGE>
Certain of the leases contain renewal options and escalation clauses which
require payments of additional rent to the extent of increases in related
operating costs. Rent expense for fiscal 1996 and 1995 was $208,868 and
$236,293, respectively.
(7) RELATED PARTY TRANSACTIONS
The Company receives advances to fund operations from stockholders who are
also employees and officers of the Company. The balance due to these
stockholders is $437,512 at July 31, 1996. Employees who are stockholders
have also received periodic advances from the Company. The total amount due
to the Company from these employees is $97,372 at July 31, 1996, all of
which is due within the next fiscal year.
(8) SUBSEQUENT EVENT
As of October 1, 1996, the Company was acquired by HealthCare Hearing
Clinics, Inc., a Washington corporation and a wholly-owned subsidiary of
HealthCare Capital Corp., a corporation organized under the laws of the
province of Alberta, Canada.
As of September 30, 1996, the Company declared a bonus to a clinic manager
in the amount of $236,000. The bonus was payable upon the completion of the
acquisition of the Company by HealthCare Hearing Clinics, Inc.
- F-31 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
HealthCare Capital Corp.:
We have audited the accompanying balance sheet of the Midwest Division of
Hearing Health Services, Inc. dba Sonus as of June 30, 1996, and the related
statements of operations and accumulated earnings and cash flows for each of the
years in the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Midwest Division of Hearing
Health Services, Inc. dba Sonus as of June 30, 1996, and the results of its
operations and cash flows for each of the years in the two year period then
ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Portland, Oregon
January 16, 1997
- F-32 -
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. DBA SONUS
BALANCE SHEETS
<TABLE>
June 30, October 31,
1996 1996
------------- -------------
(Unaudited)
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 139,396 $ 108,240
Trade accounts receivable, net of allowance
for doubtful accounts of $57,297 313,614 301,567
Accounts receivable - other 965 512
Inventory 62,619 43,161
Prepaid expenses and other current assets 11,049 35,808
------------- -------------
Total current assets 527,643 489,288
Equipment and fixtures, net 389,523 364,879
Deferred taxes 39,179 39,179
Other assets, net 25,628 24,212
------------- -------------
454,330 428,270
------------- -------------
Total assets $ 981,973 $ 917,558
============= =============
LIABILITIES AND RETAINED EARNINGS
Current liabilities:
Accounts payable $ 221,399 $ 224,238
Accrued payroll and related costs 127,164 101,433
Patient deposits 23,927 36,330
Other accrued expenses 23,538 27,937
Capital lease obligations 8,875 1,775
------------- -------------
Total current liabilities 404,903 391,713
Related party payable 277,923 279,126
------------- -------------
Total liabilities 682,826 670,839
------------- -------------
Retained earnings 299,147 246,719
------------- -------------
Total liabilities and retained earnings $ 981,973 $ 917,558
============= =============
See accompanying notes to financial statements.
</TABLE>
- F-33 -
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. DBA SONUS
STATEMENTS OF OPERATIONS AND ACCUMULATED EARNINGS
<TABLE>
Four Months
Years Ended June 30 Ended October 31
----------------------------------------------------------------
1996 1995 1996 1995
------------- ------------- -------------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Product sales $ 2,983,955 $ 2,878,986 $ 930,926 $ 1,147,596
Product cost of sales 934,038 1,031,409 337,488 355,090
------------- ------------- -------------- ------------
2,049,917 1,847,577 593,438 792,506
Net patient service revenue 478,702 463,383 174,913 166,412
Expenses:
Selling expenses 1,981,736 1,827,201 709,106 687,539
General and administrative
expenses 424,943 356,999 142,957 126,731
------------- ------------- -------------- ------------
2,406,679 2,184,200 852,063 814,270
------------- ------------- -------------- ------------
Income (loss) from operations 121,940 126,760 (83,712) 144,648
------------- ------------- ------------- ------------
Interest income 1,593 - 485 -
------------- ------------- -------------- ------------
1,593 - 485 -
------------- ------------- -------------- ------------
Net income (loss) before
income taxes 123,533 126,760 (83,227) 144,648
------------- ------------- ------------- ------------
Income tax expense (benefit) 47,687 41,024 (30,799) 57,298
------------- ------------- ------------- ------------
Net income (loss) 75,846 85,736 (52,428) 87,350
Accumulated earnings,
beginning of period 223,301 137,565 299,147 223,301
------------- ------------- -------------- ------------
Accumulated earnings, end of period $ 299,147 $ 223,301 $ 246,719 $ 310,651
============= ============= ============== ============
</TABLE>
See accompanying notes to financial statements.
- F-34 -
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. DBA SONUS
STATEMENTS OF CASH FLOWS
<TABLE>
Four Months
Years Ended June 30 Ended October 31
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(Unaudited)
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income (loss) $ 75,846 $ 85,736 $ (52,428) $ 87,350
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operations:
Depreciation 108,430 90,677 41,200 16,218
Deferred taxes (13,471) 7,226 - -
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (18,170) (199,543) 12,047 53,717
Decrease (increase) in inventory 49,179 (9,676) 19,458 46,672
Decrease (increase) in prepaids and
other assets 11,302 (27,126) (22,890) 1,144
(Decrease) increase in accounts payable (80,598) 94,897 2,839 (117,433)
Increase (decrease) in accrued liabilities 15,918 (2,906) (25,731) (3,536)
(Decrease) increase in patient deposits (20,926) 18,439 12,403 8,897
(Decrease) increase in other liabilities (1,037) 58,974 (26,400) 43,115
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities 126,473 116,698 (39,502) 136,144
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of equipment and fixtures (103,853) (202,904) (16,556) (41,243)
--------- --------- --------- ---------
Net cash used in investing activities (103,853) (202,904) (16,556) (41,243)
--------- --------- --------- ---------
Cash flows from financing activities:
Net payments on capital leases (24,556) - (7,100) (10,356)
Net (repayments to) proceeds from
related parties (6,188) 180,497 32,002 (19,799)
--------- --------- --------- ---------
Net cash (used in) provided by
financing activities (30,744) 180,497 24,902 (30,155)
--------- --------- --------- ---------
Net (decrease) increase in cash and
cash equivalents (8,124) 94,291 (31,156) 64,746
Cash and cash equivalents at
beginning of period 147,520 53,229 139,396 147,520
Cash and cash equivalents at
end of period $ 139,396 $ 147,520 $ 108,240 $ 212,266
========= ========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid $ 4,068 $ 14,437 $ 820 $ 1,025
========= ========= ========= =========
Income taxes paid $ 61,158 $ 33,798 $ 0 $ 57,298
========= ========= ========= =========
Schedule of non cash investing and financing activities:
Capital lease obligation $ - $ 33,431 $ - $ -
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
- F-35 -
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. DBA SONUS
Notes to Financial Statements
(1) ORGANIZATION AND OPERATIONS
The Midwest Division of Hearing Health Services, Inc. dba Sonus (the
Company) consists of the Michigan and Illinois operations of Hearing Health
Services, Inc., a Delaware corporation. The Company provides diagnostic,
rehabilitation and preventative hearing health care products and services to
patients through 14 clinics located in Michigan and Illinois.
The Michigan and Illinois operations of Hearing Health Services, Inc.
operated under separate management independent from other Hearing Health
Services, Inc., locations. The accompanying financial statements reflect all
significant costs of operations for the Midwest Division of Hearing Health
Services, Inc.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on-hand and short-term investments with original maturities of 90
days or less.
(b) NET REVENUES
Revenues from the sale of hearing instrument products are recognized at
the time of delivery. Revenues from the provision of hearing care
diagnostic services are recognized at the time that such services are
performed.
(c) INVENTORY
Inventory is stated at the lower of cost, determined on the first-in,
first-out method, or market value. Inventory consists of hearing
instruments and batteries, which have been purchased from vendors for
resale to customers.
(d) EQUIPMENT AND FIXTURES
Equipment and fixtures are stated at cost less accumulated depreciation
and amortization. Additions and betterments are capitalized, and
maintenance and repairs are charged to current operations as incurred. The
cost of assets retired or otherwise disposed of and the related
accumulated depreciation and amortization are removed from the accounts,
and the gain or loss on such dispositions is reflected in current
operations. Amortization of leasehold improvements is provided on the
straight-line method over the term of the lease or estimated useful lives
of the assets, whichever is less. Depreciation is provided on the
straight-line method. Estimated useful lives of the assets are:
Professional equipment 7 years
Furniture and fixtures 5 years
Office equipment 5 years
Leasehold improvements 1 - 5 years
(Continued)
- F-36 -
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. DBA SONUS
Notes to Financial Statements
(e) INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes
the enactment date.
(f) CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and trade
receivables. The Company places its cash with high credit quality
financial institutions. At times such amounts may be in excess of the FDIC
insurance limits. The Company's trade accounts receivable are derived from
numerous private payors, insurance carriers, health maintenance
organizations and government agencies. Concentration of credit risk
relating to trade accounts receivable is limited due to the diversity and
number of patients and payors.
(g) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments such as cash and cash
equivalents, trade receivables, notes payable and trade payables,
approximate their fair value.
(h) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(i) INTERIM FINANCIAL STATEMENTS
In the opinion of management, the interim financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary
for a fair statement of the results for the interim periods presented.
(Continued)
- F-37 -
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. DBA SONUS
Notes to Financial Statements
(3) EQUIPMENT AND FIXTURES
Equipment and fixtures consist of the following at June 30, 1996:
Professional equipment $ 329,453
Office equipment 194,327
Furniture and fixtures 74,445
Leasehold improvements 64,480
-------------
662,705
Less accumulated depreciation and amortization (273,182)
$ 389,523
=============
Property and equipment at June 30, 1996 includes assets acquired under
capital leases of $23,402, net of accumulated depreciation of $10,029.
Depreciation expense for fiscal years 1996 and 1995 was $108,430 and
$90,677, respectively.
(4) INCOME TAXES
The Company is a division of, and its operations are included in the tax
return for, Hearing Health Services, Inc. Income taxes on the accompanying
financial statements are provided on a stand-alone basis as if the Company
filed its own tax return.
The components of the 1996 and 1995 provision (benefit) for income taxes are
as follows:
Year Ended June 30,
------------------------------
1996 1995
------------- ------------
Current:
Federal $ 51,492 $ 28,456
State 9,666 5,342
------------- ------------
61,158 33,798
------------- ------------
Deferred:
Federal (11,342) 6,083
State (2,129) 1,143
------------- ------------
(13,471) 7,226
------------- ------------
Total $ 47,687 $ 41,024
============= ============
(Continued)
- F-38 -
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. DBA SONUS
Notes to Financial Statements
The difference between the total income tax expense and the income tax expense
computed using the statutory federal income tax rate for the years ended June
30, 1996 and 1995 is as follows:
1996 1995
---- ----
Computed tax expense at
statutory rate 34.0% 34.0%
State tax expense, net of
federal taxes 4.0% 2.1%
Nondeductible expenses 0.6% 4.2%
--- ---
Total 38.6% 40.3%
===== ====
The deferred income tax asset of $39,179 at June 30, 1996 relates primarily to
certain reserves not currently deductible for tax purposes. No valuation
allowance was deemed necessary and there was no change in the valuation
allowance from the prior year. It is more likely than not that the entire amount
of the deferred tax asset will be realized due to the taxable income from the
carryback availability in prior years.
(5) LEASES
(a) OPERATING LEASES
The Company leases office and equipment under noncancellable operating
leases which require future minimum annual rentals as follows:
Year ending June 30
1997 $ 171,811
1998 152,483
1999 101,023
2000 54,387
2001 50,156
Thereafter 89,090
------
$ 618,950
=========
Certain of the leases contain renewal options and escalation clauses which
require payments of additional rent to the extent of increases in related
operating costs. Rent expense for fiscal 1996 and 1995 was $195,369 and
$194,821, respectively.
(Continued)
- F-39 -
<PAGE>
THE MIDWEST DIVISION OF HEARING
HEALTH SERVICES, INC. DBA SONUS
Notes to Financial Statements
(b) CAPITAL LEASES
The Company leases certain professional equipment under capital leases
expiring through 1996. Future minimum lease payments related to capital
leases at June 30, 1996 are as follows:
Total minimum lease payments
(payable in fiscal year 1997) $ 9,900
Amounts representing interest 1,025
Present value of net minimum
lease payments $ 8,875
=======
(6) RELATED PARTY TRANSACTIONS
The Company receives advances to fund operations from related
partnerships managed by Foster Management. The balance due from the
Company to these partnerships is $277,923 at June 30, 1996.
The balance of the related party payable was not assumed by
HealthCare Hearing Clinics, Inc., in its acquisition of the Company
subsequent to year-end (see note 8). Therefore, the related party
payable balance is reflected as a non-current liability on the
accompanying financial statements.
The Company also leases corporate office space from a related party
under an agreement which expires in February, 2003. Rent expense
recorded for fiscal 1996 was $12,528.
(7) DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution plan that provides
eligible employees (employees that have been employed for 12 months
from their date of hire) the opportunity to accumulate funds for
their retirement. The plan does not require Company contributions,
nor have any contributions been made by the Company for the years
ended June 30, 1996 and 1995.
(8) SUBSEQUENT EVENT
As of October 31, 1996, the Company was acquired by HealthCare
Hearing Clinics, Inc., a Washington corporation and a wholly-owned
subsidiary of HealthCare Capital Corp., a corporation organized
under the laws of the Province of Alberta, Canada.
- F-40 -
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Part 8 of the Registrant's bylaws requires the Registrant to
indemnify, to the extent permitted by the Business Corporations Act (Alberta)
(the "Act"), directors and officers, former directors and officers, and any
person who acts or acted at the Registrant's request as a director or officer of
a body corporate of which the Registrant is or was a shareholder or a creditor,
and his heirs and legal representatives, from and against:
(a) all costs, charges, and expenses, including any amount to
settle an action or satisfy a judgment reasonably incurred by him in
respect of any civil, criminal, or administrative action or proceeding
to which he is made a party by reason of being or having been a
director or officer of the Registrant; and
(b) all other costs, charges, and expenses incurred in
connection with the defense of any civil, criminal, or administrative
action or proceeding to which he is made a party by reason of being or
having been a director or officer of the Registrant.
The effect of this provision of the Registrant's bylaws when
considered in light of Part 9, Section 119 of the Act is to grant a right of
indemnification to the above referenced individuals against all expenses
(including attorney fees and settlement costs) reasonably incurred in each of
the following circumstances:
(a) the individual (i) acted honestly and in good faith with a
view to the best interests of the Registrant and (ii) in the case of a
criminal or administrative action or proceeding that is enforced by a
monetary penalty, had reasonable grounds to believe that his conduct
was lawful;
(b) the individual was substantially successful on the merits
on his defense of the action or proceeding and acted honestly and in
good faith with a view to the best interests of the Registrant, and in
the case of a criminal or administrative action, had reasonable grounds
for believing his conduct was lawful; and
(c) in the case of an action on behalf of the Registrant to
procure a judgment in its favor, to which the individual is made a
party by reason of being or having been a director or officer of the
Registrant, the individual acted honestly and in good faith with a view
to the best interests of the Registrant, and the court approves such
indemnification.
The Act also permits the Registrant to purchase and maintain
insurance for the protection of (i) its directors and officers and (ii) any
director or officer of another body corporate acting at the request of the
Registrant, against liabilities incurred in such person's capacity as a director
or officer of the Registrant or of such other body corporate, except when such
liability relates to such person's failure to act honestly and in good faith
with a view to the best interests of the Registrant or such other body
corporate.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemized statement of expenses of the
Registrant in connection with the sale of the Common Shares being registered
hereby. All of the expenses are estimated, except for the SEC registration fee.
None of the expenses will be borne by the Selling Shareholders identified in the
Prospectus contained in this registration statement.
<TABLE>
=======================================================================================================================
STATEMENT OF EXPENSES OF REGISTRANT
=======================================================================================================================
<S> <C>
SEC registration fee $13,117
- -----------------------------------------------------------------------------------------------------------------------
Printing and engraving expenses 10,000*
- -----------------------------------------------------------------------------------------------------------------------
Legal fees and expenses 110,000*
- -----------------------------------------------------------------------------------------------------------------------
Auditors' fees and expenses 120,000*
- -----------------------------------------------------------------------------------------------------------------------
Transfer Agent and Registrar fees 5,000*
- -----------------------------------------------------------------------------------------------------------------------
Miscellaneous expenses 11,883*
- -----------------------------------------------------------------------------------------------------------------------
TOTAL $270,000*
=======================================================================================================================
</TABLE>
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Within the last three years the Registrant has sold securities without
registration under the Securities Act in the transactions and in reliance on the
exemptions described below. The numbers of Common Shares, special warrants, and
warrants and related issue and exercise prices set forth in this section have
been adjusted to reflect the one-for-five reverse stock split of the Common
Shares effective February 9, 1998.
SPECIAL WARRANTS
During 1996, the Registrant undertook two separate offerings of Special
Warrants. The first warrant offering was a private placement in Canada and the
U.S. of 340,000 special warrants (the "February Special Warrants"). The
aggregate offering price for the February Special Warrants was $1,241,000
(converted from Canadian dollars at February 28, 1996). Each of the February
Special Warrants entitled the holder to acquire 1.1 Common Shares and a share
purchase warrant to purchase 1.1 additional Common Shares. As a result, the
Registrant issued 374,000 Common Shares and share purchase warrants to purchase
an additional 374,000 Common Shares. The number of February Special Warrants
issued to U.S. holders totaled 80,000 and were sold to one individual and three
entities as set forth below. The private placement to U.S. investors of February
Special Warrants was made in reliance on the exemption from registration
contained in Section 4(2) of the Securities Act. The issuance of shares and
purchase warrants upon the exercise or deemed exercise of the February Special
Warrants occurred on February 28, 1997.
The February Special Warrants were issued with the assistance
of Wood Gundy, Inc. ("Wood Gundy"). In consideration for its services, Wood
Gundy was granted 6,500 February Special Warrants at a deemed issue price of
$3.65 per February Special Warrant (converted from Canadian dollars at February
28, 1996) and also received $65,000 in cash.
The purchasers of the February Special Warrants were as
follows:
II-2
<PAGE>
PURCHASER NUMBER OF
SPECIAL
WARRANTS
Sagit Investment Management Ltd. 260,000
A. Baron Cass III 24,334
Sands Partnership No. I Money Purchase Pension Plan 24,333
The Curran Companies, Inc. 24,333
Aspen Limited Partnership 7,000
-------
340,000
=======
In February 1998, purchasers of February Special Warrants exercised all
of the outstanding share purchase warrants and purchased 374,000 Common Shares
at an exercise price of $5.28 per share. The Registrant received proceeds of
$2.0 million in connection with the exercise of warrants. Sales of Common Shares
to U.S. investors were completed in reliance on the exemption from registration
contained in Section 4(2) of the Securities Act.
The second warrant offering related to a private placement in Canada of
162,000 special warrants consummated in September 1996 and a private placement
in the U.S. of 829,800 special warrants consummated in December 1996. Such
special warrants are collectively referred to herein as the "September Special
Warrants." The aggregate offering price for the September Special Warrants was
$1,012,500 for those sold in Canada and $5,186,250 for those sold in the U.S.
Each of the September Special Warrants placed in the U.S. entitled the holder to
acquire one Common Share and one share purchase warrant to purchase one
additional Common Share for $10.00. Each of the September Special Warrants
placed in Canada entitled the holder to acquire 1.1 Common Shares and a share
purchase warrant to purchase 1.1 Common Shares for $10.00. The September Special
Warrants issued to U.S. holders were sold through two placement agents to the
individuals and entities set forth below. The private placement to U.S.
investors of September Special Warrants was made in reliance on Rule 506 of
Regulation D under the Securities Act. All of the U.S. investors were accredited
investors as defined in Rule 501 of Regulation D under the Securities Act.
C.M. Oliver & Company Limited (the "Canadian Agent") acted as agent for
the Registrant in connection with the offering of the September Special Warrants
in Canada. The Canadian Agent received 6,800 September Special Warrants, each
exercisable for one Common Share and a share purchase warrant to purchase an
additional Common Share for $10.00 in partial payment of its selling commission
and was granted an option to acquire 16,200 share purchase warrants (the
"Agent's Option"), each exercisable for one Common Share at a price of $6.25.
The warrants are subject to certain rights of the Registrant to force exercise
or cancellation of the Agent's Option.
Sunrise Securities Corporation ("Sunrise") and Dallas Research &
Trading, Inc. ("Dallas Research"), served as placement agents in connection with
the placement of the September Special Warrants in the United States. Sunrise
and Dallas Research each received a selling commission equal to 9 percent of the
gross proceeds in the form of September Special Warrants, or a total of 74,682
September Special Warrants. Dallas Research also received 4,000 September
Special Warrants in payment of its corporate finance fee. Such September Special
Warrants are each exercisable for one Common Share and a share purchase warrant
to purchase an additional Common Share for $10.00. In addition, Sunrise and
Dallas Research received an option to acquire 42,980 and 40,000 share purchase
warrants, respectively, with each warrant exercisable for one Common Share at a
price of $6.25. The warrants are subject to certain rights of the Registrant to
force the exercise or cancellation of the warrants.
The purchasers of the September Special Warrants were as follows:
II-3
<PAGE>
UNITED STATES
PURCHASER NUMBER OF SPECIAL
WARRANTS ISSUED
Baron & Darlene Cass "Family Foundation" 4,000
A. Baron Cass III "Childrens Trust" 16,000
A. Baron Cass III 60,000
William J. Reik III 8,000
Philip H. Mabry 4,000
Marcus R. Mutz 8,000
James T. Mathis 1,000
Barton J. Cohen 16,000
Barton J. Cohen "Family Foundation" 4,000
The Curran Companies, Inc. 20,000
Michael D. & Lisbeth H. Bickford 8,000
Gary B. Downey 1,600
Howard Kaplan 8,000
Leonard M. Riggs Jr., M.D. 13,333
Peggy A. Riggs 6,667
John L. Strauss 80,000
Howard E. Rachofsky 80,000
John C. Stinson 5,000
Alan R. Kanuk 7,200
Paul Lappetito 2,000
William Collins 15,000
Mark W. Hill 10,000
Hill A. Feinberg 4,000
Alfa Life Insurance Co. 40,000
Alfa Mutual Insurance Co. 60,000
Alfa Mutual Fire Insurance Co. 60,000
John W. Holley Grantor Trust 24,000
Barbara Wilson and John W. Holley 5,600
Barbara Holley Art V Trust 4,000
Barbara Holley Art VII Trust 9,600
II-4
<PAGE>
Rainbow Trading Partners, Ltd. 16,000
Rainbow Trading Venture Partners, L.P. 17,600
Stanford C. Finney, Jr. 16,000
Jerome Gabbert 4,800
John Lemak 8,000
James P. Judge 8,000
Charles McKnight 1,600
Gail King 4,000
Netta Sue King McNight 1,600
Netta Sue King Q-Tip Trust 4,000
Andrea P. Thau Profit Sharing Plan 1,600
Andrea Thau Money Purchase Plan 800
John R. Lieberman 800
Donald J. Aho 1,600
Marvin Kigler 800
Stephen Rutledge 1,000
Eli Jacobson 6,400
David Stone 16,000
State Capital Partners 8,000
Christine Ferrer 16,000
Theodore Friedman 8,000
Gross Foundation Inc. 40,000
Howard Milstein 16,000
Edward Milstein 16,000
Paul Scharfer 4,000
Joe Pretlow 4,000
Derek Caldwell 8,000
Aspen Limited Partnership 14,200
-------
829,800
=======
CANADA
PURCHASER NUMBER OF SPECIAL
WARRANTS ISSUED
Sharon Woodward 12,000
II-5
<PAGE>
Tom Kay RRSP 12,000
Kathleen Margaret Kay 12,000
Sandy Pascuzzi 12,000
John B. Lansdell 12,000
Carl Vandenbrink 12,000
230666 Alberta Ltd. 12,000
Denise Nobert 12,000
Clint Stewart 12,000
Fulton Park 18,000
Jim Bresett 12,000
523905 B.C. Ltd. 24,000
-------
162,000
=======
PRIVATE PLACEMENT IN CANADA
The Registrant issued 600,000 Common Shares in a private offering in
Canada that was completed on December 14, 1995. The following individuals and
corporations received Common Shares:
NUMBER OF
COMMON SHARES
PURCHASER
Douglas F. Good 32,000
Donald Risk 8,000
Marilyn E. Marshall 150,000
Carsam Investments 50,000
Chelsea Capital Corporation 60,000
Harris McLean Financial Group Ltd. 100,000
Pacific Growth Ventures Corp. 50,000
Figtree Investments Limited 150,000
-------
600,000
=======
SALE OF CONVERTIBLE SHARES TO WARBURG
On December 24, 1997, the Registrant completed the sale of 13,333,333
Convertible Shares, together with warrants to purchase 2,000,000 Common Shares
at a price of $12.00 per share, to Warburg for an aggregate price of
$18,000,000. The Company completed the Warburg Sale in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act.
II-6
<PAGE>
COMMON SHARES ISSUED IN ACQUISITIONS
On June 6, 1997, the Registrant issued 28,368 Common Shares to the two
owners of Hearing Improvement Center, Inc., in connection with its acquisition.
On December 5, 1996, the Registrant issued 81,600 Common Shares to Deborah Law
Cross in connection with the acquisition of Hearing Dynamics, Inc. In connection
with the acquisition of certain hearing care clinics on October 31, 1996, the
Registrant issued convertible subordinated notes in the aggregate principal
amount of $2,600,000 to four affiliates of Hearing Health Services, Inc. The
notes are convertible into Common Shares at $6.50 principal amount per share. On
October 1, 1996, the Registrant issued 243,453 Common Shares to Gregory J.
Frazer, 59,618 Common Shares to Carissa Bennett, and 183,835 Common Shares to
Jami Tanihana, to acquire certain hearing care clinics located in Southern
California. The Registrant relied on the exemption provided by Section 4(2) of
the Securities Act with respect to the securities issued in the above
acquisitions.
On May 1, 1996, the Registrant issued a non-interest bearing promissory
note in the principal amount of $126,830 (converted from Canadian dollars at May
30, 1997) to a Canadian resident in connection with the acquisition of all of
the issued and outstanding shares of Pacific Hearing Clinics, Inc., and Oakridge
Hearing Clinics, Inc., which operated hearing care clinics in Vancouver, British
Columbia. The note was converted into 25,925 Common Shares in October 1997 at
$4.70 per share. In January 1995, the Registrant issued convertible notes in
aggregate principal amount of $177,260 to three Canadian residents in connection
with the Registrant's acquisition of Thomas H. Moore Audiology Ltd. These notes
were converted in December 1995, July 1996, and November 1996 into 196,960
Common Shares at $0.90, $0.90, and $0.95 per share, respectively.
EMPLOYEE STOCK OPTIONS
In reliance on Rule 701 under the Securities Act, the Registrant
granted options for 695,000 Common Shares to certain employees, officers, and
directors under the Registrant's Stock Option Plan ("1993 Plan"). The option
prices range from $1.32 per share to $9.93 per share (converted from Canadian
dollars at February 10, 1998). In addition, the Registrant has granted 183,400
options exercisable at prices ranging from $5.60 to $7.50 per share pursuant to
its Stock Award Plan in reliance on Rule 701. The Registrant has issued a total
of 245,000 Common Shares to employees, officers, and directors upon exercise of
stock options granted pursuant to the 1993 Plan. No Common Shares have been
issued pursuant to the exercise of options granted under the Stock Award Plan.
ITEM 27. EXHIBITS
The exhibits to this registration statement required by Item 601 of
Regulation S-B are listed in the accompanying index to exhibits.
ITEM 28. UNDERTAKINGS
The Registrant will:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a fundamental
change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of the
securities offered would not exceed that which was registered)
and any deviation from the low or high end
II-7
<PAGE>
of the estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue. The undertaking of the Registrant in the preceding
sentence does not apply to insurance against liability arising under the
Securities Act.
II-8
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this
Post-Effective Amendment No. 1 to Registration Statement on Form SB-2 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Portland, State of Oregon, on the 3rd day of March, 1998.
SONUS CORP.
By /s/ Edwin J. Kawasaki
Vice President, Finance and Chief Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to Registration Statement on Form SB-2 has been
signed by the following persons in the capacities indicated on March 3, 1998.
Signature Title
- --------- -----
PRINCIPAL EXECUTIVE OFFICER:
President, Chief Executive
BRANDON M. DAWSON* Officer, and Director
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ Edwin J. Kawasaki Vice President, Finance and
Edwin J. Kawasaki Chief Financial Officer
A MAJORITY OF THE BOARD OF DIRECTORS:
HUGH T. HORNIBROOK* Director
WILLIAM DeJONG* Director
DOUGLAS F. GOOD* Director
GREGORY FRAZER, Ph.D.* Director
JOEL ACKERMAN* Director
*By /s/ Edwin J. Kawasaki
Attorney-in-fact
II-9
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1 Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
5 Opinion of Ballem MacInnes as to legality of securities.
8 Opinion of Felesky Flynn as to certain Canadian tax matters.
10.1 Form of agreement for purchase of February Special Warrants.*
10.2 Special Warrant Indenture between the Registrant and The R-M Trust
Company dated February 28, 1996.*
10.3 Warrant Indenture between the Registrant and The R-M Trust Company dated
February 28, 1996.*
10.4 Form of agreement for purchase of September Special Warrants (British
Columbia).*
10.5 Form of agreement for purchase of September Special Warrants (United
States).*
10.6 Special Warrant Indenture between the Registrant and The R-M Trust
Company dated September 17, 1996 ("September Special Warrant
Indenture").*
10.7 Supplemental Indenture to September Special Warrant Indenture.*
10.8 Second Supplemental Indenture to September Special Warrant Indenture.*
10.9 Warrant Indenture between the Registrant and the R-M Trust Company dated
September 17, 1996. ("September Warrant Indenture").*
10.10 Supplemental Indenture to September Warrant Indenture.*
10.11 Sponsorship Agreement dated March 13, 1996.*
10.12 Securities Purchase Agreement between the Registrant and Warburg, Pincus
Ventures, L.P. ("Warburg"), dated November 21, 1997. Incorporated by
reference to Exhibit 99.2 to the Registrant's current report on Form 8-K
dated November 25, 1997.
10.13 Warrant Agreement between the Registrant and Warburg dated December 24,
1997.
10.14 [RESERVED]
10.15 [RESERVED]
10.16 Agency Agreement dated for reference August 22, 1996, between the
Registrant and the C.M. Oliver & Company Limited.*
10.17 U.S. Placement Agreement dated for reference October 14, 1996, between
the Registrant and Dallas Research & Trading, Inc.*
II-10
<PAGE>
10.18 U.S. Placement Agreement dated for reference October 14, 1996, between
the Registrant and Sunrise Securities Corporation.*
10.19 Stock Purchase and Sale Agreement dated as of February 28, 1997, between
Gregory J. Frazer and Laurie Van Duivenbode and SONUS-USA, Inc., a
Washington corporation ("Sonus-USA").*
10.20 Merger Agreement dated as of October 1, 1996, among the Registrant,
Hearing Care Associates- Glendale, Inc., Hearing Care
Associates-Glendora, Inc., and Hearing Care Associates-Northridge, Inc.,
and Gregory J. Frazer, Carissa Bennett, and Jami Tanihana.*
10.21 Asset Purchase Agreement effective as of October 31, 1996, among the
Registrant, Sonus-USA and Hearing Health Services, Inc., and
Audio-Vestibular Testing Center, Inc. (the "Midwest Division
Agreement").*
10.22 Merger Agreement dated as of December 2, 1996, by and among the
Registrant, Sonus-USA, and Hearing Dynamics and Deborah Law Cross.*
10.23 Stock Purchase and Sale Agreement dated as of December 17, 1996, by and
between certain selling shareholders and Sonus-USA.*
10.24 Stock Purchase and Sale Agreement dated as of January 9, 1997, by and
between Gregory J. Frazer and Stephen Martinez and Sonus-USA.*
10.25 Form of Convertible Subordinated Note relating to the Midwest Division
Agreement.*
10.26 1993 Stock Option Plan.*
10.27 Second Amended and Restated Stock Award Plan (as amended December 18,
1997).
10.28 Employment Agreement dated October 1, 1996, between Sonus-USA, and
Gregory J. Frazer.*
10.29 Employment Agreement dated as of November 1, 1996, among the Registrant,
Sonus-USA, and Kathy Foltner.*
10.30 Employment Agreement dated December 24, 1997, between the Registrant and
Brandon M. Dawson.
10.31 Employment Agreement dated December 24, 1997, between the Registrant and
Edwin J. Kawasaki.
10.32 Employment Agreement dated December 24, 1997, between the Registrant and
Randall E. Drullinger.
10.33 Consulting Agreement effective as of January 1, 1997, between the
Registrant and Hugh T. Hornibrook.*
10.34 Stock Purchase and Sale Agreement dated as of March 6, 1997, between
Gregory J. Frazer, Alfred S. Gaston and Sonus-USA.*
10.35 Stock Purchase and Sale Agreement dated as of March 14, 1997, by and
between Gregory J. Frazer, David N. Jankins, and Jami Tanihana and
Sonus-USA.*
10.36 Stock Purchase and Sale Agreement dated as of April 6, 1997, by and
between Susan Diaz, Gregory J. Frazer, and Jami Tanihana and Sonus-USA.*
II-11
<PAGE>
10.37 Equipment Lease Agreement dated as of April 1, 1997, between Siemens
Hearing Instruments, Inc., and Sonus-USA.*
10.38 Promissory Note of Brandon M. Dawson and related Pledge Agreement
between the Registrant and Mr. Dawson, each dated May 8, 1997.
Incorporated by reference to Exhibit 10.36 to the Registrant's annual
report on Form 10-KSB for the year ended July 31, 1997 (the "1997
10-KSB").
10.39 Promissory Note of Gene K. Balzer, Ph.D., and related Pledge Agreement
between the Registrant and Mr. Balzer, each dated May 19, 1997.
Incorporated by reference to Exhibit 10.37 to the 1997 10-KSB.
10.40 Stock Purchase Agreement dated August 27, 1997, by and between Carissa
D. Bennett, Gregory J. Frazer, and Evelyn L. Gong and Sonus-USA, Inc.
Incorporated by reference to Exhibit 10.35 to 1997 10-KSB.
10.41 Stock Purchase Agreement dated January 5, 1998, by and between Gregory
J. Frazer, Rhonda Jesperson and Sonus-USA.
10.42 Stock Purchase Agreement dated February 12, 1998, by and between Gregory
Frazer, Donal M. Welch and Sonus-USA.
16 Letter of Shikaze Ralston, Chartered Accountants, regarding change in
certifying accountant.*
21 The Registrant's subsidiaries are SONUS-USA, Inc., a Washington
corporation, and Sonus-Canada Ltd., a British Columbia (Canada)
corporation.
23.1 Consent of Shikaze Ralston, Chartered Accountants.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Ballem MacInnes (included in Exhibit 5).
23.4 Consent of Felesky Flynn regarding tax (included in Exhibit 8).
24 Power of attorney of certain officers and directors.*
24.1 Power of attorney for Joel Ackerman, director.
27 Financial Data Schedule.
- ----------------------------
* Previously filed.
II-12
EXHIBIT 3.1
TERMS OF SERIES A CONVERTIBLE PREFERRED SHARES
BUSINESS CORPORATIONS ACT
(SECTION 27 OR 171)
ALBERTA FORM 4
MUNICIPAL AFFAIRS
Registries ARTICLES OF AMENDMENT
- --------------------------------------------------------------------------------
1. NAME OF CORPORATION: 2. ALBERTA CORPORATE ACCESS NUMBER:
HEALTHCARE CAPITAL CORP. 20575035
- --------------------------------------------------------------------------------
3. (i) ITEM NO. 1 OF THE ARTICLES OF THE ABOVE NAMED CORPORATION IS AMENDED IN
ACCORDANCE WITH THE PROVISIONS OF SECTION 167(1)(a) OF THE BUSINESS
CORPORATIONS ACT (ALBERTA) AS FOLLOWS:
The name of the Corporation as set forth in Item No. 1 is changed to SONUS
CORP.
(ii) ITEM NO. 2 OF THE ARTICLES OF THE ABOVE NAMED CORPORATION IS AMENDED IN
ACCORDANCE WITH THE PROVISIONS OF SECTION 167(1)(f) OF THE BUSINESS
CORPORATIONS ACT (ALBERTA) BY THE ADDITION OF THE FOLLOWING PROVISIONS:
Simultaneously with the effective date of this amendment (the "Effective
Date"), each of the Corporation's Common Shares, without nominal or par
value, issued and outstanding immediately prior to the Effective Date (the
"Old Common Shares") shall automatically and without any action on the part
of the holder thereof be reclassified as and changed into one-fifth (1/5) of
a Common Share, without nominal or par value (the "New Common Shares"),
subject to the treatment of fractional share interests as described below.
Each holder of a certificate or certificates which immediately prior to the
Effective Date represented outstanding Old Common Shares (the "Old
Certificates," whether one or more) shall be entitled to receive upon
surrender of such Old Certificates to the Corporation's Transfer Agent for
cancellation, a certificate or certificates (the "New Certificates," whether
one or more) representing the number of whole New Common Shares into which
and for which the Old Common Shares formerly represented by such Old
Certificates so surrendered, are reclassified under the terms hereof. From
and after the Effective Date, Old Certificates shall represent only the
right to receive New Certificates (and, where applicable, cash in lieu of
fractional shares, as provided below) pursuant to the provisions hereof. No
certificates or scrip representing fractional share interests in New Common
Shares will be issued, and no such fractional share interest will entitle
the holder thereof to vote, or to any rights of a shareholder of the
Corporation. A holder of Old Certificates shall receive, in lieu of any
fraction of a New Common Share to which the holder would otherwise be
entitled, a cash payment therefor on the basis of the closing price of the
Old Common Shares on The Alberta Stock Exchange on the Effective Date (or in
the event the Common Shares are not so traded on the Effective Date, such
closing price on the next preceding day on which such shares were traded on
The Alberta Stock Exchange). If more than one Old Certificate shall be
surrendered at one time for the account of the same shareholder, the number
of whole New Common Shares for which New Certificates shall be issued shall
be computed on the basis of the aggregate number of Old Common Shares
represented by the Old Certificates so surrendered. In the event that the
Corporation's Transfer Agent determines that a holder of Old Certificates
has not tendered all his certificates for exchange,
<PAGE>
the Transfer Agent shall carry forward any fractional share until all
certificates of that holder have been presented for exchange such that
payment for fractional shares to any one person shall not exceed the value
of four Old common Shares. If any New Certificate is to be issued in a name
other than that in which the Old Certificates surrendered for exchange are
issued, the Old Certificates so surrendered shall be properly endorsed and
otherwise in proper form for transfer, and the person or persons requesting
such exchange shall affix any requisite stock transfer tax stamps to the Old
Certificates surrendered, or provide funds for their purchase, or establish
to the satisfaction of the Corporation's Transfer Agent that such taxes are
not payable. From and after the Effective Date the amount of capital
represented by the New Common Shares into which and for which the Old Common
Shares are reclassified under the terms hereof shall be the same as the
amount of capital represented by the Old Common Shares so reclassified,
until thereafter reduced or increased in accordance with applicable law.
- --------------------------------------------------------------------------------
DATE SIGNATURE TITLE
1998 February 9 /s/ Keith J. Engel Solicitor
- ------------------ TELEPHONE NUMBER
YEAR MONTH DAY Keith J. Engel (403) 292-9822
- --------------------------------------------------------------------------------
FOR DEPARTMENTAL USE ONLY FILED
<PAGE>
BUSINESS CORPORATIONS ACT
(SECTION 27 OR 171)
ALBERTA FORM 4
MUNICIPAL AFFAIRS
Registries ARTICLES OF AMENDMENT
- --------------------------------------------------------------------------------
1. NAME OF CORPORATION: 2. ALBERTA CORPORATE ACCESS NUMBER:
HEALTHCARE CAPITAL CORP. 20575035
- --------------------------------------------------------------------------------
3. THE ARTICLES OF THE ABOVE NAMED CORPORATION ARE AMENDED IN ACCORDANCE WITH
THE PROVISIONS OF SECTION 27 OF THE BUSINESS CORPORATIONS ACT (ALBERTA) AS
FOLLOWS:
Pursuant to the Resolutions of the Directors of the Corporation, duly
passed, and in accordance with subsection 27(5) of the Business Corporation
Act (Alberta), the Articles of the Corporation are amended such that the
first series of Preferred Shares of the Corporation are designated as
"Series A Convertible Preferred Shares" with such rights, privileges,
restrictions and conditions attaching to the shares of such series as are
set forth in Schedule "A" attached hereto and forming part of these Articles
of Amendment.
- --------------------------------------------------------------------------------
DATE SIGNATURE TITLE
1997 December 16 /s/ William DeJong Assistant Secretary and Director
- ------------------ TELEPHONE NUMBER
YEAR MONTH DAY William DeJong (403) 292-9859
- --------------------------------------------------------------------------------
FOR DEPARTMENTAL USE ONLY FILED
<PAGE>
SCHEDULE "A" TO ARTICLES OF AMENDMENT OF HEALTHCARE CAPITAL CORP.
SERIES A CONVERTIBLE PREFERRED SHARES
"1. Number and Designation. The number of shares to constitute
this series shall be 13,333,333 and the designation of such shares shall
be the "Series A Convertible Preferred Shares" (hereinafter called "this
Series"). The number of shares constituting this Series may be decreased
from time to time by action of the Board, but not below the number of
shares of this Series then outstanding. All shares of this Series shall
be identical with each other in all respects. The shares of this Series
shall rank senior to the common shares (the "Common Shares") of the
Corporation as to cash dividends and upon liquidation, as described
below. Any amounts herein referencing share prices or numbers of shares
shall be subject to appropriate adjustments in the event of any stock
splits, consolidations or the like.
"2. Dividend Rights.
(a) Subject to the provisions of this Section 2, the holders of
shares of this Series shall be entitled to receive when, as and if
declared by the Board, out of assets legally available therefor,
cumulative dividends ("Dividends") at the applicable rate per annum
specified in Section 2(b) hereof from the date of issuance and payable
in accordance with Section 2(c) hereof. Dividends shall be cumulative
from the date of initial issuance of the shares of this Series (the
"Initial Issuance Date"), whether or not there shall be assets legally
available for the payment of such Dividends. In the event that the Board
shall declare a Dividend, subject to applicable regulatory approvals,
such Dividend may, at the discretion of the Board, be payable in Common
Shares. The number of Common Shares to be issued to the holders of
shares of this Series upon the payment of a Dividend in Common Shares
shall be the amount of the Dividends payable to such holder pursuant to
this Section 2 divided by either (i) (if the Common Shares are not
traded on the New York Stock Exchange, the American Stock Exchange or
the Nasdaq National Market) U.S. $1.35 or (ii) (if the Common Shares are
traded on the New York Stock Exchange, the American Stock Exchange or
the Nasdaq National Market) the average Market Price of the Common
Shares as such term is defined below for the ten (10) trading days
immediately preceding the Record Date as such term is defined in Section
2(c) hereof.
For all purposes hereof, the term "Market Price of the
Common Shares" as of any specified date shall mean: (i) if the Common
Shares are listed or admitted for trading on one or more United States
national securities exchanges, the daily closing price for the Common
Shares on the principal exchange in the United States on which the
Common Shares are listed; (ii) if the Common Shares are not listed or
admitted for trading on any United States national securities exchange,
the daily closing price for the Common Shares on the Nasdaq National or
Nasdaq Small-Cap Market ("Nasdaq"); (iii) if the Common Shares are not
listed or admitted for trading on a United States national securities
exchange or on Nasdaq, the daily closing price of the Common Shares on
the principal stock exchange in Canada on which the Common Shares are
listed (expressed in United States dollars based upon the noon buying
rate in New York City for cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York);
(iv) if the Common Shares are not listed or admitted to trading on any
United States national
<PAGE>
- 2 -
or Canadian national securities exchange or on Nasdaq, the average of
the reported bid and asked prices on the trading day preceding such date
in the over-the-counter market as furnished by the National Quotation
Bureau, Inc., or, if such firm is not then engaged in the business of
reporting such prices, as furnished by any member of the National
Association of Securities Dealers, Inc. selected by the Company; or (v)
if the Common Shares are not publicly traded, the Market Price for such
day shall be the fair market value thereof determined jointly by the
Company and the holder of a majority of the shares of this Series then
outstanding; provided, however, that if such parties are unable to reach
agreement within a reasonable period of time, the Market Price shall be
determined in good faith by the independent investment banking firm
selected jointly by the Company and the holder of a majority of the
shares of this Series then outstanding or, if that selection cannot be
made within an additional 15 days, by an independent investment banking
firm selected by the American Arbitration Association in accordance with
its rules.
"(b) The Dividend per share of this Series shall be computed
based upon a rate per annum of 5% on a base amount of U.S. $1.35 per
share of this Series (the "Base Amount"). The Dividend rate per annum
shall be subject to increase in the event that all of the following
conditions (the "Triggering Conditions") have not been satisfied by the
dates specified below: (i) the Common Shares are listed on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National
Market; (ii) the Common Shares are traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market at a
Market Price greater than U.S. $2.40 per Common Share on each of the 10
consecutive trading days preceding such date; and (iii) the
Corporation's net income (excluding profit or loss on disposal of a
significant part of the Company's assets or separate segment thereof,
gains on restructuring payables, gains or losses on the extinguishment
of debt, expropriations of property, gains or losses that are the direct
result of a major casualty, or one-time losses resulting from
prohibition under a newly-enacted law or regulation) before income
taxes, Dividends on the shares of this Series and amortization of
goodwill and covenants not to compete for the three consecutive fiscal
quarters preceding such date, as reported in or derived from the
Corporation's quarterly or annual reports filed with the Securities and
Exchange Commission, shall have averaged at least U.S. $0.07 per fully
diluted Common Share per fiscal quarter, provided, however, in making
such calculation, the Common Shares issuable upon exercise of the
warrants issued to Warburg Pincus Ventures, L.P. ("Warburg"), pursuant
to that certain Warrant Agreement between the Corporation and Warburg
relating to warrants to purchase 10,000,000 Common Shares (the "Warrant
Agreement"), shall be excluded but Common Shares issuable upon the
conversion of the shares of this Series shall not. All references to per
share amounts or prices with respect to the Triggering Conditions shall
be appropriately adjusted for any subdivision, consolidation, or
reclassification of the Common Shares. Until the Triggering Conditions
have been satisfied, the Dividend rate per annum shall be (A)15% of the
Base Amount per share of this Series from and after January 1, 2003 and
payable in accordance with Section 2(c) hereof commencing January 1,
2004; (B) 18% of the Base Amount per share of this Series from and after
January 1, 2004 and payable in accordance with Section 2(c) hereof
commencing January 1, 2005; and (C) thereafter, 21% of the Base Amount
per share of this Series from and after January 1, 2005 and payable in
accordance with Section 2(c) hereof commencing January 1, 2006. Upon the
satisfaction of all the Triggering Conditions, the Dividend per share of
this Series shall be computed based upon a rate per annum of 5% of the
Base Amount. Accruals of Dividends shall not bear interest. All
Dividends declared upon the shares of this Series shall be declared pro
rata per share.
<PAGE>
- 3 -
"(c) The record date for the determination of the holders of
shares of this Series who shall be entitled to receive Dividends (the
"Record Date") shall be the first business day of each calendar year,
and only the holders of shares of this Series of record on the Record
Date shall be entitled to receive such Dividends. All Dividends payable
to such holders of record shall be paid on the tenth business day
following the Record Date on each issued and outstanding share of this
Series.
"(d) Dividends payable on shares of this Series for any period
other than a full dividend period shall be computed on the basis of a
360-day year consisting of twelve 30-day months. Any Dividend payment
made on shares of this Series shall first be credited against the
earliest accumulated but unpaid Dividends due with respect to the shares
of this Series.
"(e) No dividends shall be declared or paid or set aside for
payment on any share capital of the Corporation ranking, as to
dividends, on a parity with or subordinate to the shares of this Series
for any period unless full accumulated Dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set aside for such payment on the shares of this
Series for all Dividend periods terminating on or prior to the date of
payment of such dividends. When Dividends are not paid in full on the
shares of this Series and any other preferred shares of the Corporation
ranking with respect to payment of dividends on a parity with the shares
of this Series, all dividends declared or paid upon shares of this
Series and such other preferred shares shall be declared and paid pro
rata so that the amount of dividends declared and paid on the shares of
this Series and such other preferred shares shall in all cases bear to
each other the same ratio that accumulated dividends per share (which in
the case of noncumulative preferred shares shall not include any
accumulation in respect of unpaid dividends for prior dividend periods)
on shares of this Series and such other preferred shares bear to each
other. Except as provided in the preceding sentence, unless full
accumulated Dividends have been paid or declared and a sum sufficient
for the payment thereof set aside for payment, no dividends (other than
dividends or distributions paid in Common Shares, or options, warrants
or rights to subscribe for or purchase Common Shares, or, in each case,
any other series of shares of the Corporation ranking subordinate to the
shares of this Series as to dividends and upon liquidation) shall be
declared and paid or a sum sufficient for the payment thereof set aside
for payment or any other distribution declared or made upon the Common
Shares or any other class of shares of the Corporation ranking
subordinate to or on a parity with the shares of this Series as to
dividends or upon liquidation. No Common Shares or shares of any other
class of shares of the Corporation ranking subordinate to or on a parity
with the shares of this Series as to dividends or upon liquidation shall
be redeemed, purchased or otherwise acquired for any consideration (and
no funds shall be paid to or made available for a sinking fund for the
redemption of any such share capital) by the Corporation (except by
conversion into or exchange for shares of the Corporation ranking
subordinate to the shares of this Series as to dividends and upon
liquidation or except with respect to Common Shares that the Corporation
has become obligated to redeem prior to the issuance of any shares of
this Series upon the occurrence of specified circumstances) unless, in
each case, the full accumulated Dividends shall have been paid or
declared and a sum sufficient for the payment thereof set aside for
payment. Holders of shares of this Series shall not be entitled to any
dividend, whether payable in cash, property or stock, in excess of the
full Dividends on such shares.
<PAGE>
- 4 -
"(f) Upon conversion of any shares of this Series by any holder
thereof pursuant to Section 7 hereof, any Dividends accrued and payable
to such holder shall be forfeited and the Corporation shall have no
further obligation to such holder of shares of this Series for such
accumulated Dividends.
"3. Liquidation Rights. (a) In the event of any voluntary or
involuntary dissolution, liquidation, or winding up of the affairs of
the Corporation, after payment or provision for payment of the debts and
other liabilities of the Corporation and any preferential amounts
payable with respect to securities of the Corporation ranking prior to
the shares of this Series ("Senior Preferred Shares"), the holders of
shares of this Series shall be entitled to receive out of the assets of
the Corporation available for distribution to shareholders, before any
distribution of assets is made to holders of the Common Shares or any
other share capital of the Corporation ranking subordinate to the shares
of this Series, a liquidating distribution in an amount equal to the
greater of (i) U.S. $1.35 per share of this Series plus an amount equal
to any accrued and unpaid Dividends (including accumulated Dividends,
whether or not declared) to and including the date of distribution or
(ii) the amount distributable to the holders of shares of this Series as
if such holders had converted their shares of this Series into Common
Shares pursuant to Section 7 hereof immediately prior to such
dissolution, liquidation or winding up of the affairs of the Corporation
(plus accumulated Dividends, whether or not declared). Amounts payable
pursuant to clause (i) or (ii) of this Section 3(a) shall be distributed
ratably among the holders of shares of this Series in proportion to the
number of shares of this Series held. After payment to the holders of
shares of this Series of the full amount to which such holders are
entitled as set forth above, the holders of shares of this Series shall
have no right or claim to any of the remaining assets of the
Corporation.
"(b) If upon any such dissolution, liquidation or winding up of
the affairs of the Corporation, the assets of the Corporation
distributable among the holders of shares of this Series and the holders
of all other classes or series of shares of the Corporation ranking on a
parity with the shares of this Series shall be insufficient to permit
the payment to them of the full preferential amounts to which they are
entitled, then the entire assets of the Corporation so to be distributed
shall be distributed ratably among the holders of shares of this Series
and such other classes or series of shares of the Corporation in
proportion to the sum of the accumulated dividends and the liquidation
preferences per share.
"(c) The sale, conveyance, mortgage, pledge or lease of all or
substantially all the assets of the Corporation shall be deemed to be a
liquidation, dissolution or winding up of the Corporation for purposes
of this Section 3.
"4. Optional Redemption. (a) The shares of this Series may not be
redeemed before the fifth anniversary of the Initial Issuance Date.
Thereafter, the shares of this Series shall be redeemable (subject to
subsection 4(d) below) at the option of the Corporation, in whole or in
part, at the redemption price, which shall be an amount equal to the
greater of (i) U.S. $1.35 per share of this Series plus the amount of
any accrued and unpaid Dividends per share of this Series (including
accumulated Dividends, whether or not declared) or (ii) the Fair Market
Value of a share of this Series (as defined below). For purposes hereof,
the Fair Market Value shall be determined by a nationally recognized
independent investment banking firm mutually agreed to by the
Corporation
<PAGE>
- 5 -
and the holder of a majority of the shares of this Series then
outstanding, whose determination shall be conclusive.
"(b) (i) In case the Corporation shall desire to exercise its
right to redeem any shares of this Series, it shall give notice of such
redemption to holders of the shares of this Series to be redeemed as
hereinafter provided in this Section 4(b).
"(ii) Notice of redemption shall be given to the holders
of shares of this Series to be redeemed by mailing such notice by
first-class mail to their last addresses as they shall appear
upon the register for the shares of this Series not less than 120
calendar days prior to the date fixed for redemption.
"(iii) Each such notice of redemption (A) shall specify
the date fixed for redemption and the redemption price at which
shares of this Series are to be redeemed, (B) shall state that
payment of the redemption price for the shares of this Series to
be redeemed will be made at the principal executive offices of
the Corporation, upon presentation and surrender of certificates
representing such shares of this Series, and (C) if less than all
the shares of this Series are to be redeemed, shall specify the
number of shares of this Series held by each holder to be
redeemed. In case any certificate representing shares of this
Series is to be redeemed in part only, the notice of redemption
which relates to such certificate shall state the number of
shares of this Series represented by such certificate to be
redeemed and shall state that on and after the redemption date,
upon surrender of such certificate, a new certificate or
certificates for a number of shares of this Series equal to the
unredeemed portion thereof will be issued.
"(iv) If less than all the shares of this Series are to
be redeemed, the Corporation shall effect such redemption pro
rata among the holders thereof (based on the number of shares of
this Series held on the date of notice of redemption).
"(c) (i) If the giving of notice of redemption shall have been
completed as provided above, the shares of this Series specified in such
notice shall become redeemable, and shall be redeemed by the Corporation
upon presentation and surrender of the certificate representing such
shares, on the date and at the place stated in such notice at the
redemption price, and on and after such date fixed for redemption,
notwithstanding that any certificate for shares of this Series so called
for redemption shall not have been surrendered for cancellation, unless
there shall have been a default in payment of the redemption price, all
shares of this Series called for redemption shall no longer be deemed to
be outstanding, and all rights with respect to such shares of this
Series shall forthwith cease and terminate except only the right of the
holders thereof to receive from the Corporation the redemption price,
without interest, of the shares to be redeemed, and such shares shall
not thereafter be transferred on the books of the Corporation or be
deemed to be outstanding for any purpose whatsoever.
"(ii) Upon presentation of any certificate representing
shares of this Series only a portion of which are to be redeemed,
the Corporation shall immediately issue, at its expense, a new
certificate or certificates representing the shares of this
Series not redeemed.
<PAGE>
- 6 -
"(d) Except as provided in paragraph (a) above, the Corporation
shall have no right to redeem the shares of this Series. Any shares of
this Series so redeemed shall be permanently retired, shall no longer be
deemed outstanding and shall not under any circumstances be reissued,
and the Corporation may from time to time take such appropriate
corporate action as may be necessary to reduce the authorized shares of
this Series accordingly. Nothing herein contained shall prevent or
restrict the purchase by the Corporation, from time to time either at
public or private sale, of the whole or any part of the shares of this
Series at such price or prices as the Corporation may determine, subject
to the provisions of applicable law.
"5. No Mandatory Redemption. The shares of this Series shall not
be subject to mandatory redemption by the Corporation.
"6. Voting Rights. (a) Each issued and outstanding share of this
Series shall be entitled to the number of votes equal to the number of
Common Shares of the Corporation into which each such share of this
Series is convertible (as adjusted from time to time pursuant to Section
7(a) hereof), at each meeting of shareholders of the Corporation with
respect to any and all matters presented to the shareholders of the
Corporation for their action or consideration. Except as provided by
law, by the provisions of paragraph (b) below or by the provisions
establishing any other series of preferred stock of the Corporation,
holders of the shares of this Series and of any other outstanding
preferred stock shall vote together with the holders of Common Shares as
a single class.
(b) In addition to any other rights provided by law, the
Corporation shall not amend, alter or repeal the preferences, special
rights or other powers of the shares of this Series or any other
provision of the Corporation's constating documents that would adversely
affect the rights of the holders of the shares of this Series,
including, without limitation, any increase in the number of shares of
this Series, without the written consent or affirmative vote of the
holders of at least 66-2/3% of the then outstanding aggregate number of
such adversely affected shares of this Series, given in writing or by
vote at a meeting, consenting or voting (as the case may be) separately
as a class. For this purpose, the authorization or issuance of any
series of preferred stock of the Corporation with preference or priority
over, or being on a parity with the shares of this Series as to the
right to receive either dividends or amounts distributable upon
liquidation, dissolution or winding up of the Corporation shall be
deemed to adversely affect the shares of this Series.
"7. Conversion. (a) Each share of this Series may be converted at
any time, at the option of the holder thereof, in the manner hereinafter
provided, into fully-paid and nonassessable Common Shares, provided,
however, that on any redemption of any shares of this Series or any
liquidation of the Corporation, the right of conversion shall terminate
at the close of business on the full business day next preceding the
date fixed for such redemption or for the payment of any amounts
distributable on liquidation to the holders of the shares of this
Series. The initial conversion rate for shares of this Series shall be
one Common Share for each one share of this Series surrendered for
conversion, representing an initial conversion price (for purposes of
Section 7(g)) of U.S. $1.35 per share of the Corporation's Common Shares
(hereinafter, the "Conversion Price"). The applicable conversion rate
and Conversion Price from time to time in effect are subject to
adjustment as hereinafter provided.
<PAGE>
- 7 -
"(b) Whenever the Conversion Price shall be adjusted as provided
in Section 7(g) hereof, the Corporation shall forthwith file at each
office designated for the conversion of the shares of this Series, a
statement, signed by any of the Chairman of the Board, the President,
any Vice President or the Treasurer of the Corporation, showing in
reasonable detail the facts requiring such adjustment. The Corporation
shall also cause a notice setting forth any such adjustments to be sent
by mail, first class, postage prepaid, to each record holder of shares
of this Series at his or its address appearing on the stock register. If
such notice relates to an adjustment resulting from an event referred to
in paragraph 7(g)(vii), such notice shall be included as part of the
notice required to be mailed and published under the provisions of
paragraph 7(g)(vii) hereof.
"(c) The right of conversion shall be exercised by the holder by
the surrender of the certificates representing shares of this Series to
be converted to the Corporation at any time during normal business hours
at the office or agency then maintained by it for the conversion of
shares of this Series (the "Conversion Office"), accompanied by written
notice to the Corporation of such holder's election to convert and, if
so required by the Corporation or any conversion agent, by an instrument
of transfer, in form satisfactory to the Corporation and to any
conversion agent, duly executed by the registered holder or by such
holder's duly authorized attorney, and transfer tax stamps or funds
therefor, if required pursuant to Section 7(k).
"(d) As promptly as practicable after the surrender for
conversion of one or more certificates representing any shares of this
Series in the manner provided in Section 7(c) and the payment in cash of
any amount required by the provisions of Section 7(k), the Corporation
will deliver or cause to be delivered at the Conversion Office to or
upon the written order of the holder of such shares, a certificate or
certificates representing the number of full Common Shares issuable upon
such conversion, issued in such name or names as such holder may direct,
subject to any applicable contractual restrictions and any restrictions
imposed by applicable securities laws. Such conversion shall be deemed
to have been made immediately prior to the close of business on the date
of such surrender of certificates representing shares of this Series in
proper order for conversion, and all rights of the holder of such shares
as a holder of such shares shall cease at such time, and the person or
persons in whose name or names the certificates for such Common Shares
are to be issued shall be treated for all purposes as having become the
record holder or holders thereof at such time; provided, however, that
any such surrender on any date when the stock transfer books of the
Corporation shall be closed shall constitute the person or persons in
whose name or names the certificates for such Common Shares are to be
issued as the record holder or holders thereof for all purposes
immediately prior to the close of business on the next succeeding day on
which such stock transfer books are opened.
"(e) "Upon conversion in the manner provided in this Section 7 of
only a portion of the number of shares of this Series represented by a
certificate so surrendered for conversion, the Corporation shall issue
and deliver or cause to be delivered at the Conversion Office to or upon
the written order of the holder of the certificate so surrendered for
conversion, at the expense of the Corporation, a new certificate or
certificates representing the number of shares of this Series
representing the unconverted portion of the certificate so surrendered,
issued in such name or names as such holder may direct, subject to any
applicable contractual restrictions and any restrictions imposed by
applicable securities laws.
<PAGE>
- 8 -
"(f) All shares of this Series which shall have been surrendered
for conversion as herein provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the
rights, if any, to receive notices and to vote, shall forthwith cease
and terminate except only the right of the holder thereof to receive
Common Shares in exchange therefor. Any shares of this Series so
converted shall be retired and canceled and shall not be reissued, and
the Corporation may from time to time take such appropriate action as
may be necessary to reduce the authorized shares of this Series
accordingly.
(g) Anti-Dilution Provisions.
(i) In order to prevent dilution of the right granted hereunder,
the Conversion Price shall be subject to adjustment from time to time in
accordance with this paragraph 7(g)(i). At any given time the Conversion Price
shall be that dollar (or part of a dollar) amount the payment of which shall be
sufficient at the given time to acquire one Common Share of the Corporation upon
conversion of shares of this Series. Upon each adjustment of the Conversion
Price pursuant to this Section 7(g), the registered holder of shares of this
Series shall thereafter be entitled to acquire upon exercise, at the Conversion
Price resulting from such adjustment, the number of Common Shares of the
Corporation obtainable by multiplying the Conversion Price in effect immediately
prior to such adjustment by the number of shares of Common Shares of the
Corporation acquirable immediately prior to such adjustment and dividing the
product thereof by the Conversion Price resulting from such adjustment. For
purposes of this Section 7(g), the term "Number of Common Shares Deemed
Outstanding" at any given time shall mean the sum of (x) the number of shares of
the Corporation's Common Shares outstanding at such time, (y) the number of
Common Shares of the Corporation issuable assuming conversion at such time of
all outstanding shares of the Corporation's other series of convertible
preferred stock, if any, and (z) the number of Common Shares of the Corporation
deemed to be outstanding at such time under subparagraphs 7(g)(ii)(1) to (8),
inclusive.
(ii) Except as provided in paragraph 7(g)(iii) or 7(g)(vi) below,
if and whenever on or after the Initial Issuance Date, the Corporation shall
issue or sell, or shall in accordance with subparagraphs 7(g)(ii)(1) to (8),
inclusive, be deemed to have issued or sold (such issuance or sale, whether
actual or deemed, the "Triggering Transaction") any Common Shares for a
consideration per share less than
(I) (if the Common Shares are not traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market) the
Conversion Price in effect immediately prior to the time of such
issuance or sale, then forthwith upon such issuance or sale the
Conversion Price shall, subject to subparagraphs (1) to (8) of this
Section 7(g)(ii), be reduced to the Conversion Price (calculated to the
nearest tenth of a cent) determined by dividing: (i) an amount equal to
the sum of (x) the product derived by multiplying the Number of Common
Shares Deemed Outstanding immediately prior to such Triggering
Transaction by the Conversion Price then in effect, plus (y) the
consideration, if any, received by the Company upon consummation of such
Triggering Transaction, by (ii) an amount equal to the sum of (x) the
Number of Common Shares Deemed Outstanding immediately prior to such
Triggering Transaction plus (y) the number of Common Shares issued (or
deemed to be issued in accordance with subparagraphs 7(g)(ii)(1) to (8))
in connection with the Triggering Transaction; or
<PAGE>
- 9 -
(II) (if the Common Shares are traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market) the
average Market Price for the ten trading days immediately preceding such
issuance or sale, then forthwith upon such Triggering Transaction, the
Conversion Price shall, subject to subparagraphs (1) to (8) of this
Section 7(g)(ii), be reduced to the Conversion Price (calculated to the
nearest tenth of a cent) determined by multiplying the Conversion Price
in effect immediately prior to the time of such Triggering Transaction
by a fraction, the numerator of which shall be the sum of (x) the Number
of Common Shares Deemed Outstanding immediately prior to such Triggering
Transaction and (y) the number of Common Shares which the aggregate
consideration received by the Company upon such Triggering Transaction
would purchase at the average Market Price for the ten trading days
immediately preceding such Triggering Transaction, and the denominator
of which shall be the Number of Common Shares Deemed Outstanding
immediately after such Triggering Transaction.
For purposes of determining the adjusted Conversion Price under
this paragraph 7(g)(ii), the following subsections (1) to (8), inclusive, shall
be applicable:
(1) In case the Corporation at any time shall in any
manner grant (whether directly or by assumption in an
amalgamation or otherwise) any rights to subscribe for or to
purchase, or any options for the purchase of, Common Shares or
any stock or other securities convertible into or exchangeable
for Common Shares (such rights or options being herein called
"Options" and such convertible or exchangeable stock or
securities being herein called "Convertible Securities"), whether
or not such Options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price
per share for which the Common Shares are issuable upon exercise,
conversion or exchange (determined by dividing (x) the total
amount, if any, received or receivable by the Corporation as
consideration for the granting of such Options, plus the
aggregate amount of additional consideration payable to the
Corporation upon the exercise of all such Options, plus, in the
case of such Options which relate to Convertible Securities, the
aggregate amount of additional consideration, if any, payable
upon the issue or sale of such Convertible Securities and upon
the conversion or exchange thereof, by (y) the total maximum
number of Common Shares issuable upon the exercise of such
Options or the conversion or exchange of such Convertible
Securities) shall be less than the average Market Price in effect
for the ten trading days immediately prior to the time of the
granting of such Option (if the Common Shares are traded on the
New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market) or the Conversion Price in effect
immediately prior to the time of such issuance or sale (if the
Common Shares are not traded on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq National Market), then the
total maximum amount of Common Shares issuable upon the exercise
of such Options or, in the case of Options for Convertible
Securities, upon the conversion or exchange of such Convertible
Securities, shall (as of the date of granting of such Options) be
deemed to be outstanding and to have been issued and sold by the
Corporation for such price per share. No adjustment of the
Conversion Price shall be made upon the actual issuance of such
Common Shares or such Convertible Securities upon the exercise of
such Options, except as otherwise provided in subparagraph (3)
below.
<PAGE>
- 10 -
(2) In case the Corporation at any time shall in any
manner issue (whether directly or by assumption in an
amalgamation or otherwise) or sell any Convertible Securities,
whether or not the rights to exchange or convert thereunder are
immediately exercisable, and the price per share for which Common
Shares are issuable upon such conversion or exchange (determined
by dividing (x) the total amount received or receivable by the
Corporation as consideration for the issue or sale of such
Convertible Securities, plus the aggregate amount of additional
consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (y) the total maximum number
of Common Shares issuable upon the conversion or exchange of all
such Convertible Securities) shall be less than the average
Market Price in effect for the ten-day trading period immediately
prior to the time of such issue or sale (if the Common Shares are
traded on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market) or the Conversion Price
in effect immediately prior to the time of such issuance or sale
(if the Common Shares are not traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National
Market), then the total maximum number of Common Shares issuable
upon conversion or exchange of all such Convertible Securities
shall (as of the date of the issue or sale of such Convertible
Securities) be deemed to be outstanding and to have been issued
and sold by the Corporation for such price per share. No
adjustment of the Conversion Price shall be made upon the actual
issuance of such Common Shares upon exercise of the rights to
exchange or convert under such Convertible Securities, except as
otherwise provided in subparagraph (3) below.
(3) If the purchase price provided for in any Options
referred to in subparagraph (1), the additional consideration, if
any, payable upon the conversion or exchange of any Convertible
Securities referred to in subparagraphs (1) or (2), or the rate
at which any Convertible Securities referred to in subparagraph
(1) or (2) are convertible into or exchangeable for Common Shares
shall change at any time (other than under or by reason of
provisions designed to protect against dilution of the type set
forth in paragraphs 7(g)(ii) or 7(g)(iv)), the Conversion Price
in effect at the time of such change shall forthwith be
readjusted to the Conversion Price which would have been in
effect at such time had such Options or Convertible Securities
still outstanding provided for such changed purchase price,
additional consideration or rate, as the case may be, at the time
initially granted, issued or sold. If the purchase price provided
for in any Option referred to in subparagraph (1) or the rate at
which any Convertible Securities referred to in subparagraphs (1)
or (2) are convertible into or exchangeable for Common Shares,
shall be reduced at any time under or by reason of provisions
with respect thereto designed to protect against dilution, then
in case of the delivery of Common Shares upon the exercise of any
such Option or upon conversion or exchange of any such
Convertible Security, the Conversion Price then in effect
hereunder shall forthwith be adjusted to such respective amount
as would have been obtained had such Option or Convertible
Security never been issued as to such Common Shares and had
adjustments been made upon the issuance of the Common Shares
delivered as aforesaid, but only if as a result of such
adjustment the Conversion Price then in effect hereunder is
hereby reduced.
<PAGE>
- 11 -
(4) On the expiration of any Option or the termination of
any right to convert or exchange any Convertible Securities, the
Conversion Price then in effect hereunder shall forthwith be
increased to the Conversion Price which would have been in effect
at the time of such expiration or termination had such Option or
Convertible Securities, to the extent outstanding immediately
prior to such expiration or termination, never been issued.
(5) In case any Options shall be issued in connection
with the issue or sale of other securities of the Corporation,
together comprising one integral transaction in which no specific
consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued without
consideration.
(6) In case any Common Shares, Options or Convertible
Securities shall be issued or sold or deemed to have been issued
or sold for cash, the consideration received therefor shall be
deemed to be the amount received by the Corporation therefor
(before deduction for expenses or underwriters' discounts or
commissions related to such issue or sale). In case any Common
Shares, Options or Convertible Securities shall be issued or sold
for a consideration other than cash, the amount of the
consideration other than cash received by the Corporation shall
be the fair value of such consideration as determined in good
faith by the Board of Directors of the Corporation.
(7) In case the Corporation shall declare a dividend or
make any other distribution upon the share capital of the
Corporation payable in Common Shares, Options, or Convertible
Securities, then in such case any Common Shares, Options or
Convertible Securities, as the case may be, issuable in payment
of such dividend or distribution shall be deemed to have been
issued or sold without consideration.
(8) For purposes of this paragraph 7(g)(ii), in case the
Corporation shall take a record of the holders of its Common
Shares for the purpose of entitling them (x) to receive a
dividend or other distribution payable in Common Shares, Options
or in Convertible Securities, or (y) to subscribe for or purchase
Common Shares, Options or Convertible Securities, then such
record date shall be deemed to be the date of the issue or sale
of the Common Shares deemed to have been issued or sold upon the
declaration of such dividend or the making of such other
distribution or the date of the granting of such right or
subscription or purchase, as the case may be.
(iii) In the event the Corporation shall declare a dividend upon
the Common Shares (other than a dividend payable in Common Shares covered by
subparagraph 7(g)(ii)(7)) payable otherwise than out of earnings or earned
surplus, determined in accordance with generally accepted accounting principles,
including the making of appropriate deductions for minority interests, if any,
in subsidiaries (herein referred to as "Liquidating Dividends"), then, as soon
as possible after the conversion of any shares of this Series, the Corporation
shall, subject to applicable law, pay to the person converting such shares of
this Series an amount equal to the aggregate value at the time of such exercise
of all Liquidating Dividends (including but not limited to the Common Shares
which would have been issued at the time of such earlier exercise and all other
securities which would have been issued with respect to such Common Shares by
reason of stock splits, stock dividends, amalgamations or reorganizations, or
for any other reason). For the
<PAGE>
- 12 -
purposes of this paragraph 7(g)(iii), a dividend other than in cash shall be
considered payable out of earnings or earned surplus only to the extent that
such earnings or earned surplus are charged an amount equal to the fair value of
such dividend as determined in good faith by the Board.
(iv) In case the Corporation shall at any time subdivide (other
than by means of a dividend payable in Common Shares covered by paragraph
7(g)(ii)(7)) its outstanding Common Shares into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision shall be
proportionately reduced, and, conversely, in case the outstanding Common Shares
of the Corporation shall be combined into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased.
(v) If any capital reorganization or reclassification of the
share capital of the Corporation, or amalgamation of the Corporation with
another corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of Common
Shares shall be entitled to receive stock, securities, cash or other property
with respect to or in exchange for Common Shares, then, as a condition of such
reorganization, reclassification, amalgamation or sale, lawful and adequate
provision shall be made whereby the holders of shares of this Series shall have
the right to acquire and receive upon conversion of the shares of this Series,
which right shall be prior to the rights of the holders of stock ranking on
liquidation junior to this Series (but after and subject to the rights of
holders of Senior Preferred Shares, if any), such shares of stock, securities,
cash or other property issuable or payable (as part of the reorganization,
reclassification, amalgamation or sale) with respect to or in exchange for such
number of outstanding Common Shares of the Corporation as would have been
received upon conversion of the shares of this Series at the Conversion Price
then in effect. The Corporation will not effect any such amalgamation or sale,
unless prior to the consummation thereof the amalgamated corporation or the
corporation purchasing such assets shall assume by written instrument mailed or
delivered to the holders of the shares of this Series at the last address of
each such holder appearing on the books of the Corporation, the obligation to
deliver to each such holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
receive. If a purchase, tender or exchange offer is made to and accepted by the
holders of more than 50% of the outstanding Common Shares of the Corporation,
the Corporation shall not effect any amalgamation or sale with the person having
made such offer or with any Affiliate (as defined below) of such person, unless
prior to the consummation of such amalgamation or sale the holders of the shares
of this Series shall have been given a reasonable opportunity to then elect to
receive upon the conversion of the shares of this Series either the stock,
securities or assets then issuable with respect to the Common Shares of the
Corporation or the stock, securities or assets, or the equivalent, issued to
previous holders of the Common Shares in accordance with such offer. For
purposes hereof, the term "Affiliate" with respect to any given person shall
mean any person controlling, controlled by or under common control with the
given person.
(vi) The provisions of this Section 7(g) shall not apply to any
Common Shares issued, issuable or deemed outstanding under subparagraphs
7(g)(ii)(1) to (8) inclusive: (i) to any person pursuant to any stock option,
stock purchase or similar plan or arrangement for the benefit of employees of
the Corporation or its subsidiaries in effect on the Initial Issuance Date or
thereafter adopted by the Board of Directors of the Corporation, (ii) pursuant
to options, warrants and conversion rights in existence on the Initial Issuance
Date, (iii) upon exercise of the warrants of the Corporation issued to Warburg
pursuant to
<PAGE>
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the Warrant Agreement or (iv) on conversion of the shares of this Series or the
sale of any additional shares of this Series.
(vii) In the event that:
(1) the Corporation shall declare any cash dividend upon its
Common Shares, or
(2) the Corporation shall declare any dividend upon its Common
Shares payable in stock or make any special dividend or other
distribution to the holders of its Common Shares, or
(3) the Corporation shall offer for subscription pro rata to the
holders of its Common Shares any additional shares of stock of any class
or other rights, or
(4) there shall be any capital reorganization or reclassification
of the share capital of the Corporation, including any subdivision or
combination of its outstanding Common Shares, or amalgamation of the
Corporation with, or sale of all or substantially all of its assets to,
another corporation, or
(5) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in connection with such event, the Corporation shall give to the holders
of the shares of this Series:
(A) at least twenty (20) days' prior written notice of the
date on which the books of the Corporation shall close or
a record shall be taken for such dividend, distribution
or subscription rights or for determining rights to vote
in respect of any such reorganization, reclassification,
amalgamation, sale, dissolution, liquidation or winding
up; and
(B) in the case of any such reorganization, reclassification,
amalgamation, sale, dissolution, liquidation or winding
up, at least twenty (20) days' prior written notice of
the date when the same shall take place.
Such notice in accordance with the foregoing clause (A) shall also specify, in
the case of any such dividend, distribution or subscription rights, the date on
which the holders of Common Shares shall be entitled thereto, and such notice in
accordance with the foregoing clause (B) shall also specify the date on which
the holders of Common Shares shall be entitled to exchange their Common Shares
for securities or other property deliverable upon such reorganization,
reclassification, amalgamation, sale, dissolution, liquidation or winding up, as
the case may be. Each such written notice shall be given by first class mail,
postage prepaid, addressed to the holders of the shares of this Series at the
address of each such holder as shown on the books of the Corporation.
(viii) If at any time or from time to time on or after the
Initial Issuance Date, the Corporation shall grant, issue or sell any Options,
Convertible Securities or rights to purchase property (the "Purchase Rights")
pro rata to the record holders of the Common Shares of the Corporation and such
grants,
<PAGE>
- 14 -
issuances or sales do not result in an adjustment of the Conversion Price under
paragraph 7(g)(ii) hereof, then each holder of shares of this Series shall be
entitled to acquire (within thirty (30) days after the later to occur of the
initial exercise date of such Purchase Rights or receipt by such holder of the
notice concerning Purchase Rights to which such holder shall be entitled under
paragraph 7(g)(vii)) and upon the terms applicable to such Purchase Rights
either:
(A) the aggregate Purchase Rights which such holder could
have acquired if it had held the number of Common Shares
acquirable upon conversion of shares of this Series
immediately before the grant, issuance or sale of such
Purchase Rights; provided that if any Purchase Rights
were distributed to holders of Common Shares without the
payment of additional consideration by such holders,
corresponding Purchase Rights shall be distributed to the
exercising holders of the shares of this Series as soon
as possible after such exercise and it shall not be
necessary for the exercising holder of the shares of this
Series specifically to request delivery of such rights;
or
(B) in the event that any such Purchase Rights shall have
expired or shall expire prior to the end of said thirty
(30) day period, the number of Common Shares or the
amount of property which such holder could have acquired
upon such exercise at the time or times at which the
Corporation granted, issued or sold such expired Purchase
Rights.
(ix) If any event occurs as to which, in the opinion of the
Board, the provisions of this Section 7(g) are not strictly applicable or if
strictly applicable would not fairly protect the rights of the holders of the
shares of this Series in accordance with the essential intent and principles of
such provisions, then the Board shall make an adjustment in the application of
such provisions, in accordance with such essential intent and principles, so as
to protect such rights as aforesaid, but in no event shall any adjustment have
the effect of increasing the Conversion Price as otherwise determined pursuant
to any of the provisions of this Section 7(g) except in the case of a
combination of shares of a type contemplated in paragraph 7(g)(iv) and then in
no event to an amount larger than the Conversion Price as adjusted pursuant to
paragraph 7(g)(iv).
"(h) No fractional Common Shares shall be issued upon the
conversion of any share or shares of this Series. If any fractional
interest in a Common Share would, except for the provisions of this
Section 7(h), be deliverable upon the conversion of any share or shares
of this Series, the Corporation shall in lieu of delivering the
fractional Common Share therefor satisfy such fractional interest by
payment to the holder of such surrendered share or shares of this Series
of an amount in cash equal (computed to the nearest cent) to the current
market value of such fractional interest, computed on the basis of the
Market Price of the Common Shares on the date of such conversion,
provided, however, that no amount shall be paid by the Corporation to
such holder of less than U.S. $5.00.
"(i) The Corporation shall be entitled to effect the mandatory
conversion, in whole or in part, of the shares of this Series in
accordance with this Section 7 if all of the Triggering Conditions (set
forth in Section 2(b) hereof) shall have been satisfied as of the date
of the notice described below. Upon such mandatory conversion, each
share of this Series subject to such
<PAGE>
- 15 -
conversion shall be converted into Common Shares at the then effective
Conversion Price for such shares. In case the Corporation shall desire
to exercise the right to convert all or, as the case may be, any shares
of this Series in accordance with the right to do so, it shall provide
notice to the holders of the shares of this Series to be converted as
hereinafter provided in this Section 7(i).
"(i) A notice of conversion shall be given to the holders
of shares of this Series to be converted by mailing by first-class mail
to their last addresses as they shall appear upon the register for
shares of this Series not less than 120 calendar days prior to the date
fixed for conversion.
"(ii) Each such notice of conversion (A) shall specify
the date fixed for conversion and the number of Common Shares issuable
to the holder of a share of this Series upon such conversion, (B) shall
state the offices or agencies to be maintained by the Corporation for
the purpose of such conversion, upon presentation and surrender of such
shares of this Series and (C) if less than all the shares of this Series
are to be converted, shall specify the number of shares of this Series
held by each holder, and the serial numbers of the certificates thereof,
to be converted. In case any certificate representing shares of this
Series is to be converted in part only, the notice of conversion which
relates to such certificate shall state the number of shares of this
Series represented by such certificate to be converted and shall state
that on and after the conversion date, upon surrender of such
certificate, a new certificate or certificates for a number of shares of
this Series equal to the unconverted portion thereof will be issued.
"(j) The Corporation will at all times reserve and keep
available, solely for the purposes of the issuance of Common Shares upon
conversion of the shares of this Series, the full number of Common
Shares as shall be issuable upon the conversion of all such outstanding
shares of this Series.
"The Corporation will endeavor to comply with all securities laws
regulating the offer and delivery of Common Shares upon conversion of
the shares of this Series and, that if any Common Shares required to be
reserved for purposes of conversion of the shares hereunder require
registration with or approval of any governmental authority under any
U.S. (federal or state) or Canadian law before such Common Shares may be
validly issued or delivered upon conversion, the Corporation will, in
good faith and as expeditiously as possible, endeavor to secure such
registration or approval, as the case may be.
"All Common Shares which shall be issued upon conversion of the
shares of this Series will upon issuance be fully paid and nonassessable
and not subject to preemptive rights.
"(k) The issuance of certificates for Common Shares upon
conversion of shares of this Series shall be made without charge for any
stamp or other similar tax in respect of such issuance. However, if any
such certificate is to be issued in a name other than that of the holder
of record of the share or shares of this Series so converted, the holder
thereof shall pay to the Corporation the amount of any tax which may be
payable in respect of any transfer involved in such issuance or shall
establish to the satisfaction of the Corporation that such tax has been
paid or is not payable.
<PAGE>
- 16 -
"(l) In case (A) the Corporation shall take any action which
would require an adjustment in the number of Common Shares issuable to
holders of shares of this Series upon conversion thereof pursuant to
Section 7(g) above; or (B) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the
Corporation;
then the Corporation shall cause to be given to the holders of the
shares of this Series at least ten days prior to the applicable record
date hereinafter specified, a notice of (X) the date on which a record
is to be taken for the purpose of any dividend, distribution or grant to
holders of Common Shares which would require such an adjustment, or, if
a record is not to be taken, the date as of which the holders of Common
Shares of record to be entitled to such dividend, distribution, or grant
are to be determined or (Y) the date on which such reorganization,
reclassification, amalgamation, sale, transfer, dissolution, liquidation
or winding up is expected to become effective, and the date as of which
it is expected that holders of Common Shares of record shall be entitled
to exchange their Common Shares for securities or other property or
other assets deliverable upon such reorganization, reclassification,
amalgamation, sale, transfer, dissolution, liquidation, or winding up.
Failure to give such notice or any defect therein shall not affect the
legality or validity of any proceedings described in subparagraphs (A)
or (B) of this Section 7(l).
"8. Hold Period. A holder of shares of this Series shall in no
event sell or otherwise transfer any of the shares of this Series, or any Common
Shares issued upon the due conversion of any shares of this Series, for a period
of six months from the Initial Issuance Date. The Corporation shall issue or
cause to be issued certificates representing shares of this Series, and of
Common Shares issued upon due conversion of any shares of this Series, which
contain such legends as the Corporation in its discretion deems adequate to
reflect the hold period described in this Section 8.
"9. Miscellaneous.
"(a) For the purposes hereof:
"(i) the term "outstanding", when used in reference to
shares of this Series, shall mean issued shares of this Series,
excluding shares of this Series called for redemption; and
"(ii) the term "subsidiary" shall mean any company a
majority of whose outstanding voting capital stock (other than
directors' qualifying shares), at the time as of which any
determination is being made, shall be owned by the parent of such
company either directly or through other subsidiaries; and
"(iii) any shares of a series or class of shares of the
Corporation shall be deemed to rank:
"(A) prior to shares of this Series, whether or
not the dividend rates, dividend payment dates or
redemption or liquidation prices per share thereof be
different from those of shares of this Series, if the
holders of such shares of a series or class of shares
shall be entitled to receipt from the Corporation of
dividends or
<PAGE>
- 17 -
of amounts distributable upon liquidation, dissolution or
winding up, in preference or priority to the holders of
shares of this Series, as the case may be;
"(B) on a parity with or equal to shares of this
Series, whether or not the dividend rates, dividend
payment dates or redemption or liquidation prices per
share thereof be different from those of shares of this
Series, if the holders of such shares of a series or
class of shares shall be entitled to the receipt from the
Corporation of dividends or of amounts distributable upon
liquidation to their respective dividend rates or
liquidation prices, without preference or priority one
over the other as between the holders of such shares of a
series or class of shares and the holders of shares of
this Series; and
"(C) subordinate to shares of this Series, whether
or not the dividend rates, dividend payment dates or
redemption or liquidation prices per share thereof be
different from those of shares of this Series, if the
rights of the holders of such shares of a series or class
of shares shall be subordinate to the rights of the
holders of shares of this Series in respect of the
receipt from the Corporation of dividends and of amounts
distributable upon liquidation, dissolution or winding
up, including, without limitation, the Common Shares of
the Corporation.
"(b) So long as any shares of this Series are outstanding, in the
event of any conflict between the provisions hereof and any corporate
document of the Corporation (both as presently existing or hereafter
amended and supplemented) the provisions hereof, as the same may be
amended or supplemented, shall be and remain controlling.
"(c) The holders of the shares of this Series shall have no
preemptive rights."
<PAGE>
ARTICLES OF INCORPORATION
ARTICLES OF AMENDMENT
1. NAME OF CORPORATION: HEALTHCARE CAPITAL CORPORATION
2. CORPORATE ACCESS NUMBER: 20575035
3. ITEM NO. 2 OF THE ARTICLES OF THE ABOVE-NAMED CORPORATION IS
AMENDED IN ACCORDANCE WITH SECTION 167(1)(d) OF THE BUSINESS
CORPORATIONS ACT OF ALBERTA.
The authorized capital of the Corporation be increased by the creation
of an unlimited number of Preferred Shares without nominal or par value
that shall have attached thereto the rights, privileges, restrictions
and conditions hereinafter set forth:
PROVISIONS ATTACHING TO THE PREFERRED SHARES
Directors' Authority to Issue in One or More Series
i) The Preferred Shares may from time to time be issued in one or
more series and subject to the following provisions, and
subject to the sending of articles of amendment in prescribed
form, and the issuance of a certificate of amendment in
respect thereof, the directors may fix from time to time
before such issue the number of shares which is to comprise
each series and the designation, rights, privileges,
restrictions and conditions attaching to each series of
Preferred Shares including, without limiting the generality of
the foregoing, the rate or amount of dividends or the method
of calculating dividends, the dates of payment thereof, the
redemption, purchase and/or conversion prices and terms and
conditions of redemption, purchase and/or conversion, and any
sinking fund or other provisions;
ii) The Preferred Shares of each series shall, with respect to the
payment of dividends and the distribution of assets or return
of capital in the event of liquidation, dissolution or
winding-up of the Corporation, whether voluntary or
involuntary, or any other return of capital or distribution of
assets of the Corporation among its shareholders for the
purpose of winding up its affairs, rank on a parity with the
Preferred Shares of every other series and be entitled to
preference over the Common Shares and over any other shares of
the Corporation ranking junior to the Preferred Shares. The
Preferred Shares of any series may also be given such other
preferences, not inconsistent with
- 1 -
<PAGE>
these articles, over the Common Shares and any other shares of
the Corporation ranking junior to such Preferred Shares as may
be fixed in accordance with clause (i) above;
iii) If any cumulative dividends or amounts payable on the return
of capital in respect of a series of Preferred Shares are not
paid in full, all series of Preferred Shares participate
rateably in respect of accumulated dividends and return of
accumulated dividends and return of capital; and
iv) Unless the directors otherwise determine in the articles of
amendment designating a series, the holder of each share of a
series of Preferred Shares shall not, except as otherwise
specifically provided in the Business Corporations Act
(Alberta), be entitled to receive notice of or vote at any
meeting of the shareholders.
ITEM NO. 6 OF THE ARTICLES OF THE ABOVE-NAMED
CORPORATION IS AMENDED IN ACCORDANCE WITH
SECTION 167(1) OF THE BUSINESS CORPORATIONS ACT OF
ALBERTA BY THE ADDITION OF THE FOLLOWING PROVISION:
"6. OTHER PROVISIONS IF ANY:
Meetings of shareholders of the Corporation may be held in the
province of Alberta, in Vancouver, British Columbia or in
Portland, Oregon, U.S.A. as the directors may designate in the
notice relating to such meeting."
DATE SIGNATURE TITLE
- 2 -
<PAGE>
January 30, 1997 Director
FOR DEPARTMENTAL USE ONLY FILED
- 3 -
<PAGE>
ARTICLES OF AMENDMENT
1. NAME OF CORPORATION: ADVENTURE CAPITAL CORPORATION
2. CORPORATE ACCESS NO.: 20575035
3. ITEM NO. 1 OF THE ARTICLES OF THE ABOVE-NAMED CORPORATION IS
AMENDED IN ACCORDANCE WITH SECTION 167(1)(a) OF THE BUSINESS
CORPORATIONS ACT.
(i) The name of the Corporation as set forth in Item No. 1 is changed
to HEALTHCARE CAPITAL CORP.
DATE SIGNATURE TITLE
October 7, 1994 /s/ William DeJong Director
FOR DEPARTMENTAL USE ONLY FILED
- 1 -
<PAGE>
ARTICLES OF AMENDMENT
1. NAME OF CORPORATION: ADVENTURE CAPITAL CORPORATION
2. CORPORATE ACCESS NO.: 20575035
3. THE ARTICLES OF THE ABOVE-NAMED CORPORATION ARE AMENDED AS
FOLLOWS:
Pursuant to a Special Resolution duly passed by all of the Shareholders of the
Corporation and pursuant to sections 167(1)(c), (e) and (k) of the Business
Corporations Act of Alberta the Articles of the Corporation are amended as
follows:
1. The authorized Redeemable Preferred Shares of the Corporation
are eliminated by the cancellation thereof in their entirety;
2. The rights, privileges, restrictions and conditions attaching
to the authorized and issued Common Shares of the Corporation
be altered and changed to the rights, privileges, restrictions
and conditions set forth in new item No. 2 of the Articles of
the Corporation which is added to the Articles by virtue of
paragraph 3 below;
3. Item No. 2 of the Articles of the Corporation is hereby
amended by deleting the current Item No. 2 in its entirety and
substituting therefor the following:
"2. The Corporation is authorized to issue an unlimited number
of Common Shares without nominal or par value. The Common
Shares shall have attached thereto the following rights,
privileges, restrictions and conditions:
Voting Rights
(a) At all meetings of the shareholders of the Corporation,
the holders of the Common Shares shall be entitled to one (1)
vote for each such share so held.
Dividends and Other Distributions
(b) The holders of the Common Shares shall be entitled to
receive such dividends as the directors of the Corporation
may, in their discretion, declare thereon.
(c) In the event of the liquidation, dissolution or winding-up
of the Corporation or other distribution of its assets among
the shareholders, the
- 1 -
<PAGE>
holders of the Common Shares shall be entitled to receive the
remaining property of the Corporation."
4. Item No. 4 of the Articles of the Corporation, as amended
on November 18, 1993, is hereby further amended by the
deletion thereof in its entirety and the substitution therefor
of the following:
"4. Number (or Minimum and Maximum Number) of Directors:
The Corporation shall have not less than three (3) directors
nor more than eleven (11) directors. Subject to the provisions
of the Business Corporations Act of Alberta, the directors
may, between annual general meetings, appoint one or more
additional directors of the Corporation to serve until the
next annual general meeting of the Corporation provided that
the total number of directors shall not at any time exceed the
maximum hereinbefore prescribed."
DATE SIGNATURE TITLE
January 25, 1994
William DeJong Secretary
FOR DEPARTMENTAL USE ONLY FILED
- 2 -
<PAGE>
ARTICLES OF AMENDMENT
1. NAME OF CORPORATION: 575035 ALBERTA LTD.
2. CORPORATE ACCESS NO.: 20575035
3. ITEM NO. 1 OF THE ARTICLES OF THE ABOVE-NAMED CORPORATION IS
AMENDED IN ACCORDANCE WITH SECTION 167(1)(a) OF THE BUSINESS
CORPORATIONS ACT.
The name of the Corporation as set forth in Item No. 1 is changed to
ADVENTURE CAPITAL CORPORATION.
ITEM NO. 3 OF THE ARTICLES OF THE ABOVE-NAMED CORPORATION IS
AMENDED IN ACCORDANCE WITH SECTION 167(1)(l) OF THE BUSINESS
CORPORATIONS ACT BY DELETING THIS ITEM IN ITS ENTIRETY AND
REPLACING IT AS FOLLOWS:
RESTRICTIONS IF ANY ON SHARE TRANSFERS:
None.
ITEM NO. 4 OF THE ARTICLES OF THE ABOVE-NAMED CORPORATION IS
AMENDED IN ACCORDANCE WITH SECTION 167(1)(k) OF THE BUSINESS
CORPORATIONS ACT BY DELETING THIS ITEM IN ITS ENTIRETY AND
REPLACING IT AS FOLLOWS:
NUMBER (OR MINIMUM AND MAXIMUM NUMBER) OF DIRECTORS:
The Corporation shall have not less than three (3) directors nor more
than Eleven (11) directors.
ITEM NO. 6 OF THE ARTICLES OF THE ABOVE-NAMED CORPORATION IS
AMENDED IN ACCORDANCE WITH SECTION 167(l)(m) OF THE BUSINESS
CORPORATIONS ACT BY DELETING THIS ITEM IN ITS ENTIRETY AND
REPLACING IT AS FOLLOWS:
OTHER PROVISIONS IF ANY:
None.
DATE SIGNATURE TITLE
October 26, 1993 /s/ Michael G. Thomson Director
FOR DEPARTMENTAL USE ONLY FILED
- 1 -
<PAGE>
ARTICLES OF INCORPORATION
1. NAME OF CORPORATION: 575035 ALBERTA LTD.
2. THE CLASSES AND ANY MAXIMUM NUMBER OF SHARES THAT THE
CORPORATION IS AUTHORIZED TO ISSUE:
The Corporation is authorized to issue an unlimited number of Common
Shares without nominal or par value and an unlimited number of
Redeemable Preferred Shares without nominal or par value. The Common
Shares and the Redeemable Preferred Shares shall have attached thereto
the following rights, privileges, restrictions and conditions:
Voting Rights
(a) At all meetings of the shareholders of the Corporation the holders
of the Common Shares shall be entitled to one (1) vote for each such
share so held.
(b) Subject to the provisions of the Business Corporations Act of
Alberta, the holders of the Redeemable Preferred Shares shall not be
entitled to notice of or to vote at meetings of the shareholders of the
Corporation.
Dividends and Other Distributions
(c) The Redeemable Preferred Shares shall not confer upon their holders
any rights to dividends. Subject to the provisions of contained herein,
the holders of the Common Shares shall be entitled to receive such
dividends as the directors may, in their discretion, declare thereon.
In no event shall dividends be paid on the Common shares where the
payment of such dividends would result in the Corporation having
insufficient assets to enable it to redeem all of the issued and
outstanding Redeemable Preferred Shares at a price of One Dollar
($1.00) per share in accordance with the provisions of the Business
Corporations Act of Alberta. The price of One Dollar ($1.00) per share
is hereinafter referred to as the "Redemption Amount".
(d) In the event of the liquidation, dissolution or winding-up of the
Corporation or other distribution of its assets among the shareholders:
(i) the holders of the Redeemable Preferred Shares shall be
entitled to receive in priority to the holders of the Common
Shares an amount of assets having a value equal to the
Redemption Amount of each such share so held. Except as
provided for in this sub-clause 2(d) the holders of the
Redeemable Preferred Shares shall not be entitled to share in
any distribution of the property or assets of the Corporation.
- 1 -
<PAGE>
(ii) the holders of the Common Shares shall be entitled to receive
the remaining property of the Corporation, if any, after
payment or distribution of property to the holders of the
Redeemable Preferred Shares as provided for in this subclause
2(d).
Restriction on Purchase by Corporation of Common Shares
(e) In no event shall the Corporation make any payment to purchase or
otherwise acquire any of the Common Shares if such payment would result
in the Corporation having insufficient assets to enable it to redeem
all of the issued and outstanding Redeemable Preferred Shares at the
Redemption Amount per share in accordance with the provisions of the
Business Corporations Act of Alberta.
Redemption of Redeemable Preferred Shares
(f) The Redeemable Preferred Shares shall be redeemable in whole or in
part at the option of either the holder thereof or the directors of the
Corporation at a price per share equal to the Redemption Amount. In the
event that a part only of the then outstanding Redeemable Preferred
Shares is at any time to be redeemed at the option of the directors of
the Corporation, the number of such shares so to be redeemed shall be
selected by lot, in such manner as the directors in their discretion
shall decide, or, if the directors so determine, may be redeemed pro
rata, disregarding fractions, and the directors may make such
adjustments as may be necessary to avoid the redemption of fractional
shares. Not less than thirty (30) days' notice in writing of any
redemption of the Redeemable Preferred Shares at the option of the
directors shall be given by mailing such notice to the registered
holders of the Redeemable Preferred Shares to be redeemed, specifying
the date and place or places of such redemption. If notice of any such
redemption be given by the Corporation in the manner aforesaid and an
amount sufficient to redeem the shares shall have been deposited in any
chartered bank in Canada, trust company, or Province of Alberta
Treasury Branches as specified in the notice on or before the date
fixed for redemption, the holders thereof shall have no rights against
the Corporation in respect thereof except, upon the surrender of
certificates for such Redeemable Preferred Shares, to receive payment
therefor out of the monies deposited. After the Redemption Amount of
such shares has been deposited in any chartered bank in Canada, trust
company or Province of Alberta Treasury Branches, as aforesaid, notice
shall be given to the holders of any Redeemable Preferred Shares called
for redemption who have failed to present the certificates representing
such shares within two (2) months of the date specified for redemption
that the money has been so deposited and may be obtained by the holders
of the said Redeemable Preferred Shares upon presentation of the
certificates representing such shares called for redemption at any
chartered bank in Canada, trust company or Province of Alberta Treasury
Branches, as the case may be; where a holder of Redeemable Preferred
Shares desires that all or a portion of such shares held by him be
redeemed, he shall give notice in writing to the Corporation specifying
the number of Redeemable Preferred Shares that he wishes to
- 2 -
<PAGE>
be redeemed. Within sixty (60) days of receipt of such notice, the
Corporation shall, subject to the provisions of the Business
Corporations Act of Alberta, redeem the number of Redeemable Preferred
Shares specified in such notice, and upon surrender of the certificate
or certificates for such Redeemable Preferred Shares the Corporation
shall pay to the holder thereof the Redemption Amount in respect of
each such Redeemable Preferred Share so redeemed.
Variance of Shareholders' Rights
(g) The rights, privileges, restrictions and conditions attached to the
Common Shares or the Redeemable Preferred Shares may only be varied if
the variation is consented to by all of the holders of all the Common
shares and the Redeemable Preferred Shares which are outstanding. The
Corporation shall not without the approval of all of the holders of the
Common Shares and the Redeemable Preferred Shares create or issue any
class of shares ranking as to capital or dividends prior to or on a
parity with the Common Shares and the Redeemable Preferred Shares.
3. RESTRICTIONS IF ANY ON SHARE TRANSFERS:
The right of shareholders to transfer or dispose of their shares in the
Corporation shall be subject to the following restrictions:
(a) Except where a transfer is made pursuant to the provisions of
sub-clause 3(b) below, any transfer of shares in the
Corporation shall require a resolution of the Board of
directors of the Corporation approving such transfer.
(b) Any share of a deceased shareholder may be transferred by his
executors or administrators to any child or other issue,
son-in-law, daughter-in-law, father, mother, brother, sister,
nephew, niece, widow or widower of such deceased shareholder
or to any other beneficiary named in the Will of such deceased
shareholder and any shares of the Corporation standing in the
name of the trustees of the Will of any deceased shareholder
may be transferred upon any change of trustees to the trustees
for the time being of such Will.
4. NUMBER (OR MINIMUM AND MAXIMUM NUMBER) OF DIRECTORS:
The Corporation shall have not less than one (1) director nor more than
nine (9) directors. Subject to the provisions of the Business
Corporations Act of Alberta, the directors may, between annual general
meetings, appoint one or more additional directors of the Corporation
to serve until the next annual general meeting of the Corporation
provided that the total number of directors shall not at any time
exceed the maximum hereinbefore prescribed.
- 3 -
<PAGE>
5. RESTRICTIONS IF ANY ON BUSINESSES THE CORPORATION MAY CARRY
ON:
There shall be no restrictions as to the businesses which the
Corporation may carry on.
6. OTHER PROVISIONS IF ANY:
(a) The number of shareholders of the Corporation shall be limited
to not more than fifty (50) persons, (exclusive of persons who
are in the employment of the Corporation or that of an
affiliate within the meaning of the Business Corporations Act
of Alberta and also exclusive of persons who, having been
formerly in the Corporation's employment or that of an
affiliate, were, while in that employment, shareholders of the
Corporation and have continued to be shareholders of the
Corporation after termination of that employment); provided
that where two (2) or more persons hold one or more shares in
the Corporation jointly they shall, for the purpose of this
sub-clause 6(a), be treated as a single shareholder.
(b) No invitation shall be made to the public to subscribe for
securities of the Corporation.
(c) The Corporation shall have a lien on shares registered in the
name of any shareholder who is indebted to the Corporation for
any amount.
7. INCORPORATORS
Date: July 26, 1993
NAMES ADDRESS SIGNATURE
Deborah L. Watson 40th Floor, West Tower /s/ Deborah L. Watson
Petro-Canada Centre
150 - 6th Avenue S.W.
Calgary, Alberta
T2P 3Y7
FOR DEPARTMENTAL USE ONLY
CORPORATE ACCESS NO. INCORPORATION DATE
- 4 -
BY-LAW NO. 1B
AMENDMENT TO BY-LAW 3.05
A BY-LAW RELATING GENERALLY TO THE CONDUCT OF THE BUSINESS AND AFFAIRS OF
HEALTHCARE CAPITAL CORP. (HEREINAFTER CALLED THE "CORPORATION").
3.05 QUORUM OF SHAREHOLDERS: A quorum of Shareholders is present at a Meeting of
Shareholders if not less than 33-1/3% of the issued shares entitled to vote at
the Meeting are represented in person or by proxy.
<PAGE>
BY-LAW NO. 1A
A BY-LAW RELATING GENERALLY TO THE CONDUCT OF THE BUSINESS AND AFFAIRS
OF ADVENTURE CAPITAL CORPORATION (HEREINAFTER CALLED THE "CORPORATION").
PART I
INTERPRETATION
1.01 In this By-law and all other By-laws of the Corporation, unless the context
otherwise specifies or requires:
"ACT" means the Business Corporations Act (Alberta), as from time to time
amended, and every statute in substitution thereof;
"ARTICLES" means, as the case may require, the original or restated articles of
incorporation, articles of amendment, articles of amalgamation, articles of
continuance, articles of reorganization, articles of arrangement, articles of
dissolution and articles of revival of the Corporation, and includes an
amendment to any of them;
"BOARD" means the board of Directors, as such board may be constituted from time
to time;
"BY-LAW" means this by-law and all other by-laws of the Corporation from time to
time in force and effect;
"DIRECTORS" means the directors of the Corporation;
"MEETING OF SHAREHOLDERS" includes an annual or other general meeting of
Shareholders and a meeting of any class or classes of Shareholders;
"SHAREHOLDER" means a shareholder of the Corporation;
"CHIEF EXECUTIVE OFFICER" means the President or, if the Corporation does not
have a President or if the office of President is vacant, the officer of the
Corporation holding the paramount office.
PART 2
DIRECTORS
2.01 BORROWING POWERS OF DIRECTORS: Without limiting the powers of the Directors
as set forth in the Act, but subject to the Articles, the Directors may from
time to time on behalf of the Corporation, without authorization of the
Shareholders:
(a) borrow money upon the credit of the Corporation;
- 1 -
<PAGE>
(b) issue, reissue, sell or pledge bonds, debentures, notes or other
evidences of indebtedness or guarantee of the Corporation, whether
secured or unsecured;
(c) to the extent permitted by the Act, give a guarantee on behalf of the
Corporation to secure performance of an obligation of any person; and
(d) mortgage, hypothecate, pledge or otherwise create an interest in or
charge on all or any currently owned or subsequently acquired property
of the Corporation to secure payment of a debt or performance of any
other obligation of the Corporation.
2.02 DELEGATION: Subject to the Articles, the Directors may from time to time,
by resolution, delegate to a committee of Directors, a single Director or an
officer or officers of the Corporation, all or any of the powers conferred on
the Directors by the preceding section of this By-law or by the Act.
2.03 POWER TO ADOPT SEAL AND AUTHORIZE USE: The Directors may, by resolution,
adopt a seal for the Corporation, and authorize persons to affix the seal and to
attest by their signatures that the seal was duly affixed.
2.04 DIRECTORS' POWER TO ISSUE SHARES: Subject to the Articles, the
Directors may, by resolution, issue shares of the Corporation at such time, to
such persons and, subject to the Act, for such consideration as the Directors
may from time to time determine.
2.05 DIRECTORS' POWER TO MAKE. AMEND OR REPEAL BY-LAWS: Subject to the
Articles and the Act, the Directors may, by resolution, make, amend or repeal
any By-laws that regulate the business or affairs of the Corporation.
2.06 DIRECTORS' POWER TO APPOINT OFFICERS: Subject to the Articles:
(a) the Directors may designate the officers of the Corporation, appoint as
officers individuals of full capacity who may, but need not, be
Directors of the Corporation, specify their duties and, except where
delegation is prohibited by the Act, delegate to them powers to manage
the business and affairs of the Corporation;
(b) a Director may be appointed to any office of the Corporation; and
(c) two (2) or more offices of the Corporation may be held by the same
person.
2.07 DIRECTORS' POWER TO FIX REMUNERATION OF DIRECTORS AND OFFICERS:
Subject to the Articles, the Directors may fix the remuneration of the
Directors and of the officers of the Corporation.
2.08 FINANCIAL DISCLOSURE: Subject to the Articles, the Directors shall not be
required to place before the annual meeting of Shareholders any information
respecting the financial position of the Corporation or the results of its
operations except that information required by the Act.
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<PAGE>
2.09 REMUNERATION AND EXPENSES: The Directors shall be paid such remuneration
for their services as the Board may from time to time determine. The Directors
shall also be entitled to be reimbursed for travelling and other expenses
properly incurred by them in attending meetings of the Board or any committee
thereof. Nothing contained herein shall preclude any Director from serving the
Corporation in any other capacity and receiving remuneration therefor.
2.10 DIRECTORS' MEETINGS:
(a) CONVENING MEETINGS: Any Director may convene a meeting of Directors.
(b) NOTICE OF MEETING OF DIRECTORS: At least forty-eight (48) hours'
notice (inclusive of the day on which the notice is communicated, or
deemed to be communicated, and the day of the meeting) shall be given
of a meeting of the Directors, and the notice shall specify the place,
the day and the hour of the meeting. Except where required by the Act,
the notice need not specify the purpose of the meeting or the business
to be transacted thereat.
(c) NOTICE OF ADJOURNED MEETING OF DIRECTORS: If a meeting of the Directors
is adjourned by one or more adjournments, it is not necessary to give
notice of the adjourned meeting, other than by announcement at the time
of the adjournment, if:
(i) all of the Directors are present at the time of the
announcement; or
(ii) those Directors who were not present at the time of
the announcement attend the adjourned meeting and
participate in the meeting;
but in all other cases, notice of the adjourned meeting shall be given as if it
were a new meeting, provided that if the adjournment is for a period of time
which makes it impossible or impracticable to give forty-eight (48) hours'
notice, the notice shall be deemed to have been properly given if transmitted on
the next business day following the adjournment.
(d) MANNER OF TRANSMITTING NOTICES: Notice of a meeting of the Directors,
or any other communication required to be made, may be given or made to
a Director either:
(i) in writing:
(1) by first class mail, postage prepaid,
addressed to the Director at the
Director's latest address as shown in
the records of the Corporation;
(2) by delivery to the Director's latest
address as shown in the records of the
Corporation and leaving the notice in the
custody of an adult person found there,
placing it in a mail receptacle at that
address
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or affixing it to a door or placing in some
other place at that address where the notice
or communication is likely to be found;
(3) by personally serving it upon the Director;
or
(4) by any electronic device capable of
transmitting a printed message directed to
the Director at a place where the Director
has access to a device capable of receiving
the message; or
(ii) verbally, whether by means of a telephone or
otherwise.
All notices or other communication given or made in writing in
accordance with the foregoing shall be deemed to have been
communicated:
(i) if given or made by mail, at the time it would be delivered in
the ordinary course of mail unless there are reasonable
grounds for believing that the Director did not receive the
notice or communication at that time, or at all;
(ii) if delivered or personally served, on the day that it was
delivered or served; and
(iii) if by electronic device, one (1) hour following transmission.
(e) WAIVER OF NOTICE: Notice of any meeting of Directors or of any
committee of Directors or the time for the giving of any such notice or
any irregularity in any meeting or in the notice thereof may be waived
by any Director in writing or by telecopy, telegram, cable or telex
addressed to the Corporation or in any other manner, and any such
waiver may be validly given either before or after the meeting to which
such waiver relates. Attendance of a Director at any meeting of
Directors or of any committee of Directors is a waiver of notice of
such meeting, except when a Director attends a meeting for the express
purpose of objecting to the transaction of any business on the grounds
that the meeting is not lawfully called.
(f) OMISSION OF NOTICE: The accidental omission to give notice of any
meeting of Directors, or of any committee of Directors, or the
non-receipt of any notice by any person shall not invalidate any
resolution passed or any proceeding taken at such meeting.
(g) PLACE OF MEETINGS OF DIRECTORS: Subject to the Articles, meetings of
the Directors may be held at any place in Alberta, or at any place
outside of Alberta if all Directors entitled to attend and vote at the
meeting either participate in the meeting or consent, verbally or
otherwise, to the meeting being held at that place.
(h) CHAIRMAN OF MEETINGS OF DIRECTORS OR COMMITTEE OF DIRECTORS: Unless and
until the Directors have elected a Chairman of the Board, the Chief
Executive Officer shall act as chairman of all meetings of the
Directors but if the Chairman of the Board or the Chief Executive
Officer, as the case may be, is absent or refuses to act as chairman,
the
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Directors in attendance shall by a vote of the majority of them elect
some other Director present at the meeting to act as chairman of the
meeting.
(i) SECRETARY OF MEETINGS OF DIRECTORS: The chairman of a meeting of
Directors may appoint a Director to act as secretary of a meeting of
Directors, and in the absence of such appointment, the chairman of the
meeting shall also act as secretary of the meeting.
(j) QUORUM OF DIRECTORS: Subject to the Articles, a majority of Directors
shall constitute a quorum at any meeting of Directors.
(k) PARTICIPATION BY TELEPHONE: A Director may participate in a meeting of
Directors by means of telephone or other communication facilities that
permit all persons participating in the meeting to hear each other.
(l) RESOLUTION BY MAJORITY: Subject to the Articles, every resolution
submitted to a meeting of Directors shall be decided by a vote of a
majority of the Directors participating in the meeting, and the
declaration of the chairman of the meeting on the result of the vote
shall be final. In case of an equality of votes, the chairman of the
meeting shall not have a casting vote.
2.11 MEETINGS OF COMMITTEES OF DIRECTORS: The provisions of Section 2.10 of this
By-law shall apply equally to meetings of committees of Directors, but when
applying those provisions to a meeting of a committee of Directors, the phrase
"meeting of Directors" shall mean "meeting of a committee of Directors" and the
word "Director" shall mean "member of a committee of Directors".
2.12 WRITTEN RESOLUTION IN LIEU OF MEETING: Subject to the Articles, a
resolution in writing signed by all the Directors entitled to vote on that
resolution at a meeting of Directors or committee of Directors is as valid as if
it had been passed at a meeting of Directors or a committee of Directors. A
resolution in writing may be signed in any number of counterparts which together
shall be construed as a single instrument. A resolution in writing shall take
effect on the date when it is expressed to be effective notwithstanding that the
effective date is before or after the date on which it was signed by the
Directors or any of them. A resolution in writing transmitted by telegraph,
telex or other device capable of transmitting a printed message and purporting
to be sent by a Director shall be valid as a counterpart of a resolution in
writing of the Directors or committee of Directors.
PART 3
SHAREHOLDERS' MEETINGS
3.01 CHAIRMAN OF MEETING OF SHAREHOLDERS: The Chairman of the Board, or failing
him the President of the Corporation, shall act as chairman at all Meetings of
Shareholders. If the Chairman of the Board and the President are both absent or
refuse to act as chairman of the meeting, the Shareholders in attendance shall
elect some other person in attendance at the meeting, who need not be a
Shareholder, to act as chairman of the meeting.
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3.02 PLACE OF SHAREHOLDERS' MEETINGS: Subject to the Articles and the
provisions of the Act permitting a Meeting of Shareholders to be held outside of
Alberta, a Meeting of Shareholders shall be held at the place in Alberta
determined by the Directors.
3.03 PARTICIPATION IN MEETING BY TELEPHONE: A Shareholder or any other person
entitled to attend a Meeting of Shareholders may participate in the meeting by
means of telephone or other communication facilities that permit all persons
participating in the meeting to hear each other, and a person participating in
such a meeting by those means is deemed for the purposes of the Act to be
present at the meeting.
3.04 NOTICE OF ADJOURNED MEETING: If a Meeting of Shareholders is adjourned by
one or more adjournments for an aggregate of less than thirty (30) days, it is
not necessary to give notice of the adjourned meeting, other than by
announcement at the time of the adjournment.
3.05 QUORUM OF SHAREHOLDERS: A quorum of Shareholders is present at a Meeting of
Shareholders, if two persons present and representing in person or by proxy not
less than 10% of the issued shares entitled to vote at a meeting.
3.06 LOSS OF QUORUM DURING MEETING: If a quorum is present at the opening of a
Meeting of Shareholders, the Shareholders present may proceed with the business
of the meeting notwithstanding that a quorum is not present throughout the
meeting.
3.07 VOTING JOINTLY HELD SHARES: If two (2) or more persons hold shares of the
Corporation jointly, one of those holders present at a Meeting of Shareholders
may, in the absence of the others, vote the shares, but if two (2) or more of
those persons who are present, in person or by proxy, vote, they shall vote as
one on the shares jointly held by them.
3.08 VOTING: Voting at a Meeting of Shareholders shall be by show of hands
except when a vote by ballot is demanded by a Shareholder or a proxyholder
entitled to vote at the meeting. If a vote by ballot is demanded at a meeting in
which a Shareholder, or other person entitled to attend and vote at the meeting,
is participating by telephone or other communication facilities, such
Shareholder or other person may verbally appoint some person present at the
meeting to cast a ballot on his behalf and a ballot so cast shall be valid as if
it were personally cast by the Shareholder or other person so participating.
3.09 WRITTEN RESOLUTION IN LIEU OF MEETING: Subject to the Articles, a
resolution in writing signed by all the Shareholders entitled to vote on that
resolution at a Meeting of Shareholders is as valid as if it had been passed at
a Meeting of Shareholders. A resolution in writing may be signed in any number
of counterparts which together shall be construed as a single instrument. A
resolution in writing shall take effect on the date when it is expressed to be
effective notwithstanding that the effective date is before or after the date on
which it was signed by the Shareholders or any of them. A resolution in writing
transmitted by telegraph, telex or other device capable of transmitting a
printed message and purporting to be sent by a Shareholder shall be valid as a
counterpart of a resolution in writing of the Shareholders.
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PART 4
LIEN ON SHARES
4.01 If the Articles provide that the Corporation has a lien on shares
registered in the name of a Shareholder or his legal representative for a debt
of that Shareholder to the Corporation, such lien may be enforced, subject to
the Act and to any other provision of the Articles, by the sale of shares
thereby affected or by any other action, suit, remedy or proceedings authorized
or permitted by law or by equity and, pending such enforcement, the Corporation
may refuse to register a transfer of the whole or any part of such shares.
PART 5
VOTING RIGHTS IN OTHER BODIES CORPORATE
5.01 The signing officers of the Corporation may execute and deliver instruments
of proxy and arrange for the issuance of voting certificates or other evidence
of the right to exercise the voting rights attaching to any securities held by
the Corporation. Such instruments, certificates or other evidence shall be in
favour of such person or persons as may be determined by the person signing or
arranging for them. In addition, the Board may direct the manner in which, and
the person or persons by whom, any particular voting rights or class of voting
rights may or shall be exercised.
PART 6
SHARES AND SHARE CERTIFICATES
6.01 ALLOTMENT: Subject to the Articles, the Board may from time to time allot,
or grant options to purchase, and issue the whole or any part of the authorized
and unissued shares of the Corporation at such times and to such persons and for
such consideration as the Board shall determine, provided that no share shall be
issued until the consideration for the share is fully paid as provided for in
the Act.
6.02 COMMISSIONS: The Board may from time to time authorize the Corporation to
pay a reasonable commission to any person in consideration of his purchasing or
agreeing to purchase shares of the Corporation from the Corporation or from any
other person, or procuring or agreeing to procure purchasers for shares of the
Corporation.
6.03 NON-RECOGNITION OF TRUSTS: Subject to the provisions of the Act, the
Corporation may treat the person in whose name a share is registered in the
securities register as the absolute owner of the share as if that person had
full legal capacity and authority to exercise all rights of ownership,
irrespective of any indication to the contrary through knowledge or notice or
description in the Corporation's records or on the share certificate.
6.04 SHARE CERTIFICATES: Every holder of one or more shares of the Corporation
shall be entitled, at his option, to a share certificate, or to a
non-transferable written acknowledgment of his right to obtain a share
certificate, stating the name of the person to whom the certificate or
acknowledgment was issued, and the number and class or series of shares held by
him as
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<PAGE>
shown on the securities register. Share certificates and acknowledgements of a
Shareholder's right to a share certificate, shall, subject to the Act, be in
such form as the Board shall from time to time approve. Any share certificate
shall be signed by any number of signing officers as the Board may determine and
need not be under the corporate seal, provided that, unless the Board otherwise
determines, certificates representing shares in respect of which a transfer
agent and/or registrar has been appointed shall not be valid unless
countersigned by or on behalf of such transfer agent and/or registrar. The
signature of a sole signing officer or two signing officers, as the case may be,
may be printed or mechanically reproduced in facsimile upon share certificates
and every such facsimile signature shall for all purposes be deemed to be the
signature of the officer whose signature it reproduces and shall be binding upon
the Corporation. A share certificate executed as aforesaid shall be valid
notwithstanding that one or both of the officers whose facsimile signature
appears thereon no longer holds office at the date of issue of the certificate.
6.05 REPLACEMENT OF SHARE CERTIFICATE: The Board or any officer or agent
designated by the Board may in its or his discretion direct the issue of a new
share certificate in lieu of and upon cancellation of a share certificate that
has been mutilated or in substitution for a share certificate claimed to have
been lost, destroyed or wrongfully taken, on payment of such fee not exceeding
such amount as may be allowed by the Act, and on such terms as to indemnity,
reimbursement of expenses and evidence of loss and of title as the Board may
from time to time prescribe, whether generally or in any particular case.
6.06 JOINT SHAREHOLDERS: If two or more persons are registered as joint holders
of any share, the Corporation shall not be bound to issue more than one
certificate in respect thereof, and delivery of such certificate to one of such
persons shall be sufficient delivery to all of them. Any one of such persons may
give effectual receipts for the certificate issued in respect thereof or for any
dividend, bonus, return of capital or other money payable or warrant issuable in
respect of such share.
6.07 FRACTIONAL SHARE: The Corporation may issue a certificate for a fractional
share or may issue in its place, as may be determined by the Board, scrip
certificates in a form that entitles the holder to receive a certificate for a
full share by exchanging scrip certificates aggregating a full share. The
Directors may attach conditions to any scrip certificates, including that the
scrip certificates become void if they are not exchanged for a share certificate
representing a full share by a specified date, and that any shares for which
those scrip certificates are exchangeable may, notwithstanding any pre-emptive
right, be issued by the Corporation to any person and the proceeds of those
shares distributed rateably to the holders of the scrip certificates.
6.08 TRANSFER AND TRANSMISSION OF SHARES: Shares of the Corporation may be
transferred in the form of a transfer of endorsement endorsed on the
certificates issued for the shares of the Corporation or in any form of transfer
which may be approved by the Board.
6.09 REGISTRATION OF TRANSFER: Subject to the provisions of the Act, no transfer
of shares shall be registered in a securities register except upon presentation
of the certificate
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<PAGE>
representing such shares with a transfer endorsed thereon or delivered therewith
duly executed by the registered holder or by his attorney or successor duly
appointed, together with such reasonable assurance or evidence of signature,
identification and authority to transfer as the Board may from time to time
prescribe, upon payment of all applicable taxes and any fees prescribed by the
Board.
6.10 RIGHTS OF REPRESENTATIVES: The Corporation may treat a person as a
registered Shareholder entitled to exercise all rights of the Shareholder he
represents if that person produces to the Board such evidence as may be
reasonably required that he is the executor, administrator, heir or legal
representative of the heirs of the estate of a deceased Shareholder, or a
guardian, committee or trustee representing a registered Shareholder.
6.11 NO DUTY TO THIRD PERSON: The Corporation is not required to enquire into
the existence of, or see to the performance or observance of, any duty owed to a
third person by a registered holder of any of its shares, or by anyone whom it
treats, subject to the Act, as the owner or registered holder of its shares.
6.12 TRANSFER AGENTS AND REGISTRARS: The Board may from time to time appoint one
or more trust companies registered under the Trust Companies Act (Alberta) as
its agent or agents to maintain the central securities register or registers,
and an agent or agents to maintain branch securities registers. Such a person
may be designated as transfer agent or registrar according to his functions and
one person may be appointed both registrar and transfer agent.
The Board may at any time terminate any such appointment.
PART 7
INFORMATION AVAILABLE TO SHAREHOLDERS
7.01 AVAILABLE INFORMATION: Except as provided by the Act, no Shareholder shall
be entitled to obtain information respecting any details or conduct of the
Corporation's business which in the opinion of the Directors would not be in
the interest of the Corporation to communicate to the public.
7.02 INSPECTION OF INFORMATION: The Directors may from time to time, subject to
those rights conferred by the Act, determine whether, to what extent, at what
time and place and under what conditions or regulations the documents, books,
registers and accounting records of the Corporation or any of them shall be open
to the inspection of Shareholders, and no Shareholder shall have any right to
inspect any document, book, register or accounting record of the Corporation
except as conferred by statute or authorized by the Board or by a resolution of
the Shareholders.
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<PAGE>
PART 8
INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE CORPORATION
8.01 In all circumstances permitted by the Act, the Corporation shall indemnify
a Director or officer of the Corporation, a former Director or officer of the
Corporation, or a person who acts or acted at the Corporation's request as a
director or officer of a body corporate of which the Corporation is or was a
shareholder or a creditor, and his heirs and legal representatives, from and
against:
(a) all costs, charges and expenses, including an amount to settle an
action or satisfy a judgment reasonably incurred by him in respect of
any civil, criminal or administrative action or proceeding to which he
is made a party by reason of being or having been a Director or officer
of the Corporation or such body corporate; and
(b) all other costs, charges and expenses reasonably incurred in connection
with the defence of any civil, criminal or administrative action or
proceeding to which he is made a party by reason of being or having
been a Director or officer of the Corporation or such body corporate.
Enacted by resolution of the Board of Directors passed at a meeting of
the Directors of the Corporation held at Calgary, Alberta on the 25th day of
January, 1994.
President
Secretary
Confirmed by the shareholders in accordance with the Act the 25th day
of January, 1994.
Michael G. Thomson Craig R. Thomson
Murray T.A. Campbell Bruce Ramsay
William DeJong
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March 2, 1998
Sonus Corp.
Suite 2390
111 SW 5th Avenue Portland, Oregon 97204 U.S.A.
Dear Sirs:
Re: Sonus Corp. - Form SB-2 Registration
-----------------------------------------
We have acted as Alberta counsel for Sonus Corp. ("Sonus"), a
body corporate organized under the laws of the Province of Alberta, Canada, in
connection with the preparation of a post-effective amendment to the
Registration Statement on Form SB-2 to be filed by Sonus with the Securities and
Exchange Commission (the "SEC") on or shortly after March 2, 1998 (the
"Registration Statement"), respecting the proposed resale of 3,744,492 common
shares without par value of Sonus (the "Offered Shares") by the Selling
Shareholders identified in the Registration Statement.
The Offered Shares are comprised of the following:
(i) 2,151,830 common shares which are presently issued
and outstanding;
(ii) 1,093,482 common shares (the "Purchase Warrant
Shares") which are issuable upon the exercise of
purchase warrants (the "Purchase Warrants") issued by
Sonus in a private placement of special warrants in
September and December of 1996 (the "September
Special Warrant Offering");
(iii) 99,180 common shares (the "Option Shares") which are
issuable upon the exercise of purchase warrants (the
"Option Warrants") issuable upon the exercise of
options granted to the placement agents in connection
with the September Special Warrant Offering; and
(iv) 400,000 common shares (the "Note Shares") which are
issuable upon exercise of the conversion rights
associated with convertible promissory notes (the
"Notes") issued by Sonus in connection with the
acquisition
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of the Midwest Division of Hearing Health Services,
Inc., in October 1996.
In our capacity as Alberta counsel for Sonus, we have reviewed
and examined the Certificates and Articles of Sonus and its by-laws and
applicable resolutions and minutes of meetings of directors and shareholders
contained in its corporate minute book. For the purposes of this opinion, we
have assumed such minute book is complete and accurate in all material aspects.
In addition, we have reviewed all such other documents and
have made such further investigations as we have considered appropriate and
necessary in order to enable us to give the opinions expressed herein, and have
made such examinations of law as we have deemed appropriate for the purpose of
giving the opinions expressed herein.
We also have been furnished with and have examined originals
or copies, certified or otherwise identified to our satisfaction, of all such
records of Sonus, agreements and other instruments, certificates of officers and
representatives of Sonus, certificates of public officials and other documents
as we have deemed necessary or relevant as a basis for the opinion hereinafter
expressed. In particular, as to various questions of fact, we have relied upon a
certificate of an Officer of Sonus (the "Certificate"), a copy of which is
attached hereto. Insofar as the opinions herein relate to the number of issued
and outstanding securities of Sonus and to any issued and outstanding common
shares of Sonus being fully-paid, we have relied exclusively upon the
Certificate.
In making such examinations, we have assumed (i) the
genuineness of all signatures; (ii) the authenticity of all documents submitted
to us as originals; (iii) the conformity to original documents of all documents
submitted to us as certified copies or photocopies; (iv) the authority of all
persons signing documents on behalf of Sonus; and (v) the identity and capacity
of all individuals acting or purporting to act as public officials.
We are solicitors qualified to carry on the practice of law in
the Province of Alberta only and we express no opinion as to any laws or matters
governed by any laws other than the laws of the Province of Alberta and the
federal laws of Canada applicable therein.
Based on the foregoing, we are of the option that:
1. The Purchase Warrant Shares have been duly authorized
and when the Purchase Warrants have been duly
exercised and the Purchase Warrant Shares have been
duly delivered against payment therefor pursuant to
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<PAGE>
the terms of the Purchase Warrants, the Purchase
Warrant Shares will be validly issued, fully paid and
non-assessable.
2. The Option Shares have been duly authorized and when
the Option Warrants have been duly exercised and the
Option Shares have been duly delivered against
payment therefor pursuant to the terms of the Option
Warrants, the Option Shares will be validly issued,
fully paid and non-assessable.
3. The Note Shares have been duly authorized and when
the holders of the Notes have duly exercised their
rights of conversion pursuant to the terms of the
Notes and the Note Shares have been duly delivered,
the Note Shares will be validly issued, fully paid
and non-assessable.
4. The Offered Shares, excluding the Purchase Warrant
Shares, Option Shares and Note Shares, have been
validly issued and are fully paid and non-assessable.
5. The statements in the prospectus included in the
Registration Statement (the "Prospectus") under the
heading "Service and Enforcement of Legal Process" to
the extent that such matters represent matters of law
or legal conclusions, are accurate and complete
statements or summaries of the matters set forth
therein.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement. We further consent to the use of our name under
the headings "Legal Matters" and "Service and Enforcement of Legal Process" in
the Prospectus.
Yours very truly,
BALLEM MacINNES
/s/ Ballem MacInnes
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<PAGE>
CERTIFICATE
TO: Ballem MacInnes
Re: Form SB-2 Registration Statement
I, Edwin J. Kawasaki, Vice President-Finance and Chief Financial Officer of
Sonus Corp. (the "Company") DO HEREBY CERTIFY in my capacity as such and not in
my personal capacity, that:
1. The corporate minute book of the Company is complete and accurate in
all material respects and all minutes of the meetings and/or
resolutions of the shareholders and directors of the Company are
recorded therein, and, no steps have been taken or are pending to
cancel the Company's incorporation, to strike the Company from the
register or to dissolve or wind up the Company.
2. The authorized capital of the Company consists of an unlimited number
of Common Shares ------- without par value and an unlimited number of
preferred shares without par value issuable in series, of which
5,834,582 Common Shares and 13,333,333 Series A Convertible Preferred
Shares are issued and outstanding. All of such outstanding Common
Shares and Series A Convertible Preferred Shares have been authorized
for issuance by the Board of Directors of the Company and are
fully-paid. Additionally, an aggregate of 7,721,728 Common Shares have
been authorized for issuance by the Board of Directors of the Company
as follows: (i) 1,462,400 stock options; (ii) 1,192,662 issued and
outstanding warrants of the Company; (iii) 400,000 Common Shares upon
the conversion of issued and outstanding convertible subordinated notes
of the Company; and (iv) 4,666,666 Common Shares pursuant to the
conversion of 13,333,333 Series A Convertible Preferred Shares and the
exercise of 2,000,000 warrants issued by the Company.
THIS CERTIFICATE is delivered to you in order to confirm certain facts to enable
you to render your legal opinion respecting the Registration Statement on Form
SB-2 to be filed with the Securities and Exchange Commission and, in that
regard, you and the Securities and Exchange Commission are entitled to rely upon
same.
DATED at the City of Portland, in the State of Oregon, this 2nd day of March,
1998.
/s/ Edwin J. Kawasaki
Edwin J. Kawasaki
Vice President-Finance and Chief Financial Officer
FELESKY FLYNN
BARRISTERS & SOLICITORS
3400 FIRST CANADIAN CENTRE
350 - 7 AVENUE S.W.
CALGARY, ALBERTA CANADA T2P 3N9
TEL (403) 260-3300
February 27, 1998
Board of Directors
Sonus Corp.
111 S.W. Fifth Avenue, Suite 2390
Portland, Oregon 97204
Ladies and Gentlemen:
We have acted as tax counsel for Sonus Corp. (the "Company")
in connection with the registration of certain shares of the Company's common
stock under the Securities Act of 1933, as amended ("Securities Act"). We hereby
confirm the opinion described under the caption "Canadian Federal Income Tax
Considerations" in the prospectus included in the Company's post-effective
amendment No. 1 to its registration statement on Form SB-2, Registration No.
333-23137 ("Registration Statement").
We also hereby consent to the use of our name under the
caption "Canadian Federal Income Tax Considerations" in the Registration
Statement. In giving this consent, we do not thereby admit that we come within
the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations thereunder.
Yours truly,
FELESKY FLYNN
/s/ H. George McKenzie
Per: H. GEORGE MCKENZIE, Q.C.
HEALTHCARE CAPITAL CORP.
-----------------------------
WARRANT AGREEMENT
-----------------------------
WARRANTS TO PURCHASE 10,000,000 COMMON SHARES
-----------------------------
THIS WARRANT AGREEMENT (this "Agreement") dated as of December 24, 1997
is made and entered into by and between HealthCare Capital Corp., a corporation
organized under the laws of Alberta, Canada (the "Company"), and Warburg Pincus
Ventures, L.P., a Delaware limited partnership (the "Warrantholder").
Subject to the terms and conditions hereof, the Company agrees to issue
to the Warrantholder, pursuant to a Securities Purchase Agreement dated as of
November 21, 1997, by and between the Company and the Warrantholder (the
"Securities Purchase Agreement"), warrants, as hereinafter described and the
form of which is attached hereto as Exhibit 1 (the "Warrants"), to purchase up
to an aggregate of 10,000,000 common shares without par value of the Company
(the "Common Shares"), at a Warrant Price of U.S. $2.40 per Common Share,
subject to adjustment pursuant to Section 6 hereof. As used herein (i) the term
"Shares" shall mean, unless the context otherwise requires, collectively the
Common Shares issuable upon exercise of the Warrants together with any other
securities or other property issuable upon such exercise as provided in Section
6 of this Agreement; (ii) the term "Warrants" shall include any and all warrants
outstanding pursuant to this Agreement, including those evidenced by a
certificate or certificates issued upon division, exchange or substitution
pursuant to this Agreement; and (iii) the term "Warrant Price" shall mean the
price per Share at which Shares shall at any time be purchasable upon exercise
of the Warrants. Terms which are capitalized but not defined herein shall have
the same meanings as in the Securities Purchase Agreement. Any amounts herein
referencing share prices or numbers of shares shall be subject to appropriate
adjustments in the event of any stock splits, consolidations or the like.
For the purpose of defining the terms and provisions of the Warrants and
the respective rights and obligations thereunder, the Company and the
Warrantholder, for value received, hereby agree as follows:
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Section 1. Restrictions on Transfer and Form of Warrants.
1.1. Registration. Certificates evidencing the Warrants shall be
numbered and shall be registered on the books of the Company when issued, in
accordance with Alberta corporate practice.
1.2. Restriction on Transfer of the Warrants. The Warrants shall not be
transferable and may not be sold, assigned, hypothecated or otherwise
transferred by the Warrantholder without the express written consent of the
Company, such consent not to be unreasonably withheld. Any transferee permitted
under this Section 1.2 shall acquire title to such transferred Warrants and to
all rights represented thereby.
1.3. Form of Warrants. The form of certificate evidencing the Warrants
shall be substantially as set forth in Exhibit 1 hereto. Certificates evidencing
the Warrants shall be executed on behalf of the Company by its President or by
any Vice President, shall be attested to by its Secretary or any Assistant
Secretary, and shall be dated as of the date of execution thereof.
1.4. Legends on Warrants and Common Shares. The Warrants, and the Shares
issuable upon the exercise thereof, have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"). Each certificate for
the Warrants shall bear the following legend:
"THE WARRANTS REPRESENTED BY THIS CERTIFICATE, AND THE COMMON
SHARES ISSUABLE UPON EXERCISE OF SUCH WARRANTS, HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 OR THE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY PROVINCE
OF CANADA. SUCH WARRANTS MAY NOT BE SOLD, OFFERED FOR SALE,
ASSIGNED, EXCHANGED, PLEDGED OR HYPOTHECATED OR OTHERWISE
TRANSFERRED, IN ANY MANNER, AND SUCH COMMON SHARES MAY NOT BE
OFFERED FOR SALE, SOLD, PLEDGED OR HYPOTHECATED OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL,
REASONABLY SATISFACTORY TO THE COMPANY, THAT AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE. THE WARRANTS REPRESENTED BY THIS
CERTIFICATE MAY NOT BE TRADED IN CANADA EXCEPT AS PERMITTED BY
RELEVANT CANADIAN SECURITIES LAWS."
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Each certificate for the Shares shall bear the following legend:
"THE COMMON SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 OR THE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY PROVINCE
OF CANADA AND MAY NOT BE SOLD, ASSIGNED, EXCHANGED OR OTHERWISE
TRANSFERRED, IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF
COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE THIS CERTIFICATE
MAY NOT CONSTITUTE `GOOD DELIVERY' IN SATISFACTION OF A TRADE
MADE ON A STOCK EXCHANGE IN CANADA. THIS CERTIFICATE IS NOT
TRANSFERABLE IN CANADA UNTIL [THE DATE SIX MONTHS FROM THE
CLOSING DATE] EXCEPT PURSUANT TO AN EXEMPTION FROM THE PROSPECTUS
REQUIREMENTS CONTAINED IN THE APPLICABLE SECURITIES LEGISLATION."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to a registration statement under the
Securities Act of the Common Shares represented thereby) shall also bear a like
legend unless, in the opinion of counsel reasonably satisfactory to the Company,
the securities represented thereby need no longer be subject to such
restrictions.
Section 2. Term of Warrants; Exercise of Warrants.
(a) Subject to the terms of this Agreement, the Warrantholder shall have
the right, at any time and from time to time during the period commencing at
9:00 a.m., Pacific Time, on January --, 1998, (the "Commencement Date") and
ending at 5:00 p.m., Pacific Time, on the third anniversary of the Commencement
Date (the "Termination Date") to purchase from the Company up to the number of
fully paid and nonassessable Shares which the Warrantholder may at the time be
entitled to purchase pursuant to this Agreement, upon surrender to the Company
at its principal office of the certificates evidencing the Warrants to be
exercised, with the purchase form, in the form attached hereto as Exhibit 2,
duly completed and signed, and upon payment to the Company of an amount (the
"Exercise Payment") equal to the Warrant Price multiplied by the number of
Shares being purchased pursuant to such exercise, payable in cash, by certified
or official bank check, or by wire transfer. The Company shall use its
reasonable best efforts prior to the Termination Date to obtain any applicable
regulatory approvals of those regulatory agencies having jurisdiction over the
Company in order to extend the Termination Date
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for a further period of two years, in which event the Company's right of
purchase under this Section 2(a) shall end at 5:00 p.m., Pacific Time, on the
fifth anniversary of the Commencement Date.
(b) At any time subsequent to the first anniversary of the Commencement
Date, in lieu of exercising the Warrants as provided in Section 2(a) above, and
subject to all applicable law and all applicable regulatory approvals,
limitations and restrictions, the Warrantholder may elect to receive, without
any cash payment, a number of Shares equal to the value (as determined below) of
any or all of the Warrants held of record by the Warrantholder, upon surrender
to the Company at its principal office of the certificates evidencing such
Warrants, with the attached cashless exercise form attached hereto as Exhibit 3
duly completed and signed, in which event the Company shall issue to the
Warrantholder a number of Shares computed using the following formula:
X = Y(A-B)
------
A
where
X = the number of Common Shares to be issued pursuant to
this Section 2(b).
Y = the number of Common Shares issuable upon exercise of
the surrendered Warrants.
A = the average of the Market Prices of the Common Shares
for the sixty (60) calendar days immediately preceding
the date upon which the certificates evidencing the
surrendered Warrants are received by the Company at its
principal office.
B = the Warrant Price on such date.
For all purposes of this Agreement, the term "Market Price" as of any
specified date shall mean: (i) if the Common Shares are listed or admitted for
trading on one or more United States national securities exchanges, the daily
closing price for the Common Shares on the principal exchange in the United
States on which the Common Shares are listed; (ii) if the Common Shares are not
listed or admitted for trading on any United States national securities
exchange, the daily closing price for the Common Shares on the Nasdaq National
or Nasdaq Small-Cap Market ("Nasdaq"); (iii) if the Common Shares are not listed
or admitted for trading on a United States national securities exchange or on
Nasdaq, the daily closing price of the Common Shares on the principal stock
exchange in Canada on which the Common Shares are listed (expressed in United
States dollars based upon the noon buying rate in New York City for cable
transfers in Canadian dollars as certified for customs purposes by the Federal
Reserve Bank of New York); (iv) if the
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<PAGE>
Common Shares are not listed or admitted to trading on any United States
national or Canadian national securities exchange or on Nasdaq, the average of
the reported bid and asked prices on the trading day preceding such date in the
over-the-counter market as furnished by the National Quotation Bureau, Inc., or,
if such firm is not then engaged in the business of reporting such prices, as
furnished by any member of the National Association of Securities Dealers, Inc.
selected by the Company; or (v) if the Common Shares are not publicly traded,
the Market Price for such day shall be the fair market value thereof determined
jointly by the Company and the Warrantholder; provided, however, that if such
parties are unable to reach agreement within a reasonable period of time, the
Market Price shall be determined in good faith by an independent investment
banking firm selected jointly by the Company and the Warrantholder or, if that
selection cannot be made within an additional 15 days, by an independent
investment banking firm selected by the American Arbitration Association in
accordance with its rules.
If the Warrantholder elects to exercise the Warrants pursuant to this
Section 2(b), the Warrantholder shall simultaneously convert all Series A
Convertible Preferred Shares of the Company (the "Convertible Shares") then
owned by the Warrantholder into Common Shares.
In the event that the Warrantholder elects to exercise the Warrants
pursuant to this Section 2(b), and the average Market Price of the Common
Shares, as defined above, for the 60 calendar days immediately preceding the
date on which the certificates evidencing the surrendered Warrants are received
by the Company at its principal office, is greater than U.S. $3.20, then the
right to a cashless exercise of Warrants shall be limited to such number of
Warrants as would result in the issuance of 2,500,000 Shares and any remaining
Warrants to be exercised by the Warrantholder shall be exercised, at such time
or times elected by the Warrantholder, in accordance with the provisions of
Section 2(a). Such per share amount of U.S. $3.20 shall be appropriately
adjusted for any stock splits, consolidations or the like.
(c) The Company may, at any time, elect to force the exercise of
the Warrants by the Warrantholder subject to the terms of this Agreement
provided that the Company shall have satisfied all of the following conditions
prior to the date of such election by the Company:
(i) the Common Shares are listed on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market;
(ii) the Common Shares are traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market at a
Market Price greater than U.S. $2.40 per share for the 10 consecutive
trading days immediately preceding the date of such election; and
(iii) The Company's net income (excluding profit or loss
on disposal of a significant part of the Company's assets or separate
segment thereof, gains on restructuring payables, gains or losses on the
extinguishment of debt, expropriations of property, gains or losses that
are the direct result of a major casualty, or one-time losses
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<PAGE>
resulting from prohibitions under a newly-enacted law or regulation) for
the three consecutive fiscal quarters ended immediately prior to the
date of such election, as reported in or derived from its quarterly or
annual reports filed with the Securities and Exchange Commission, before
income taxes, dividends on the Convertible Shares and amortization of
goodwill and covenants not to compete for such quarterly periods, shall
have averaged at least U.S. $0.07 per fully diluted Common Share per
fiscal quarter, provided, however, that in making such calculation, the
Common Shares issuable upon exercise of the Warrants shall be excluded
but Common Shares issuable upon the conversion of the Convertible Shares
shall not.
The foregoing conditions (i), (ii) and (iii) shall hereinafter be collectively
referred to as the "Triggering Conditions." All references to per share amounts
or prices with respect to the Triggering Conditions shall be appropriately
adjusted for any stock splits, consolidations or the like.
The Company shall give the Warrantholder written notice that the
Triggering Conditions have been satisfied and that the Company intends to force
the exercise of the Warrants. In this event, the Termination Date shall be the
date ten (10) business days after such notice shall be effectively delivered to
the Warrantholder as provided in Section 10 of this Agreement.
In the event of a forced exercise of Warrants pursuant to this Section
2(c), in lieu of exercising the Warrants as provided in Section 2(a) above, and
subject to all applicable law and all applicable regulatory approvals,
limitations and restrictions, the Warrantholder may elect to receive, without
any cash payment, a number of Shares equal to the value (as determined below) of
any or all of the Warrants held of record by the Warrantholder, upon surrender
to the Company at its principal office of the certificates evidencing such
Warrants, with the attached cashless exercise form thereof duly completed and
signed, in which event the Company shall issue to the holder a number of Shares
computed using the formula set forth in Section 2(b) except the term "A" in such
formula, the Market Price of the Common Shares, shall be calculated based on the
ten (10) trading days immediately preceding the date on which the certificates
evidencing the surrendered Warrants are received by the Company at its principal
offices.
In the event that the Warrantholder elects to exercise the Warrants
without any cash payment following a forced exercise pursuant to this Section
2(c), and the average Market Price of the Common Shares, as defined above, for
the 60 calendar days immediately preceding the date on which the certificates
evidencing the surrendered Warrants are received by the Company at its principal
office, is greater than U.S. $3.20, then the right to a cashless exercise of
Warrants shall be limited to such number of Warrants as would result in the
issuance of 2,500,000 Shares and any remaining Warrants to be exercised by the
Warrantholder shall be exercised, at such time or times elected by the
Warrantholder, in accordance with the provisions of Section 2(a). Such per share
amount of U.S. $3.20 shall be appropriately adjusted for any stock splits,
consolidations or the like.
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<PAGE>
(d) Upon the surrender of Warrant certificates and payment of the
Exercise Payment (in cash, except in the event of a cashless exercise), the
Company, at its expense, shall issue and cause to be delivered with all
reasonable dispatch, and in any event within ten (10) days thereafter, to the
Warrantholder a certificate or certificates for the number of full Shares so
acquired upon the exercise of the Warrant, together with cash in respect of any
fractional Shares otherwise issuable upon such surrender, determined in
accordance with Section 7 hereof. Such certificate or certificates shall be
deemed to have been issued, and the Warrantholder shall be deemed to have become
a holder of record of such Shares, as of the date of surrender of the Warrants
being exercised and (in the case of exercise pursuant to Section 2(a)) payment
of the Exercise Payment notwithstanding that the certificate or certificates
representing such securities shall not actually have been delivered or that the
stock transfer books of the Company shall then be closed. The Warrants shall be
exercisable at the election of the Warrantholder either in full or from time to
time in part and, in the event that a certificate evidencing Warrants is
exercised in respect of fewer than all of the Shares specified therein at any
time prior to the Termination Date, a new certificate evidencing the remaining
portion of the Warrants shall be issued by the Company.
Section 3. Payment of Taxes. The Company will pay all transfer and stamp
taxes and fees, if any, attributable to the initial issuance of the Warrants or
the issuance of Shares upon exercise of the Warrants.
Section 4. Mutilated or Missing Warrants. In case the certificate or
certificates evidencing any Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the affected Warrantholder,
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated certificate or certificates, or in lieu of and substitution for the
certificate or certificates lost, stolen or destroyed, a new Warrant certificate
or certificates of like tenor and representing an equivalent right or interest,
but only upon receipt of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of such Warrant and, if requested, at the
cost and expense of the Warrantholder (in the case of loss, theft or
destruction), an unsecured bond of indemnity in form and amount reasonably
satisfactory to the Company. Such substitute Warrant certificate shall also
comply with such other reasonable regulations as the Company may prescribe.
Section 5. Reservation of Common Shares. There has been reserved, and
the Company shall at all times keep reserved and available so long as any
Warrants remain outstanding, out of its authorized share capital, such number of
Shares as shall be subject to purchase under all outstanding Warrants. Every
transfer agent for the Common Shares and other securities of the Company
issuable upon the exercise of Warrants will be irrevocably authorized and
directed at all times to reserve such number of authorized Common Shares and
other securities as shall be requisite for such purposes. The Company will keep
a copy of this Agreement on file with every transfer agent for the Common
Shares. The Company will supply every such transfer agent with duly executed
stock and other certificates, as appropriate, for such
7
<PAGE>
purpose and will provide or otherwise make available any cash which may be
payable as provided in Section 7 hereof.
Section 6. Adjustment of Number and Kind of Securities. The number and
kind of securities purchasable upon the exercise of the Warrants and the Warrant
Price shall be subject to adjustment from time to time upon the happening of
certain events, as follows:
Section 6.1. Anti-Dilution Provisions And Other Adjustments. In order to
prevent dilution of the rights granted hereunder, the Warrant Price shall be
subject to adjustment from time to time in accordance with this Section 6. Upon
each adjustment of the Warrant Price pursuant to this Section 6, the
Warrantholder shall thereafter be entitled to acquire upon exercise, at the
Warrant Price resulting from such adjustment, the number of Shares obtainable by
multiplying the Warrant Price in effect immediately prior to such adjustment by
the number of Shares acquirable immediately prior to such adjustment and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
(a) Adjustment for Issue or Sale of Common Shares at Less than
Specified Prices. Except as provided in Sections 6.3 or 6.5 below, if and
whenever on or after the date of issuance hereof the Company shall issue or
sell, or shall in accordance with subparagraphs 6.1(a)(1) to (8), inclusive, be
deemed to have issued or sold (such issuance or sale, whether actual or deemed,
a "Triggering Transaction") any Common Shares for a consideration per share less
than
(I) (if the Common Shares are not traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market)
U.S. $1.35 then forthwith upon such issue or sale the Warrant Price
shall, subject to subparagraphs (1) to (8) of this Section 6.1(a), be
reduced to the Warrant Price (calculated to the nearest tenth of a cent)
determined by dividing: (i) an amount equal to the sum of (x) the
product derived by multiplying the Number of Common Shares Deemed
Outstanding immediately prior to such Triggering Transaction by the
Warrant Price then in effect, plus (y) the consideration, if any,
received by the Company upon consummation of such Triggering
Transaction, by (ii) an amount equal to the sum of (x) the Number of
Common Shares Deemed Outstanding immediately prior to such Triggering
Transaction plus (y) the number of shares of Common Stock issued (or
deemed to be issued in accordance with subparagraphs 6.1(a)(1) to (8))
in connection with the Triggering Transaction; or
(II) (if the Common Shares are traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market) the
average Market Price for the ten trading days immediately preceding such
issuance or sale, then forthwith upon such Triggering Transaction, the
Warrant Price shall, subject to subparagraphs (1) to (8) of this Section
6.1(a), be reduced to the Warrant Price (calculated to the nearest tenth
of a cent) determined by multiplying the Warrant Price in effect
immediately prior to the time of such Triggering Transaction by a
fraction, the numerator of which shall be the
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<PAGE>
sum of (x) the Number of Common Shares Deemed Outstanding immediately
prior to such Triggering Transaction and (y) the number of Common Shares
which the aggregate consideration received by the Company upon such
Triggering Transaction would purchase at the average Market Price for
the ten trading days immediately preceding such Triggering Transaction,
and the denominator of which shall be the Number of Common Shares Deemed
Outstanding immediately after such Triggering Transaction.
For purposes of this Section 6, the term "Number of Common Shares
Deemed Outstanding" at any given time shall mean the sum of (i) the number of
Common Shares outstanding at such time, and (ii) the number of Common Shares
deemed to be outstanding under subparagraphs 6.1(a)(1) to (8), inclusive, at
such time.
For purposes of determining the adjusted Warrant Price under this
Section 6.1(a), the following subsections (1) to (8), inclusive, shall be
applicable:
(1) In case the Company at any time shall in any manner
grant (whether directly or by assumption in an amalgamation or
otherwise) any rights to subscribe for or to purchase, or any
options for the purchase of, Common Shares or any stock or other
securities convertible into or exchangeable for Common Shares
(such rights or options being herein called "Options" and such
convertible or exchangeable stock or securities being herein
called "Convertible Securities"), whether or not such Options or
the right to convert or exchange any such Convertible Securities
are immediately exercisable, and the price per share for which
the Common Shares are issuable upon exercise, conversion or
exchange (determined by dividing (x) the total amount, if any,
received or receivable by the Company as consideration for the
granting of such Options, plus the minimum aggregate amount of
additional consideration payable to the Company upon the exercise
of all such Options, plus, in the case of such Options which
relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable upon the issue or sale
of such Convertible Securities and upon the conversion or
exchange thereof, by (y) the total maximum number of Common
Shares issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities) shall be
less than the average Market Price in effect for the ten trading
days immediately prior to the time of the granting of such Option
(if the Common Shares are traded on The New York Stock Exchange,
The American Stock Exchange or The National Nasdaq Market) or
U.S. $1.35 (if the Common Shares are not traded on The New York
Stock Exchange, The American Stock Exchange, or the Nasdaq
National Market) then the total maximum amount of Common Shares
issuable upon the exercise of such Options, or, in the case of
Options for Convertible Securities, upon the conversion or
exchange of such Convertible Securities, shall (as of the date of
granting of such Options) be deemed to be outstanding and to have
been issued and sold by the Company for such price per share. No
adjustment of the Warrant Price shall be
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<PAGE>
made upon the actual issue of such Common Shares or such
Convertible Securities upon the exercise of such Options, except
as otherwise provided in subparagraph (3) below.
(2) In case the Company at any time shall in any manner
issue (whether directly or by assumption in an amalgamation or
otherwise) or sell any Convertible Securities, whether or not the
rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which Common Shares are
issuable upon such conversion or exchange (determined by dividing
(x) the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion
or exchange thereof, by (y) the total maximum number of Common
Shares issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the average Market
Price in effect for the ten trading days immediately prior to the
time of such issue or sale (if the Common Shares are traded on
The New York Stock Exchange, The American Stock Exchange, or The
Nasdaq National Market) or U.S. $1.35 (if the Common Shares are
not traded on The New York Stock Exchange, The American Stock
Exchange, or The Nasdaq National Market), then the total maximum
number of Common Shares issuable upon conversion or exchange of
all such Convertible Securities shall (as of the date of the
issue or sale of such Convertible Securities) be deemed to be
outstanding and to have been issued and sold by the Company for
such price per share. No adjustment of the Warrant Price shall be
made upon the actual issue of such Common Shares upon exercise of
the rights to exchange or convert under such Convertible
Securities, except as otherwise provided in subparagraph (3)
below.
(3) If the purchase price provided for in any Options
referred to in subparagraph (1), the additional consideration, if
any, payable upon the conversion or exchange of any Convertible
Securities referred to in subparagraphs (1) or (2), or the rate
at which any Convertible Securities referred to in subparagraph
(1) or (2) are convertible into or exchangeable for Common Shares
shall change at any time (other than under or by reason of
provisions designed to protect against dilution of the type set
forth in Section 6.1(a) or (b)), the Warrant Price in effect at
the time of such change shall forthwith be readjusted to the
Warrant Price which would have been in effect at such time had
such Options or Convertible Securities still outstanding provided
for such changed purchase price, additional consideration or
conversion rate, as the case may be, at the time initially
granted, issued or sold. If the purchase price provided for in
any Option referred to in subparagraph (1) or the rate at which
any Convertible Securities referred to in subparagraphs (1) or
(2) are convertible into or exchangeable for Common Shares, shall
be reduced at any time under or by reason of provisions with
respect thereto designed to protect against dilution, then in
case of the delivery of Common
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<PAGE>
Shares upon the exercise of any such Option or upon conversion or
exchange of any such Convertible Security, the Warrant Price then
in effect hereunder shall forthwith be adjusted to such
respective amount as would have been obtained had such Option or
Convertible Security never been issued as to such Common Shares
and had adjustments been made upon the issuance of the Common
Shares delivered as aforesaid, but only if as a result of such
adjustment the Warrant Price then in effect hereunder is hereby
reduced.
(4) On the expiration of any Option or the termination of
any right to convert or exchange any Convertible Securities, the
Warrant Price then in effect hereunder shall forthwith be
increased to the Warrant Price which would have been in effect at
the time of such expiration or termination had such Option or
Convertible Securities, to the extent outstanding immediately
prior to such expiration or termination, never been issued.
(5) In case any Options shall be issued in connection
with the issue or sale of other securities of the Company,
together comprising one integral transaction in which no specific
consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued without
consideration.
(6) In case any Common Shares, Options or Convertible
Securities shall be issued or sold or deemed to have been issued
or sold for cash, the consideration received therefor shall be
deemed to be the amount received by the Company therefor. In case
any Common Shares, Options or Convertible Securities shall be
issued or sold for a consideration other than cash, the amount of
the consideration other than cash received by the Company shall
be the fair value of such consideration as determined in good
faith by the Board of Directors of the Company. In case any
Common Shares, Options or Convertible Securities shall be issued
in connection with any amalgamation in which the Company is an
amalgamating corporation, the amount of consideration therefor
shall be deemed to be the fair value of such portion of the net
assets and business of the other corporation which is a party to
the amalgamation as shall be attributed by the Board of Directors
of the Company in good faith to such Common Shares, Options or
Convertible Securities, as the case may be.
(7) In case the Company shall declare a dividend or make
any other distribution upon the stock of the Company payable in
Options or Convertible Securities, then in such case any Options
or Convertible Securities, as the case may be, issuable in
payment of such dividend or distribution shall be deemed to have
been issued or sold without consideration.
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(8) For purposes of this Section 6.1(a), in case the
Company shall take a record of the holders of its Common Shares
for the purpose of entitling them (x) to receive a dividend or
other distribution payable in Common Shares, Options or in
Convertible Securities, or (y) to subscribe for or purchase
Common Shares, Options or Convertible Securities, then such
record date shall be deemed to be the date of the issue or sale
of the Common Shares deemed to have been issued or sold upon the
declaration of such dividend or the making of such other
distribution or the date of the granting of such right or
subscription or purchase, as the case may be.
(b) In case the Company shall (i) pay a dividend in Common Shares
or make a distribution in Common Shares or (ii) subdivide its
outstanding Common Shares, the Warrant Price in effect immediately prior
to such subdivision or dividend shall be proportionately reduced by the
same ratio as the dividend or subdivision. In case the Company shall at
any time combine its outstanding Common Shares, the Warrant Price in
effect immediately prior to such combination shall be proportionately
increased by the same ratio as the combination. Any adjustment made
pursuant to this subsection 6.1(b) shall become effective immediately on
the effective date of such event retroactive to the record date, if any,
for such event.
(c) Whenever the number of Common Shares purchasable upon the
exercise of Warrants is adjusted as herein provided, the Company shall
cause to be promptly delivered to the Warrantholder notice of such
adjustment and a certificate of the chief financial officer of the
Company setting forth the number of Common Shares purchasable upon the
exercise of the Warrants after such adjustment, the Warrant Price that
will be effective after such adjustment, a brief statement of the facts
requiring such adjustment and the computation by which such adjustment
was made. If such notice relates to an adjustment resulting from an
event referred to in Section 8, such notice shall be included as part of
the notice required to be delivered and published under the provisions
of Section 8 hereof.
6.2. No Adjustment for Dividends. Except as provided in this Section 6,
no adjustment to the Warrants or any provision or condition thereof in respect
of any dividends or distributions out of earnings shall be made during the term
of the Warrants or upon the exercise of Warrants.
6.3. Dividends Not Paid Out of Earnings or Earned Surplus. In the event
the Company shall declare a dividend upon the Common Shares (other than a
dividend payable in Common Shares) payable otherwise than out of earnings or
earned surplus, determined in accordance with generally accepted accounting
principles, including the making of appropriate deductions for minority
interests, if any, in subsidiaries (herein referred to as "Liquidating
Dividends"), then, as soon as possible after the exercise of this Warrant, the
Company shall pay to the person exercising such Warrant an amount equal to the
aggregate value at the time of such exercise of all Liquidating Dividends
(including but not limited to the Common Shares which would have
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<PAGE>
been issued at the time of such earlier exercise and all other securities which
would have been issued with respect to such Common Shares by reason of stock
splits, stock dividends, amalgamations or reorganizations, or for any other
reason). For the purposes of this subsection 6.3, a dividend other than in cash
shall be considered payable out of earnings or earned surplus only to the extent
that such earnings or earned surplus are charged an amount equal to the fair
value of such dividend as determined in good faith by the Board of Directors of
the Company.
6.4. Reclassification, Amalgamation, etc. If any capital reorganization
or reclassification of the share capital of the Company, or amalgamation of the
Company with another corporation, or the sale of all or substantially all of its
assets to another corporation shall be effected in such a way that holders of
Common Shares shall be entitled to receive stock, securities, cash or other
property with respect to or in exchange for Common Shares, then, as a condition
of such reorganization, reclassification, amalgamation or sale, lawful and
adequate provision shall be made whereby the Warrantholder shall have the right
to acquire and receive upon exercise of this Warrant such shares of stock,
securities, cash or other property issuable or payable (as part of the
reorganization, reclassification, amalgamation or sale) with respect to or in
exchange for such number of outstanding Shares as would have been received upon
exercise of this Warrant at the Warrant Price then in effect. The Company will
not effect any such amalgamation or sale, unless prior to the consummation
thereof the amalgamated corporation or the corporation purchasing such assets
shall assume by written instrument mailed or delivered to the Warrantholder the
obligation to deliver to such holder such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such holder may be entitled to
purchase. If a purchase, tender or exchange offer is made to and accepted by the
holders of more than 50% of the outstanding Common Shares of the Company, the
Company shall not effect any amalgamation or sale with the person having made
such offer or with any Affiliate of such person, unless prior to the
consummation of such amalgamation or sale the Warrantholder shall have been
given a reasonable opportunity to then elect to receive upon the exercise of
this Warrant either the stock, securities or assets then issuable with respect
to the Common Shares of the Company or the stock, securities or assets, or the
equivalent, issued to previous holders of the Common Shares in accordance with
such offer. For purposes hereof the term "Affiliate" with respect to any given
person shall mean any person controlling, controlled by or under common control
with the given person. In the event of a merger described in Section
368(a)(2)(E) of the Internal Revenue Code of 1986 (or any successor provision),
in which the Company is the surviving corporation, the right to purchase Shares
upon exercise of the Warrants shall terminate on the date of such merger and
thereupon the Warrants shall become null and void, but only if the controlling
corporation (after such event) shall agree to substitute for the Warrants its
warrants entitling the Warrantholder to purchase the kind and amount of shares
and other securities and property which it would have been entitled to receive
had the Warrants been exercised immediately prior to such merger. Any such
agreements referred to in this subsection 6.3 shall provide for adjustments,
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 6, and shall contain substantially the same terms,
conditions and provisions as are contained herein immediately prior to such
event. The provisions of this subsection 6.4 shall similarly apply to successive
amalgamations, sales or conveyances.
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6.5. No Adjustment for Exercise of Certain Options, Warrants, Etc. The
provisions of this Section 6 shall not apply to any Common Shares issued,
issuable or deemed outstanding under subparagraphs 6.1(a)(1) to (8) inclusive:
(i) to any person pursuant to any stock option, stock purchase or similar plan
or arrangement for the benefit of employees, consultants or directors of the
Company or its subsidiaries in effect on the date hereof or hereafter adopted by
the Board of Directors of the Company, or (ii) pursuant to options, warrants and
conversion rights in existence on the date hereof, including the Convertible
Shares.
6.6. Grant, Issue or Sale of Options, Convertible Securities, or Rights.
If at any time or from time to time on or after the date of this Agreement, the
Company shall grant, issue or sell any Options, Convertible Securities or rights
to purchase property (the "Purchase Rights") pro rata to the record holders of
any class of share capital of the Company and such grants, issuances or sales do
not result in an adjustment of the Warrant Price under Section 6.1(a) hereof,
then the Warrantholder shall be entitled to acquire (within thirty (30) days
after the later to occur of the initial exercise date of such Purchase Rights or
receipt by the Warrantholder of the notice concerning Purchase Rights to which
the Warrantholder shall be entitled under Section 8) and upon the terms
applicable to such Purchase Rights either:
(a) the aggregate Purchase Rights which the Warrantholder could
have acquired if it had held the number of Shares acquirable upon
exercise of this Warrant immediately before the grant, issuance or sale
of such Purchase Rights; provided that if any Purchase Rights were
distributed to the Warrantholder of Common Shares without the payment of
additional consideration by such holders, corresponding Purchase Rights
shall be distributed to the Warrantholder as soon as possible after
exercise of this Warrant and it shall not be necessary for the
Warrantholder specifically to request delivery of such rights; or
(b) in the event that any such Purchase Rights shall have expired
or shall expire prior to the end of said thirty (30) day period, the
number of Shares or the amount of property which the Warrantholder could
have acquired upon such exercise at the time or times at which the
Company granted, issued or sold such expired Purchase Rights.
6.7. Nominal Value of Common Shares. Before taking any action which
would cause an adjustment effectively reducing the portion of the Warrant Price
allocable to each Share below the then nominal value per Share issuable upon
exercise of the Warrants, the Company will take any corporate action which may,
in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable Shares upon exercise of
the Warrants.
6.8. Independent Public Accountants. The Company may retain a firm of
independent public accountants of recognized national standing in the United
States (which may be any such firm regularly employed by the Company) to make
any computation required under this Section.
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<PAGE>
6.9. Statement on Warrant Certificates. Irrespective of any adjustments
in the number of securities issuable upon exercise of Warrants, Warrant
certificates theretofore or thereafter issued may continue to express the same
number of securities as are stated in the similar Warrant certificates initially
issuable pursuant to this Agreement. However, the Company may, at any time in
its reasonable discretion, make any change in the form of Warrant certificate
that it may deem appropriate and that does not affect the substance thereof; and
any Warrant certificate hereafter issued, whether upon registration of transfer
of, or in exchange or substitution for, an outstanding Warrant certificate, may
be in the form so changed.
6.10. Adjustment by Board of Directors. If any event occurs as to which,
in the opinion of the Board of Directors of the Company, the provisions of this
Section 6 are not strictly applicable or if strictly applicable would not fairly
protect the rights of the Warrantholder in accordance with the essential intent
and principles of such provisions, then the Board of Directors shall make an
adjustment in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such rights as aforesaid, but
in no event shall any adjustment have the effect of increasing the Warrant Price
as otherwise determined pursuant to any of the provisions of this Section 6
except in the case of a combination of shares of a type contemplated in Section
6.1(a) and then in no event to an amount larger than the Warrant Price as
adjusted pursuant to Section 6.1(a).
Section 7. Fractional Interests. The Company shall not issue fractional
Common Shares upon any exercise of any Warrants. If any fraction of a Common
Share would, except for the provisions of this Section 7, be issuable on the
exercise of any Warrants, the Company shall pay an amount in cash equal to the
Market Price (as defined in Section 2(b) hereof, except if the Common Shares are
not publicly traded, as determined in good faith by the Board of Directors of
the Company) multiplied by such fraction, provided, however, that no amount
shall be paid by the Company of less than U.S. $5.00.
Section 8. No Rights as Shareholder; Notices to Warrantholder. Nothing
contained in this Agreement or in the Warrants shall be construed as conferring
upon the Warrantholder any rights as a shareholder of the Company, including
(without limitation) the right to vote, receive dividends, consent or receive
notices as a shareholder in respect of any meeting of shareholders for the
election of directors of the Company or any other matter, except as provided
herein. If, however, at any time prior to the expiration of the Warrants and
prior to their exercise in full, any one or more of the following events shall
occur:
(a) any action which would require an adjustment pursuant to
Section 6.1 or 6.3; or
(b) the Company shall declare any cash dividend upon its Common
Shares; or
15
<PAGE>
(c) the Company shall declare any dividend upon its Common Shares
payable in stock or make any special dividend or other distribution to
the holders of its Common Shares; or
(d) the Company shall offer Purchase Rights to the holders of its
Common Shares; or
(e) there shall be any capital reorganization or reclassification
of the share capital of the Company, including any subdivision or
combination of its outstanding Common Shares, or amalgamation of the
Company with, or sale of all or substantially all of its assets to,
another corporation; or
(f) there shall be a dissolution, liquidation or winding up of
the Company (other than in connection with an amalgamation or sale of
its property, assets and business as an entirety or substantially as an
entirety);
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section 10 hereof, at least 20 days prior to (i)
the date fixed as a record date or the date of closing the transfer books for
the determination of the shareholders entitled to any relevant dividend,
distribution, Purchase Rights or other rights or for the determination of
shareholders entitled to vote on such proposed reorganization, reclassification,
amalgamation, sale, dissolution, liquidation or winding up and (ii) the date
when any such reorganization, reclassification, amalgamation, sale, dissolution,
liquidation or winding up shall take place. Such notice in accordance with the
foregoing clause (i) shall also specify, in the case of any such dividend,
distribution or Purchase Rights, the date on which the holders of Common Shares
shall be entitled thereto, and such notice in accordance with the foregoing
clause (ii) shall also specify the date on which the holders of Common Shares
shall be entitled to exchange their Common Shares for securities or other
property deliverable upon such reorganization, reclassification, amalgamation,
sale, dissolution, liquidation or winding up, as the case may be.
Section 9. No Dilution or Impairment. The Company will not, by amendment
of its charter or through reorganization, amalgamation, dissolution, sale of
assets or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
Warrantholder against dilution or other impairment. Without limiting the
generality of the foregoing, the Company will not increase the par value of any
shares receivable upon the exercise of this Warrant above the amount payable
therefor upon such exercise, and at all times will take all such action as may
be necessary or appropriate in order that the Company may validly and legally
issue fully paid and non-assessable shares upon the exercise of this Warrant.
Section 10. Notices. Any notice hereunder shall be in writing and shall
be effective when delivered in person or by facsimile transmission, or seven
business days after being mailed
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<PAGE>
by certified or registered mail, postage prepaid, return receipt requested, to
the appropriate party at the following addresses:
If to the Warrantholder:
Warburg Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017-3147
Facsimile: 212-878-9351
Attention: Mr. Joel Ackerman
with a copy to:
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
Facsimile: 212-821-8111
Attention: Steven J. Gartner, Esq.
If to the Company:
HealthCare Capital Corp.
111 SW Fifth Avenue, Suite 2390
Portland, Oregon 97204
Facsimile: 503-225-9309
Attention: Mr. Brandon M. Dawson
with copy to:
Carter, Ledyard & Milburn
2 Wall Street
New York, New York 10005
Facsimile: 212-732-3232
Attention: John K. Whelan, Esq.
or, in each case, to such other address as the parties may hereinafter
designate by like notice.
Section 11. Successors. All the covenants and provisions of this
Agreement for the benefit of the Warrantholder or the Company shall bind and
inure to the benefit of their successors and, in the case of the Warrantholder,
permitted assigns. This Agreement shall not be assignable by the Company.
Section 12. Amalgamation of the Company. The Company shall not
amalgamate with any other corporation or sell all or substantially all of its
property to another corporation, unless the provisions of Section 6.4 are
complied with.
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<PAGE>
Section 13. Remedies. The Company stipulates that the remedies at law of
the Warrantholder in the event of any default by the Company in the performance
of or compliance with any of the terms of this Warrant are not and will not be
adequate, and that the same may be specifically enforced.
Section 14. Subdivision of Rights. The Warrants (as well as any new
warrants issued pursuant to the provisions of this Section) are exchangeable,
upon the surrender hereof by the Warrantholder at the principal office of the
Company for any number of new warrants of like tenor and date representing in
the aggregate the right to subscribe for and purchase the number of Shares which
may be subscribed for and purchased hereunder.
Section 15. Applicable Law; Submission to Jurisdiction. This Agreement
shall be deemed to be a contract made under the laws of the State of New York
and for all purposes shall be construed in accordance with the internal laws of
said State (without reference to its rules as to conflicts of laws). The Company
hereby agrees to the non-exclusive jurisdiction of the courts of the State of
New York or the federal courts sitting in the City of New York in connection
with any action arising out of this Agreement.
Section 16. Benefits of this Agreement. Except as provided in Section
1.2 and Section 11, nothing in this Agreement shall be construed to give to any
person or corporation other than the Company and the Warrantholder any legal or
equitable right, remedy or claim under this Agreement. Except as provided in
Section 1.2 and Section 11, this Agreement shall be for the sole and exclusive
benefit of the Company and the Warrantholder.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the date and year first above written.
HEALTHCARE CAPITAL CORP.
By: /s/ Brandon M. Dawson
Print Name: Brandon M. Dawson
Title: President and Chief Executive
Officer
WARBURG PINCUS VENTURES, L.P.
By: Warburg, Pincus & Co.,
General Partner
By: /s/ Patrick T. Hackett
Print Name: Patrick T. Hackett
Title: Managing Director
18
<PAGE>
EXHIBIT 1
[FORM OF WARRANT CERTIFICATE]
"THE WARRANTS REPRESENTED BY THIS CERTIFICATE, AND THE COMMON
SHARES ISSUABLE UPON EXERCISE OF SUCH WARRANTS, HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 OR THE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY PROVINCE
OF CANADA. SUCH WARRANTS MAY NOT BE SOLD, OFFERED FOR SALE,
ASSIGNED, EXCHANGED, PLEDGED OR HYPOTHECATED OR OTHERWISE
TRANSFERRED, IN ANY MANNER, AND SUCH COMMON SHARES MAY NOT BE
OFFERED FOR SALE, SOLD, PLEDGED OR HYPOTHECATED OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL,
REASONABLY SATISFACTORY TO THE COMPANY, THAT AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE." THE WARRANTS REPRESENTED BY THIS
CERTIFICATE MAY NOT BE TRADED IN CANADA EXCEPT AS PERMITTED BY
RELEVANT CANADIAN SECURITIES LAWS.
WARRANT CERTIFICATE NO. -----
HEALTHCARE CAPITAL CORP.
(ORGANIZED UNDER THE LAWS
OF ALBERTA)
DECEMBER --, 1997
WARRANTS TO PURCHASE COMMON SHARES
This certifies that, for value received, Warburg Pincus Ventures, L.P.
(the "Warrantholder") is the registered owner of --- warrants (the "Warrants")
each to purchase from HealthCare Capital Corp. (the "Company"), at any time
prior to 5:00 p.m., Pacific Time, on January --, 2001, one common share of the
Company, without par value (a "Common Share") at a purchase price per Common
Share of U.S. $2.40 (the "Warrant Price"). The Warrants are subject to, and the
Warrantholder, by acceptance of this certificate, consents to, all the terms and
provisions of, the Warrant Agreement dated as of January 16, 1998, between the
Warrantholder and the Company, pursuant to which the Warrants were issued (the
"Warrant Agreement"). Any capitalized terms used herein and not defined herein
shall have the meanings assigned to such terms in the Warrant Agreement. The
Termination Date may be extended for a further period of two years, as provided
in Section 2(a) of the Warrant Agreement.
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<PAGE>
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form herein duly
executed (with a signature guarantee as provided therein), and simultaneous
payment of the Warrant Price for each Warrant exercised, at the principal office
of the Company. Payment of such price shall be made at the option of the
Warrantholder in cash by certified or official bank check or by wire transfer.
Subject to the terms and conditions set forth in Section 2 of the Warrant
Agreement, the Warrantholder may also receive Common Shares without any cash
payment by presentation of this Warrant Certificate with the Cashless Exercise
Form herein duly executed (with a signature guarantee as provided therein) at
the principal office of the Company.
Upon any partial exercise of the Warrants evidenced hereby, there shall
be signed and issued to the Warrantholder a new Warrant Certificate in respect
of the Common Shares as to which the Warrants evidenced hereby shall not have
been exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Common Shares as here evidenced by the
Warrant or Warrants exchanged. No fractional Common Shares will be issued upon
the exercise of rights to purchase hereunder, but the Company shall pay the cash
value of any fraction otherwise issuable upon the exercise of one or more
Warrants, as provided in the Warrant Agreement.
The Warrants evidenced hereby are transferable only in accordance with
the terms and conditions set forth in Section 1.2 of the Warrant Agreement.
This Warrant Certificate does not entitle the Warrantholder to any of
the rights of a shareholder of the Company.
20
<PAGE>
EXHIBIT 2
PURCHASE FORM
HealthCare Capital Corp.
111 SW Fifth Avenue, Suite 2390
Portland, Oregon 97204
Pursuant to Section 2(a) of the Warrant Agreement, the undersigned
hereby irrevocably elects to exercise the right of purchase represented by this
Warrant Certificate for, and to purchase thereunder, ---------- common shares of
the Company (the "Common Shares"), and requests that certificates for such
Common Shares be issued in the name of:
Warburg Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017-3147
Taxpayer Identification Number: ----------------
If this Warrant Certificate is hereby being exercised with respect to fewer than
all the Common Shares specified herein, please issue a new Warrant Certificate
for the unexercised balance of the Warrants, registered in the name of the
undersigned Warrantholder as below indicated and delivered to the address stated
below.
Dated: -----------------------
Name of Warrantholder:
Warburg Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017-3147
By: Warburg, Pincus & Co.
General Partner
By:--------------------------------
Print Name:
Title:
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<PAGE>
EXHIBIT 3
CASHLESS EXERCISE FORM
HealthCare Capital Corp.
111 SW Fifth Avenue, Suite 2390
Portland, Oregon 97204
Pursuant to Section 2(b) of the Warrant Agreement, the undersigned
hereby irrevocably elects to exercise the right represented by this Warrant
Certificate for, and to receive thereunder without any cash payment, ----------
common shares of the Company (the "Common Shares") as provided for therein, and
requests that certificates for such Common Shares be issued in the name of:
Warburg Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017-3147
Taxpayer Identification Number:
If this Warrant Certificate is hereby being exercised with respect to fewer than
all the Common Shares specified herein, please issue a new Warrant Certificate
for the unexercised balance of the Warrants, registered in the name of the
undersigned Warrantholder as below indicated and delivered to the address stated
below.
Dated: -----------------------
Name of Warrantholder :
Warburg Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017-3147
By: Warburg, Pincus & Co.
General Partner
By:--------------------------------
Print Name:
Title:
22
HEALTHCARE CAPITAL CORP.
SECOND AMENDED AND RESTATED
STOCK AWARD PLAN
(as amended December 18, 1997)
ARTICLE 1
ESTABLISHMENT AND PURPOSE
1.1 Establishment; Amendment and Restatement. HealthCare
Capital Corp. ("Corporation") established the HealthCare Capital Corp. Stock
Award Plan (the "Plan"), effective as of December 10, 1996, subject to
shareholder approval as provided in Article 16 of the Plan. The Plan was
previously amended and restated effective February 5, 1997, was further amended
and restated effective October 15, 1997, and was further amended to increase the
number of Shares issuable hereunder to 9,000,000 Shares, subject to shareholder
approval.
1.2 Purpose. The purpose of the Plan is to promote and advance
the interests of Corporation and its shareholders by enabling Corporation and
its subsidiaries to attract, retain, and reward key employees, directors, and
outside consultants. It is also intended to strengthen the mutuality of
interests between such employees, directors, and outside consultants and
Corporation's shareholders. The Plan is designed to meet this intent by offering
stock options and other equity-based incentive awards, thereby providing a
proprietary interest in pursuing the long-term growth, profitability, and
financial success of Corporation.
ARTICLE 2
DEFINITIONS
2.1 Defined Terms. For purposes of the Plan, the following
terms shall have the meanings set forth below:
"Award" means an award or grant made to a Participant of
Options, Stock Appreciation Rights, Restricted Units, Performance Awards, or
Other Stock-Based Awards pursuant to the Plan.
"Award Agreement" means an agreement as described in Section
6.4 evidencing an Award granted under the Plan.
"Board" means the Board of Directors of Corporation.
"Code" means the Internal Revenue Code of 1986, as amended and
in effect from time to time, or any successor thereto, together with rules,
regulations, and interpretations promulgated thereunder. Where the context so
requires, any reference to a particular Code section shall be construed to refer
to the successor provision to such Code section.
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<PAGE>
"Consultant" means any consultant or adviser to Corporation or
a Subsidiary who is not an employee of Corporation or a Subsidiary, but does not
include any person involved in a capital-raising or investor relations activity
on behalf of the Corporation.
"Continuing Restriction" means a Restriction contained in
Sections 15.4, 15.6, and 15.7 of the Plan and any other Restrictions expressly
designated by the Board in an Award Agreement as a Continuing Restriction.
"Corporation" means HealthCare Capital Corp., an Alberta,
Canada, corporation, or any successor corporation.
"Disability" means the condition of being "disabled" within
the meaning of Section 22(e)(3) of the Code. However, the Board may change the
foregoing definition of "Disability" or may adopt a different definition for
purposes of specific Awards.
"Dollars" or "$" means United States dollars.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended and in effect from time to time, or any successor statute. Where the
context so requires, any reference to a particular section of the Exchange Act,
or to any rule promulgated under the Exchange Act, shall be construed to refer
to successor provisions to such section or rule.
"Fair Market Value" of a Share on a particular day means,
without regard to any Restrictions, the mean between the reported high and low
sale prices, or, if there is no sale on such day, the mean between the reported
bid and asked prices, for that day, of Shares on that day or, if that day is not
a trading day, the last prior trading day, on the principal securities exchange
or automated securities interdealer quotation system on which such Shares shall
have been traded.
"Incentive Stock Option" or "ISO" means any Option granted
pursuant to the Plan that is intended to be and is specifically designated in
its Award Agreement as an "incentive stock option" within the meaning of Section
422 of the Code.
"Nonemployee Director" means a member of the Board who is not
an employee of Corporation or a Subsidiary.
"Nonqualified Option" or "NQO" means any Option granted
pursuant to the Plan that is not an Incentive Stock Option.
"Option" means an ISO or an NQO.
"Other Stock-Based Award" means an Award as described in
Section 11.1.
"Participant" means an employee or Consultant of Corporation
or a Subsidiary or a Nonemployee Director who is granted an Award under the
Plan.
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<PAGE>
"Performance Award" means an Award granted pursuant to the
provisions of Article 10 of the Plan, the Vesting of which is contingent on
attaining one or more Performance Goals.
"Performance Cycle" means a designated performance period
pursuant to the provisions of Section 10.3 of the Plan.
"Performance Goal" means a designated performance objective
pursuant to the provisions of Section 10.4 of the Plan.
"Plan" means this HealthCare Capital Corp. Stock Award Plan,
as amended and restated as set forth herein and as it may be hereafter amended
from time to time.
"Reporting Person" means a Participant who is subject to the
reporting requirements of Section 16(a) of the Exchange Act.
"Restricted Unit" means an Award of stock units representing
Shares described in Section 9.1 of the Plan.
"Restriction" means a provision in the Plan or in an Award
Agreement which limits the exercisability or transferability, or which governs
the forfeiture, of an Award or the Shares, cash, or other property payable
pursuant to an Award.
"Retirement" means:
(a) For Participants who are employees, retirement from active
employment with Corporation and its Subsidiaries at or after age 65, or
such earlier retirement date as approved by the Board for purposes of
the Plan;
(b) For Participants who are Nonemployee Directors,
termination of membership on the Board after attaining age 65, or such
earlier retirement date as approved by the Board for purposes of the
Plan; and
(c) For individual Participants who are Consultants,
termination of service as a Consultant after attaining a retirement age
specified by the Board for purposes of an Award to such Consultant.
However, the Board may change the foregoing definition of "Retirement" or may
adopt a different definition for purposes of specific Awards.
"Shares" means the Common Shares without nominal or par value
of Corporation or any security of Corporation issued in substitution, exchange,
or in lieu of such securities.
"Stock Appreciation Right" or "SAR" means an Award described
in Article 8 of the Plan.
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<PAGE>
"Stock Option Plan" means the Corporation's incentive stock
option plan adopted effective November 18, 1993.
"Subsidiary" means a "subsidiary corporation" of Corporation
within the meaning of Section 425 of the Code, namely any corporation in which
Corporation directly or indirectly controls 50 percent or more of the total
combined voting power of all classes of stock having voting power.
"Vest" or "Vested" means:
(a) In the case of an Award that requires exercise, to be or
to become immediately and fully exercisable and free of all
Restrictions (other than Continuing Restrictions);
(b) In the case of an Award that is subject to forfeiture, to
be or to become nonforfeitable, freely transferable, and free of all
Restrictions (other than Continuing Restrictions);
(c) In the case of an Award that is required to be earned by
attaining specified Performance Goals, to be or to become earned and
nonforfeitable, freely transferable, and free of all Restrictions
(other than Continuing Restrictions); or
(d) In the case of any other Award as to which payment is not
dependent solely upon the exercise of a right, election, or option, to
be or to become immediately payable and free of all Restrictions
(except Continuing Restrictions).
2.2 Gender and Number. Except where otherwise indicated by the
context, any masculine or feminine terminology used in the Plan shall also
include the opposite gender; and the definition of any term in Section 2.1 in
the singular shall also include the plural, and vice versa.
ARTICLE 3
ADMINISTRATION
3.1 General. Except as provided in Section 3.2, the Plan shall
be administered by the Board.
3.2 Committee. The Board may delegate administration of the
Plan to a committee of two or more Nonemployee Directors. In the event the Board
delegates administration to such a committee, the committee will have all the
authority of the Board with respect to administration of the Plan, other than
the authority to grant Awards to Nonemployee Directors, which authority shall
reside exclusively with the Board, and subject to any additional limits on such
delegation imposed by the Board.
3.3 Authority of the Board. The Board shall have full power
and authority to administer the Plan in its sole discretion, including the
authority to:
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(a) Construe and interpret the Plan and any Award Agreement;
(b) Promulgate, amend, and rescind rules and procedures
relating to the implementation of the Plan;
(c) With respect to Participants:
(i) Select the employees, Nonemployee Directors, and
Consultants who will be granted Awards;
(ii) Determine the number and types of Awards to be
granted to each Participant;
(iii) Determine the number of Shares, or Share
equivalents, to be subject to each Award;
(iv) Determine the option price, purchase price, base
price, or similar feature for any Award; and
(v) Determine all the terms and conditions of all
Award Agreements, consistent with the requirements of the Plan
and subject to approval, to the extent required, by any
regulatory authority having jurisdiction over Awards granted
under the Plan.
Decisions of the Board, or any delegate as permitted by the Plan, will be final,
conclusive, and binding on all Participants.
3.4 Liability of Board Members. No member of the Board will be
liable for any action or determination made in good faith with respect to the
Plan, any Award, or any Participant.
3.5 Costs of Plan. The costs and expenses of administering the
Plan will be borne by Corporation.
ARTICLE 4
DURATION OF THE PLAN AND SHARES SUBJECT TO THE PLAN
4.1 Duration of the Plan. The HealthCare Capital Corp. Stock
Award Plan initially became effective December 10, 1996, subject to approval by
Corporation's shareholders as provided in Article 16 of the Plan. The Plan will
remain in effect until Awards have been granted covering all the available
Shares or the Plan is otherwise terminated by the Board. Termination of the Plan
will not affect outstanding Awards.
4.2 Shares Subject to the Plan.
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4.2.1 General. The shares which may be made subject to Awards
under the Plan are Shares, which may be either authorized and unissued Shares or
reacquired Shares. No fractional Shares may be issued under the Plan.
4.2.2 Maximum Number of Shares. The maximum number of Shares
for which Awards may be granted under the Plan is 9,000,000 Shares, subject to
adjustment pursuant to Article 13 of the Plan; provided that the maximum number
of Shares issuable under the Plan may not exceed the number permitted by the
regulations, guidelines or policies of any regulatory authority having
jurisdiction over the issuance of Shares pursuant to the Plan.
4.2.3 Availability of Shares for Future Awards. If an Award
under the Plan is canceled or expires for any reason prior to having been fully
Vested or exercised by a Participant or is settled in cash in lieu of Shares or
is exchanged for other Awards, all Shares covered by such Awards will be made
available for future Awards under the Plan. Furthermore, any Shares covered by a
Stock Appreciation Right which are not issued upon exercise will become
available for future Awards.
ARTICLE 5
ELIGIBILITY
Officers and other key employees of Corporation and its
Subsidiaries (who may also be directors of Corporation or a Subsidiary),
Consultants, and Nonemployee Directors who, in the Board's judgment, are or will
be contributors to the long-term success of Corporation shall be eligible to
receive Awards under the Plan.
ARTICLE 6
AWARDS
6.1 Types of Awards. The types of Awards that may be granted
under the Plan are:
(a) Options governed by Article 7 of the Plan;
(b) Stock Appreciation Rights governed by Article 8 of the
Plan;
(c) Restricted Units governed by Article 9 of the Plan;
(d) Performance Awards governed by Article 10 of the Plan; and
(e) Other Stock-Based Awards or combination Awards governed by
Article 11 of the Plan.
In the discretion of the Board, any Award may be granted alone, in addition to,
or in tandem with other Awards under the Plan.
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6.2 General. Subject to the limitations of the Plan, the Board
may cause Corporation to grant Awards to such Participants, at such times, of
such types, in such amounts, for such periods, with such option prices, purchase
prices, or base prices, and subject to such terms, conditions, limitations, and
restrictions as the Board, in its discretion, deems appropriate; provided that
all Awards granted under the Plan are subject to approval by any regulatory
authority having jurisdiction over such grants. Awards may be granted as
additional compensation to a Participant or in lieu of other compensation to
such Participant. A Participant may receive more than one Award and more than
one type of Award under the Plan, subject to approval, to the extent required,
by any regulatory authority having jurisdiction over Awards granted under the
Plan.
6.3 Nonuniform Determinations. The Board's determinations
under the Plan or under one or more Award Agreements, including, without
limitation, the selection of Participants to receive Awards, the type, form,
amount, and timing of Awards, the terms of specific Award Agreements, and
elections and determinations made by the Board with respect to exercise or
payments of Awards, need not be uniform and may be made by the Board selectively
among Participants and Awards, whether or not Participants are similarly
situated.
6.4 Award Agreements. Each Award will be evidenced by a
written Award Agreement between Corporation and the Participant. Award
Agreements, or the form thereof, must be approved by the Board and may, subject
to the provisions of the Plan, contain any provision approved by the Board,
subject to approval, to the extent required, by any regulatory authority having
jurisdiction over Awards granted under the Plan.
6.5 Provisions Governing All Awards. All Awards will be
subject to the following provisions:
(a) Alternative Awards. If any Awards are designated in their
Award Agreements as alternative to each other, the exercise of all or
part of one Award automatically will cause an immediate equal (or pro
rata) corresponding termination of the other alternative Award or
Awards.
(b) Rights as Shareholders. No Participant will have any
rights of a shareholder with respect to Shares subject to an Award
until such Shares are issued in the name of the Participant.
(c) Employment Rights. Neither the adoption of the Plan nor
the granting of any Award will confer on any person the right to
continued employment with Corporation or any Subsidiary or the right to
remain as a director of or a consultant to Corporation or any
Subsidiary, as the case may be, and will not interfere in any way with
the right of Corporation or a Subsidiary to terminate such person's
employment or to remove such person as a Consultant or as a director at
any time for any reason or for no reason, with or without cause.
(d) Termination Of Employment. The terms and conditions under
which an Award may be exercised, if at all, after a Participant's
termination of employment or
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service as a Nonemployee Director or Consultant will be determined by
the Board and specified in the applicable Award Agreement, subject to
approval, to the extent required, by any regulatory authority having
jurisdiction over Awards granted under the Plan.
(e) Change in Control. The Board, in its discretion, may
provide in any Award Agreement that in the event of a change in control
of Corporation (as the Board may define such term in the Award
Agreement), as of the date of such change in control:
(i) All, or a specified portion of, Awards requiring
exercise will become fully and immediately exercisable,
notwithstanding any other limitations on exercise;
(ii) All, or a specified portion of, Awards subject
to Restrictions will become fully Vested; and
(iii) All, or a specified portion of, Awards subject
to Performance Goals will be deemed to have been fully earned.
The Board, in its discretion, may include change in control provisions
in some Award Agreements and not in others, may include different
change in control provisions in different Award Agreements, and may
include change in control provisions for some Awards or some
Participants and not for others.
(f) Reporting Persons. Notwithstanding anything in the Plan to
the contrary, the Board, in its sole discretion, may bifurcate the Plan
so as to restrict, limit, or condition the use of any provision of the
Plan to Participants who are Reporting Persons without so restricting,
limiting or conditioning the Plan with respect to other Participants.
(g) Service Periods. At the time of granting Awards, the Board
may specify, by resolution or in the Award Agreement, the period or
periods of service performed or to be performed by the Participant in
connection with the grant of the Award.
(h) Nontransferability. Each Award shall not be transferable
or assignable otherwise than by will or the laws of descent and
distribution and shall be exercisable (if exercise is required) during
the lifetime of the Participant, only by the Participant or, in the
event the Participant becomes legally incompetent, by the Participant's
guardian or legal representative.
ARTICLE 7
OPTIONS
7.1 Types of Options. Options granted under the Plan may be in
the form of Incentive Stock Options or Nonqualified Options. The grant of each
Option and the Award Agreement governing each Option will identify the Option as
an ISO or an NQO. In the event the Code is amended to provide for tax-favored
forms of stock options other than or in addition
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to Incentive Stock Options, the Board may grant Options under the Plan meeting
the requirements of such forms of options.
7.2 General. Options will be subject to the terms and
conditions set forth in Article 6 of the Plan and this Article 7 and may contain
such additional terms and conditions, not inconsistent with the express
provisions of the Plan, as the Board deems desirable, subject to approval by any
regulatory authority having jurisdiction over Awards granted under the Plan.
7.3 Option Price. Each Award Agreement for Options will state
the option exercise price per Share of Common Stock purchasable under the
Option, which will not be less than:
(a) 75 percent of the Fair Market Value of a Share on the date
of grant for all Nonqualified Options; or
(b) 100 percent of the Fair Market Value of a Share on the
date of grant for all Incentive Stock Options;
provided that at no time shall the option exercise price of an Option at the
date of grant be greater or less than that permitted under the regulations,
guidelines or policies of any regulatory authority having jurisdiction over
Awards granted under the Plan.
7.4 Option Term. The Award Agreement for each Option will
specify the term during which the Option may be exercised, as determined by the
Board, subject to approval by any regulatory authority having jurisdiction over
Awards granted under the Plan.
7.5 Time of Exercise. The Award Agreement for each Option will
specify, as determined by the Board:
(a) The time or times when the Option will become exercisable
and whether the Option will become exercisable in full or in graduated
amounts over a period specified in the Award Agreement;
(b) Such other terms, conditions, and restrictions as to when
the Option may be exercised as are determined by the Board; and
(c) The extent, if any, to which the Option will remain
exercisable after the Participant ceases to be an employee, Consultant
or Nonemployee Director of Corporation or a Subsidiary;
in each case, subject to approval by any regulatory authority having
jurisdiction over Awards granted under the Plan. An Award Agreement for an
Option may, in the discretion of the Board, provide whether, and to what extent,
the Option will become immediately and fully exercisable (i) in the event of the
death, Disability, or Retirement of the Participant, or (ii) upon the occurrence
of a change in control of Corporation.
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7.6 Method of Exercise. The Award Agreement for each Option
will specify the method or methods of payment acceptable upon exercise of an
Option. An Award Agreement may provide that the option price is payable in full
in cash or, at the discretion of the Board, by delivery (in a form approved by
the Board) of an irrevocable direction to a securities broker acceptable to the
Board (i) to sell Shares subject to the Option and to deliver all or a part of
the sales proceeds to Corporation in payment of all or a part of the option
price and withholding taxes due, or (ii) to pledge Shares subject to the Option
to the broker as security for a loan and to deliver all or a part of the loan
proceeds to Corporation in payment of all or a part of the option price and
withholding taxes due.
7.7 Special Rules for Incentive Stock Options. In the case of
an Option designated as an Incentive Stock Option, the terms of the Option and
the Award Agreement shall be in conformance with the statutory and regulatory
requirements specified in Section 422 of the Code, as in effect on the date such
ISO is granted. ISOs may not be granted under the Plan after December 9, 2006,
unless the ten-year limitation of Section 422(b)(2) of the Code is removed or
extended.
ARTICLE 8
STOCK APPRECIATION RIGHTS
8.1 General. Stock Appreciation Rights will be subject to the
terms and conditions set forth in Article 6 of the Plan and this Article 8 and
may contain such additional terms and conditions, not inconsistent with the
express terms of the Plan, as the Board deems desirable, subject to approval, to
the extent required, by any regulatory authority having jurisdiction over Awards
granted under the Plan.
8.2 Nature of Stock Appreciation Right. A Stock Appreciation
Right (or SAR) is an Award entitling a Participant to receive an amount equal to
the excess (or if the Board determines at the time of grant, a portion of the
excess) of the Fair Market Value of a Share on the date of exercise of the SAR
over the base price, as described below, on the date of grant of the SAR,
multiplied by the number of Shares with respect to which the SAR is exercised.
The base price will be designated by the Board in the Award Agreement for the
SAR and may be the Fair Market Value of a Share on the grant date of the SAR or
such other higher or lower price as the Board determines.
8.3 Exercise. A Stock Appreciation Right may be exercised by a
Participant in accordance with procedures established by the Board. The Board
may also provide that a SAR will be automatically exercised on one or more
specified dates or upon the satisfaction of one or more specified conditions.
8.4 Form of Payment. Payment upon exercise of a Stock
Appreciation Right may be made in cash, in installments, in Shares, or in any
other form or combination of such methods as the Board shall determine.
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ARTICLE 9
RESTRICTED UNITS
9.1 Nature of Restricted Units. A Restricted Unit is an Award
of stock units (with each unit having a value equivalent to one Share) granted
to a Participant subject to such terms and conditions as the Board deems
appropriate, and may include a requirement that the Participant forfeit such
Restricted Units upon termination of Participant's employment (or service as a
Consultant or Nonemployee Director) for specified reasons within a specified
period of time or upon other conditions, as set forth in the Award Agreement for
such Restricted Units.
9.2 General. Restricted Units will be subject to the terms and
conditions of Article 6 of the Plan and this Article 9 and may contain such
additional terms and conditions, not inconsistent with the express provisions of
the Plan, as the Board deems desirable, subject to approval, to the extent
required, by any regulatory authority having jurisdiction over Awards granted
under the Plan.
9.3 Restriction Period. Restricted Units will provide that
such Awards, and the Shares subject to such Awards, may not be transferred, and
may provide that, in order for a Participant to Vest in such Awards, the
Participant must remain in the employment (or remain as a Consultant or
Nonemployee Director) of Corporation or its Subsidiaries, subject to relief for
reasons specified in the Award Agreement, for a period commencing on the date of
grant of the Award and ending on such later date or dates as the Board may
designate at the time of the Award (the "Restriction Period"). During the
Restriction Period, a Participant may not sell, assign, transfer, pledge,
encumber, or otherwise dispose of Shares underlying Restricted Units. The Board,
in its sole discretion, may provide for the lapse of restrictions in
installments during the Restriction Period. Upon expiration of the applicable
Restriction Period (or lapse of Restrictions during the Restriction Period where
the Restrictions lapse in installments) the Participant will be entitled to
settlement of the Restricted Units or portion thereof, as the case may be.
Although Restricted Units usually will Vest based on continued employment (or
continued service as a Consultant or Nonemployee Director) and Performance
Awards under Article 10 of the Plan will usually Vest based on attainment of
Performance Goals, the Board, in its discretion, may condition Vesting of
Restricted Units on attainment of Performance Goals as well as continued
employment (or continued service as a Consultant or Nonemployee Director). In
such case, the Restriction Period for such Restricted Units will include the
period prior to satisfaction of the Performance Goals.
9.4 Forfeiture. If a Participant ceases to be an employee (or
Consultant or Nonemployee Director) of Corporation or a Subsidiary during the
Restriction Period for any reason other than reasons which may be specified in
an Award Agreement (such as death, Disability, or Retirement) the Award
Agreement may require that all non-Vested Restricted Units previously granted to
the Participant be forfeited and returned to Corporation.
9.5 Settlement of Vested Restricted Units. Upon Vesting of an
Award (or portion thereof) of Restricted Units, a Participant will be entitled
to receive payment for Restricted Units in an amount equal to the aggregate Fair
Market Value of the number of Shares covered by such Restricted Units at the
expiration of the applicable Restriction Period. Payment
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in settlement of a Restricted Unit will be made as soon as practicable following
the conclusion of the applicable Restriction Period in cash, in installments, in
Shares equal to the number of Restricted Units, or in any other form or
combination of such methods as the Board, in its sole discretion, determines.
ARTICLE 10
PERFORMANCE AWARDS
10.1 General. Performance Awards will be subject to the terms
and conditions set forth in Article 6 of the Plan and this Article 10 and may
contain such other terms and conditions not inconsistent with the express
provisions of the Plan, as the Board deems desirable, subject to approval, to
the extent required, by any regulatory authority having jurisdiction over Awards
granted under the Plan.
10.2 Nature of Performance Awards. A Performance Award is an
Award of stock units (with each unit having a value equivalent to one Share)
granted to a Participant subject to such terms and conditions as the Board deems
appropriate, including, without limitation, the requirement that the Participant
forfeit such Performance Award or a portion of such Award in the event specified
Performance Goals are not met within a designated Performance Cycle.
10.3 Performance Cycles. For each Performance Award, the Board
will designate a performance period (the "Performance Cycle") with a duration to
be determined by the Board in its discretion within which specified Performance
Goals are to be attained. There may be several Performance Cycles in existence
at any one time and the duration of Performance Cycles for specific Awards may
differ from each other.
10.4 Performance Goals. For each Performance Award, the Board
will establish Performance Goals on the basis of such criteria and to accomplish
such objectives as the Board may from time to time select. Performance Goals may
be based on performance criteria for Corporation, a Subsidiary, or an operating
group or division, or based on a Participant's individual performance.
Performance Goals may include objective and subjective criteria. During any
Performance Cycle, the Board may adjust the Performance Goals for such
Performance Cycle as it deems equitable in recognition of unusual or
nonrecurring events affecting Corporation, changes in applicable tax laws or
accounting principles, or such other factors as the Board may determine.
10.5 Determination of Vested Awards. As soon as practicable
after the end of a Performance Cycle, the Board will determine the extent to
which Performance Awards have been earned on the basis of performance in
relation to the established Performance Goals.
10.6 Timing and Form of Payment. Settlement of earned
Performance Awards will be made to the Participant as soon as practicable after
the expiration of the Performance Cycle and the Board's determination under
Section 10.5, in the form of cash, installments, or Shares, or in any form or
combination of such methods as the Board determines.
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ARTICLE 11
OTHER STOCK-BASED AND COMBINATION AWARDS
11.1 Other Stock-Based Awards. The Board may grant other
Awards under the Plan pursuant to which Shares are or may in the future be
acquired, or Awards denominated in or measured by Share equivalent units,
including Awards valued using measures other than the market value of Shares.
Such Other Stock-Based Awards may be granted either alone, in addition to, or in
tandem with, any other type of Award granted under the Plan.
11.2 Combination Awards. The Board may also grant Awards under
the Plan in tandem or combination with other Awards or in exchange of Awards, or
in tandem or combination with, or as alternatives to, grants or rights under any
other employee plan of Corporation, including the plan of any acquired entity.
No action authorized by this section will reduce the amount of any existing
benefits or change the terms and conditions thereof without the Participant's
consent.
ARTICLE 12
DEFERRAL ELECTIONS
The Board may permit a Participant to elect to defer receipt
of the payment of cash or the delivery of Shares that would otherwise be due to
such Participant by virtue of the exercise, earn-out, or Vesting of an Award
made under the Plan. If any such election is permitted, the Board will establish
rules and procedures for such payment deferrals, including, but not limited to,
payment or crediting of a growth factor on such deferred amounts credited in
cash.
ARTICLE 13
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, ETC.
13.1 Plan Does Not Restrict Corporation. The existence of the
Plan and the Awards granted under the Plan will not affect or restrict in any
way the right or power of the Board or the shareholders of Corporation to make
or authorize any adjustment, recapitalization, reorganization, or other change
in Corporation's capital structure or its business, any merger or consolidation
of the Corporation, any issue of bonds, debentures, preferred or prior
preference stocks ahead of or affecting Corporation's capital stock or the
rights thereof, the dissolution or liquidation of Corporation or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding.
13.2 Adjustments by the Board. In the event of any change in
capitalization affecting the Shares of Corporation, such as a stock dividend,
stock split, recapitalization, merger, consolidation, split-up, combination or
exchange of shares or other form of reorganization, or any other change
affecting the Shares, such proportionate adjustments as the Board, in its sole
discretion, deems appropriate to reflect such change, will be made with respect
to the aggregate number of Shares for which Awards in respect thereof may be
granted under the Plan, the maximum number of Shares which may be sold or
awarded to any Participant, the number of Shares covered by each outstanding
Award, and the price per Share in respect of
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outstanding Awards. The Board may also make such adjustments in the number of
Shares covered by, and price or other value of any outstanding Awards in the
event of a spin-off or other distribution (other than normal cash dividends), of
Corporation assets to shareholders.
ARTICLE 14
AMENDMENT AND TERMINATION
Without further approval of Corporation's shareholders, the
Board may at any time terminate the Plan, or may amend it from time to time in
such respects as the Board may deem advisable; provided that the Board may not,
without approval of the shareholders, make any amendment that would materially
increase the aggregate number of Shares that may be issued under the Plan
(except for adjustments pursuant to Article 13 of the Plan); and provided
further that any amendment of the Plan shall be subject to approval, to the
extent required, by any regulatory authority having jurisdiction over the Plan.
ARTICLE 15
MISCELLANEOUS
15.1 Tax Withholding.
15.1.1 General. Corporation will have the right to deduct from
any settlement of any Award under the Plan, including the delivery or vesting of
Shares, any taxes of any kind required by the laws of any Canadian or U.S.
jurisdiction to be withheld with respect to such payments or to take such other
action as may be necessary in the opinion of Corporation to satisfy all
obligations for the payment of such taxes. The recipient of any payment or
distribution under the Plan may be required to make arrangements satisfactory to
Corporation for the satisfaction of any such withholding tax obligations,
whether or not such recipient is an employee of Corporation or a Subsidiary on
the date of such settlement. Corporation will not be required to make any such
payment or distribution under the Plan until such obligations are satisfied.
15.1.2 Stock Withholding. The Board, in its sole discretion,
may permit a Participant to satisfy all or a part of the withholding tax
obligations incident to the settlement of an Award involving payment or delivery
of Shares to the Participant by having Corporation withhold a portion of the
Shares that would otherwise be issuable to the Participant. Such Shares will be
valued based on their Fair Market Value on the date the tax withholding is
required to be made.
15.2 Unfunded Plan. The Plan will be unfunded and Corporation
shall not be required to segregate any assets that may at any time be
represented by Awards under the Plan. Any liability of Corporation to any person
with respect to any Award under the Plan will be based solely upon any
contractual obligations that may be effected pursuant to the Plan. No such
obligation of Corporation shall be deemed to be secured by any pledge of, or
other encumbrance on, any property of Corporation.
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15.3 Payments to Trust. The Board is authorized to cause to be
established a trust agreement or several trust agreements whereunder the Board
may make payments of amounts due or to become due to Participants in the Plan.
However, the Board has no obligation to establish such a trust or fund.
15.4 Annulment of Awards. Any Award Agreement may provide that
the grant of an Award payable in cash is provisional until cash is paid in
settlement of such Award or that the grant of an Award payable in Shares is
provisional until the Participant becomes entitled to the stock certificate in
settlement of such Award. In the event the employment (or service as a
Consultant or Nonemployee Director) of a Participant is terminated for cause (as
defined below), any Award that is provisional will be annulled as of the date of
such termination for cause. For the purpose of this Section 15.4, the term "for
cause" will have the meaning set forth in the Participant's employment
agreement, if any, or otherwise means any discharge (or removal) for material or
flagrant violation of the policies and procedures of Corporation or for other
job performance or conduct that is materially detrimental to the best interests
of Corporation, as determined by the Board.
15.5 Engaging in Competition With Corporation. Any Award
Agreement may provide that, if a Participant terminates employment with
Corporation or a Subsidiary for any reason whatsoever, and within 18 months
after the date of such termination accepts employment with any competitor of (or
otherwise engages in competition with) Corporation, the Board, in its sole
discretion, may require such Participant to return to Corporation the economic
value of any Award that is realized or obtained (measured at the date of
exercise, Vesting, or payment) by such Participant at any time during the period
beginning on the date that is six months prior to the date of such Participant's
termination of employment with Corporation.
15.6 Other Corporation Benefit and Compensation Programs.
Payments and other benefits received by a Participant under an Award made
pursuant to the Plan will not be deemed a part of a Participant's regular,
recurring compensation for purposes of the termination indemnity or severance
pay law of any state or country and will not be included in, or have any effect
on, the determination of benefits under any other employee benefit plan or
similar arrangement provided by Corporation or a Subsidiary unless expressly so
provided by such other plan or arrangements, or except where the Board expressly
determines that an Award or portion of an Award should be included to accurately
reflect competitive compensation practices or to recognize that an Award has
been made in lieu of a portion of cash compensation. Awards under the Plan may
be made in combination with or in tandem with, or as alternatives to, grants,
awards, or payments under any other Corporation or Subsidiary plans,
arrangements, or programs. The Plan notwithstanding, Corporation or any
Subsidiary may adopt such other compensation programs and additional
compensation arrangements as it deems necessary to attract, retain, and reward
employees and directors for their service with Corporation and its Subsidiaries.
15.7 Securities Law Restrictions. No Shares will be issued
under the Plan unless counsel for Corporation is satisfied that such issuance
will be in compliance with the applicable securities laws of any Canadian or
U.S. jurisdiction. Certificates for Shares delivered under the Plan may be
subject to such stop-transfer orders and other restrictions as the Board deems
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advisable under the rules, regulations, and other requirements of the Securities
and Exchange Commission, the Alberta or British Columbia Securities Commissions,
any stock exchange upon which the Shares are then listed, and any applicable
securities law. The Board may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
15.8 Governing Law. Except with respect to references to the
Code or applicable securities laws, the Plan and all actions taken thereunder
will be governed by and construed in accordance with the laws of the State of
Oregon.
ARTICLE 16
SHAREHOLDER APPROVAL
The adoption of the Plan, as amended and restated effective
October 15, 1997, and any grant of Awards under the Plan are expressly subject
to the approval of the Plan by the shareholders at the 1997 annual meeting of
Corporation's shareholders. In the event that such shareholder approval is
received, no additional stock options will be granted thereafter under the Stock
Option Plan and such plan will immediately terminate; provided that such
termination will have no effect on any options previously granted thereunder.
ARTICLE 17
OTHER APPROVALS
For so long as the Shares are listed on The Alberta Stock
Exchange, the Plan is subject to approval by such Exchange and compliance with
all conditions imposed by such Exchange from time to time with respect to the
granting and administration of Awards under the Plan.
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AMENDMENT TO
EMPLOYMENT AGREEMENT
This Amendment is made and entered into effective November 14, 1997, by
and between HEALTHCARE CAPITAL CORP., an Alberta, Canada, corporation
("Corporation"), and BRANDON M. DAWSON ("Executive").
RECITALS
A. Effective November 14, 1997, Corporation and Executive entered into
an employment agreement (the "Agreement").
B. Corporation and Executive mutually desire to amend the Agreement as
set forth in this Amendment.
AMENDMENT
1. Section 4.1 of the Agreement is amended to read as follows:
"4.1 Base Salary. As compensation for the performance of
Executive's services hereunder, inclusive of services as an officer and
director of Corporation's Affiliates, Corporation will pay to Executive
in accordance with its normal payroll practices an annual salary (the
"Base Salary") of $185,000 per year, subject to such increases (but not
decreases) as are determined from time to time by the Board, or a
compensation committee designated by the Board."
2. Except as expressly provided in this Amendment, the Agreement will
continue in full force and effect.
CORPORATION: HEALTHCARE CAPITAL CORP.
By /s/ Edwin J. Kawasaki
Its Vice President - Finance
EXECUTIVE:
/s/ Brandon M. Dawson
BRANDON M. DAWSON
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into effective November
14, 1997, between HEALTHCARE CAPITAL CORP., an Alberta, Canada corporation
("Corporation"), and BRANDON M. DAWSON ("Executive").
RECITALS
A. Executive is currently Chief Executive Officer and President and a
director of Corporation. Executive is an innovative, highly experienced, and
knowledgeable executive whose creativity, expertise, and effort have been
instrumental in the development of the business and growth of Corporation.
B. Corporation recognizes that the future growth, profitability, and
success of the business of Corporation and its subsidiaries require, and will be
substantially and materially advanced by, the continued employment of Executive.
Corporation desires, therefore, to secure for Corporation and its affiliates the
continued benefit of Executive's experience, ability, and leadership. In order
to retain the services of Executive and to maximize the period of his continued
availability, and in recognition of his continuing contribution to Corporation's
success, Corporation desires to offer Executive the compensation, amenities, and
other benefits that executives of comparable experience and ability generally
receive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms have the
meanings set forth in this Section 1:
"AFFILIATE" - Any person, firm, corporation, association, organization,
or unincorporated trade or business that, now or hereinafter, directly or
indirectly, controls, is controlled by, or is under common control with
Corporation.
"BOARD" - The board of directors of Corporation.
"CAUSE" - Cause for termination of employment means:
(i) A material act of fraud or dishonesty by Executive within the
course of performing his duties for Corporation or its Affiliates;
(ii) Gross negligence or intentional misconduct by Executive in
performing material duties for Corporation or its Affiliates, or
unjustifiable
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neglect by Executive of the performance of material duties for
Corporation or its Affiliates;
(iii) Commission of an act (or failure to take an action)
intentionally against the interest of Corporation or its Affiliates
that causes Corporation or an Affiliate material injury; or
(iv) An act of serious moral turpitude that causes Corporation or
an Affiliate material injury.
Notwithstanding the foregoing, Executive will not be deemed to have been
terminated for Cause unless and until there has been delivered to Executive a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Board (excluding Executive), at a
meeting of the Board called and held for that purpose, finding that, in the good
faith opinion of the Board, Executive was guilty of conduct constituting Cause
as defined in this Agreement and specifying the particulars thereof in detail.
Executive must have been given reasonable notice of such meeting and Executive,
together with his counsel, must have been given an opportunity to be heard
before the Board at the meeting. This provision will not be deemed to restrict
the authority, discretion, or power of the Board, by any action taken in
compliance with Corporation's articles of incorporation and bylaws, to remove
Executive as an officer or director of Corporation, with or without Cause.
Rather, the foregoing provisions merely define, for purposes of Executive's
contractual rights and remedies under this Agreement, the circumstances in which
termination of Executive's employment will constitute termination for Cause.
"CHANGE IN CONTROL" - A change in control of Corporation means:
(i) The acquisition by any Person of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50
percent or more of the combined voting power of the then outstanding
Voting Securities; provided, however, that for purposes of this
paragraph (i), the following acquisitions will not constitute a Change
of Control: (A) any acquisition directly from Corporation, (B) any
acquisition by Corporation, (C) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by Corporation or any
corporation controlled by Corporation, (D) any acquisition by Warburg,
Pincus Ventures, L.P. ("WPV") or by any Person that, now or
hereinafter, directly or indirectly controls, is controlled by, is
under common control with, or is otherwise an affiliate of, WPV, or (E)
any acquisition by any corporation pursuant to a transaction which
complies with clauses (A), (B), and (C) of paragraph (iii) below; or
(ii) individuals who, as of the date of this Agreement, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date of this Agreement whose
election, or
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nomination for election by Corporation's shareholders, was approved by
a vote of at least a majority of the directors then comprising the
Incumbent Board will be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board; or
(iii) consummation of a reorganization, merger, or consolidation
or sale or other disposition of all or substantially all of the assets
of Corporation (a "Business Combination") in each case, unless,
following such Business Combination, (A) all or substantially all of
the individuals and entities who were the beneficial owners of the
Voting Securities outstanding immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 50
percent of, respectively, the then outstanding shares of common stock
and the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of such
transaction owns Corporation or all or substantially all of
Corporation's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the Voting
Securities, (B) no Person (excluding any employee benefit plan (or
related trust) of Corporation or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly, 50
percent or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or
the combined voting power of the then outstanding voting securities of
such corporation except to the extent that such ownership existed prior
to the Business Combination and (C) at least a majority of the members
of the board of directors of the corporation resulting from such
Business Combination were members of Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination.
"COMPETITIVE ENTITY" - A Person, firm, or entity engaged in the
national or regional (in the United States or Canada) retail provision of
audiology services and/or dispensing of hearing aids.
"DISABILITY" OR "DISABLED" - Inability to perform duties with
Corporation on a full-time basis by reason of "Total Disability" within the
meaning of Corporation's Group Long Term Disability Insurance Plan or any
successor plan or program maintained by Corporation. In the event Corporation no
longer maintains a similar plan or program, Disability or Disabled means
inability to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment.
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"EFFECTIVE DATE" - December 24, 1997.
"EXCHANGE ACT" - The Securities Exchange Act of 1934, as amended.
"GOOD REASON" - For all purposes of this Agreement, termination by
Executive of his employment with Corporation during the Employment Term for
"Good Reason" means termination based on any of the following:
(a) A change in Executive's status or position or positions with
Corporation that represents a material demotion from Executive's status
or position or positions as of the date of this Agreement or a material
change in Executive's duties or responsibilities that is inconsistent
with such status or position or positions;
(b) Removal of Executive as a member of the Board (other than for
cause or by reason of his failure to be re-elected to the Board);
(c) A reduction by Corporation in Executive's Base Salary (as in
effect on the date of this Agreement or as increased at any time during
the Term of this Agreement);
(d) The failure of Corporation to continue Executive's
participation (on terms comparable to those for other key executives of
Corporation) in any Plans and vacation programs or arrangements in
which other key executives of Corporation are participants (unless such
failure to continue is caused by an action or status of Executive); or
(e) Corporation's requiring Executive to be based more than 35
miles from Corporation's principal executive office, except for
required travel on Corporation's business to an extent substantially
consistent with Executive's business travel obligations as of the date
of this Agreement.
"PERSON" - Any individual, corporation, partnership, limited liability
company, group, association, or other "person," as such term is used in Section
13(d)(3) or Section 14(d) of the Exchange Act, other than Corporation or any
employee benefit plan or plans sponsored by Corporation.
"PLAN" - Any compensation plan such as a plan providing for incentive
or deferred compensation, stock options or other stock or stock-related grants
or awards, or any employee benefit plan such as a thrift, investment, savings,
pension, profit sharing, medical, disability, accident, life insurance,
cafeteria, or relocation plan or any other plan, policy, or program of
Corporation providing similar types of benefits to employees of Corporation.
"SEVERANCE PAYMENTS" - The severance payments described in Section 5.4
of this Agreement.
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"TERM" - The period from the Effective Date through December 24, 2001;
provided, however, that the Term will automatically be extended to December 24,
2002 (and thereafter will be similarly extended in additional one-year
extensions) unless, on or before June 30, 2001 (or, if the Term has been
extended, June 30 of the last day of the Term), either Corporation or Executive
gives written notice of non-extension of the Term.
"TERMINATION BENEFITS" - The payments and benefits described in Section
5 of this Agreement.
"TERMINATION DATE" - The date Executive's employment with Corporation
is terminated for any reason by Corporation or by Executive.
"VOTING SECURITIES" - Corporation's issued and outstanding securities
ordinarily having the right to vote at elections of Corporation's Board.
2. EMPLOYMENT AND MEMBERSHIP ON THE BOARD. Corporation hereby agrees to
employ Executive and retain Executive as a member of the Board, and Executive
hereby accepts employment with Corporation, during the Term of this Agreement on
the terms and conditions set forth in this Agreement. Corporation's agreement to
employ Executive and retain him as a director is subject to the reservations
provided in the definition of "Cause" in Section 1 and in Section 3.3.
3. EXECUTIVE DUTIES.
3.1 Position and Duties. Executive agrees to render services to
Corporation as Chief Executive Officer and President and a member of the Board
of Corporation and as an executive officer of such of Corporation's Affiliates
as the parties to this Agreement mutually agree, including Affiliates that may
be formed or acquired subsequent to the Effective Date. As Chief Executive
Officer of Corporation, Executive will have responsibility for policy matters
affecting Corporation's business and will have such executive and managerial
duties as the Board prescribes from time to time.
3.2 Exclusive Employment. Executive agrees that during the Term of this
Agreement:
(a) Executive will devote substantially all his regular business
time solely and exclusively to the business of Corporation, whether
such business is operated directly by Corporation or through one or
more Affiliates of Corporation;
(b) Executive will diligently carry out his responsibilities under
this Agreement;
(c) Executive will not, directly or indirectly, without the prior
approval of the Board, provide services on behalf of any Competitive
Entity or
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on behalf of any subsidiary or affiliate of any such Competitive
Entity, as an employee, consultant, independent contractor, agent, sole
proprietor, partner, member, joint venturer, corporate officer, or
director;
(d) Executive will not acquire by reason of purchase the ownership
of more than 1 percent of the outstanding equity interest in any
Competitive Entity; and
(e) Except as expressly set forth above, Executive may engage in
personal business and investment activities.
3.3 Corporation Reserved Rights. Corporation reserves, on its own
behalf and on behalf of its shareholders, the right to elect, from time to time,
any person to its Board, to appoint any person as an officer of Corporation, and
to remove any officer or director, including Executive, in any manner and upon
the basis or bases presently or subsequently provided for by its articles of
incorporation and bylaws. Nothing in this Agreement will be deemed to constitute
any restriction on the authority, discretion, or power of the Board, but rather
will only give Executive contractual rights and remedies.
3.4 Nondisclosure. During and after the Term of this Agreement,
Executive agrees not to disclose to any persons with interests adverse or
potentially adverse to Corporation (other than an employee or agent of
Corporation or any Affiliate entitled to receive such information) confidential
information relating to the business of Corporation or any Affiliate and
obtained by Executive while providing services to Corporation or any Affiliate
without the consent of the Board, or until the information ceases to be
confidential. Notwithstanding the foregoing, Executive will not be precluded
from making disclosures respecting Corporation or any Affiliate where the
disclosures are made pursuant to compulsory legal process or when otherwise
required by an appropriate government agency.
4. COMPENSATION AND BENEFITS.
4.1 Base Salary. As compensation for the performance of Executive's
services hereunder, inclusive of services as an officer and director of
Corporation's Affiliates, Corporation will pay to Executive in accordance with
its normal payroll practices an annual salary (the "Base Salary") of $195,000
per year, subject to such increases (but not decreases) as are determined from
time to time by the Board, or a compensation committee designated by the Board.
4.2 Annual Bonus. During the Term of this Agreement, Executive will be
eligible to receive an incentive bonus for each fiscal year (beginning with the
fiscal year ending July 31, 1998) (an "Annual Bonus") in an amount (as
determined by the Board) up to 100 percent of Executive's Base Salary for such
fiscal year. The Annual Bonus for each fiscal year will be payable no later than
120 days following the end of each fiscal year.
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4.3 Stock Options
4.3.1 Option Limitations. Corporation's common stock is traded on the
Alberta Stock Exchange ("ASE"). The rules of the ASE limit the number of shares
of Corporation's common stock with respect to which its listed companies may
grant stock options. Corporation has granted options up to the maximum permitted
under such rules. Corporation intends to apply for listing on the American Stock
Exchange ("AMEX") when it is able to meet the listing requirements for the AMEX.
At such time as Corporation obtains an AMEX listing, it will be permitted to
grant additional stock options.
4.3.2 Option Awards. At such time as Corporation is permitted to grant
additional options, Corporation will immediately grant Executive nonqualified
stock option awards (the "Options") under Corporation's Stock Award Plan for the
following number of shares of Corporation's common stock with the following
option exercise prices:
Per Share
Group No. Shares Option Exercise Price(1)
----- ---------- ------------------------
1 1,800,000 US $1.35
2 400,000 US $2.00
3 500,000 US $2.40
The Options will have the following additional features:
o The number of shares subject to the Options and the respective
option exercise prices will be adjusted to reflect any reverse stock
split or other similar restructuring of Corporation's common stock;
o The effective date of the option grants (the "Grant Date") will
be the date the Board takes action to grant the Options;
o The Options will have a term of the shorter of (a) the maximum
term allowable under the rules of the principal stock exchange or
market system on which shares of Corporation's common stock are traded
on the Grant Date or (b) 10 years, commencing on the Grant Date;
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(1) The option exercise prices will be the greater of the fair market value of a
share of common stock on the Grant Date or the minimum prices shown in the table
so that the grant of the Options will not result in any direct charge to
Corporation's reported earnings.
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o The Options of each group will become exercisable over four
years at 25 percent per year as follows, based on the anniversaries of
the Grant Date:
Cumulative
Anniversary of Percentage
Grant Date Exercisable
-------------- -----------
Prior to First 0%
First 25%
Second 50%
Third 75%
Fourth 100%
o The Options will become immediately and fully exercisable in the
event that, within two years following a Change in Control of
Corporation, Executive is terminated without Cause or one of the events
described in the definition of Good Reason in Section 1 of this
Agreement occurs (provided, however, that for this purpose, an
acquisition of more than 50 percent of the Voting Securities by WPV, or
any person that directly or indirectly controls, is controlled by, is
under common control with, or is otherwise affiliated with WPV, will
constitute a Change in Control);
o In the event Executive's employment is terminated by Corporation
without Cause or by Executive for Good Reason, the Options will become
exercisable as of the date of such termination to the following extent:
o The portion of the Options that become
exercisable prior to the Termination Date will remain
exercisable; and
o The Options will become fully exercisable as of
the Termination Date as to the number of shares:
(a) That would have become exercisable
(had Executive's employment not terminated) as of
the anniversary of the Grant Date next following
the Termination Date; plus
(b) A pro rata portion of the number of
shares that would have become exercisable as of the
second anniversary of the Grant Date next following
the Termination Date, determined on the ratio of
the number of days from the Grant Date or an
anniversary of the Grant Date through the
Termination Date to 365.
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o Corporation agrees to register the shares subject to the Option;
o The Option will be governed by an Award Agreement as approved by the
Board; and
o Vested Options will remain exercisable for 90 days after termination
of employment or, in the case of termination due to death or Disability, for
one year.
4.4 Other Benefits. During the Term of this Agreement, Executive will
be entitled to participate in all Plans (including Plans adopted following the
Effective Date) covering Corporation's key executive and managerial employees as
described in Corporation's employee manual, as amended from time to time,
including, without limitation, Plans providing medical, disability, and life
insurance benefits, and vacation pay. In addition Corporation will pay up to
$1,000 per calendar month during the Term of this Agreement for lease of an
automobile for Executive's use (subject to normal Corporation policies regarding
accounting for personal use of such automobile).
4.5 Expenses. Executive is authorized to incur on behalf of
Corporation, and Corporation will directly pay or will fully reimburse Executive
for all customary and reasonable out-of-pocket expenses incurred for promoting,
pursuing, or otherwise furthering the business of Corporation or its affiliates.
4.6 Split-Dollar Life Insurance. Corporation will provide Executive
with an equity split-dollar life insurance policy with the following features:
(a) The face amount of the policy will be $2 million;
(b) Subject to Section 4.6(c), Corporation will pay the premiums
on the policy and will treat an amount equal to the PS-58 cost of the
policy as taxable income to Executive;
(c) Corporation will not be required to pay more than $20,000 per
year in premiums or other fees on the policy;
(d) The policy will be owned by Executive, subject to a collateral
assignment in favor of Corporation (covering, without limitation, all
rights to collect death benefit, surrender value, policy loan proceeds,
and other policy distributions and to exercise all nonforfeiture rights
with respect to the policy) to secure an amount equal to the premiums
paid by Corporation; and
(e) A $2 million portion of Corporation's existing $7 million term
key-man policy on Executive's life will be converted into the
split-dollar policy described in this Section 4.6 (or, at Corporation's
option, a separate split-dollar policy will be obtained).
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5. TERMINATION OF AGREEMENT.
5.1 Death. If Executive dies prior to the expiration of the Term of
this Agreement, Corporation will pay to Executive's representative his Base
Salary through the date of death. All benefits, including death benefits, to
which Executive is then entitled under Plans in which Executive is a participant
will be payable as provided in those Plans. This Agreement will terminate as of
the date of death and Corporation will have no further obligations to Executive
under this Agreement.
5.2 Disability. In the event Executive becomes Disabled during the
Term, the Agreement will remain in effect and Executive will be entitled to
continue to receive the compensation and benefits described in Section 4 until
the expiration of the Term with the following modifications:
(a) The Annual Bonus, if any, that otherwise would be earned by
Executive for the year in which his employment is terminated by reason
of Disability (the "Disability Year") will be prorated based on the
number of days before and after the Termination Date;
(b) Executive will not be entitled to any Annual Bonus for years
following the Disability Year; and
(c) The amounts otherwise payable to Executive as Base Salary
following the Termination Date will be reduced by the amount, if any,
of benefits paid to Executive under Corporation's Group Long Term
Disability Insurance Plan. To the extent allowable under applicable law
and other Corporation Plans, Executive will be treated as an employee
of Corporation during the period after the Termination Date and through
the end of the Term for purposes of this Agreement and the Plans in
which Executive is a participant.
5.3 Termination for Cause or Voluntary Termination Without Good Reason.
Pending the determination by the Board whether or not Cause exists for
termination of Executive's employment pursuant to the definition of Cause in
Section 1, the Board may suspend Executive or relieve Executive of his duties as
an officer, but may not terminate Executive's employment. Upon such
determination that Cause exists, Corporation may terminate Executive's
employment. If Corporation terminates Executive's employment for Cause or
Executive terminates employment other than for Good Reason, Corporation will pay
Executive his Base Salary through the effective date of such termination and,
only if Corporation elects, additional compensation equal to one-half of
Executive's Base Salary for the period during which Executive is obligated not
to compete pursuant to Section 5.7 of this Agreement. This Agreement will
terminate as of the Termination Date, and Corporation will have no further
obligations to Executive under this Agreement. All accrued benefits to which
Executive is then entitled under Plans in which he is a participant will be
payable as provided in those Plans.
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5.4 Termination Without Cause or With Good Reason. If Executive's
employment with Corporation is terminated (other than for Disability or upon
Executive's death) by Corporation without Cause or by Executive with Good
Reason, Corporation will pay Executive the following amounts ("Severance
Payments"):
(a) Executive's Base Salary through the Termination Date; and
(b) In lieu of any further salary payments to Executive for
periods subsequent to the Termination Date, an amount of severance pay
(payable in 24 substantially equal monthly installments commencing on
the first day of the first calendar month beginning after the
Termination Date) equal to two times the sum of:
(i) Executive's Base Salary, at the rate in effect
on the Termination Date, and
(ii) The average Annual Bonus (if any) paid to
Executive or accrued to his benefit (the "Average Bonus") in
respect of the two fiscal years last ended prior to the
fiscal year in which the Termination Date occurs. For
purposes of this Section 5.4(b)(ii), if the Termination Date
is prior to the date that Executive's Annual Bonus for the
fiscal year ending July 31, 1999, has been determined by the
Board, the Average Bonus will be the amount of the Annual
Bonus paid to Executive for the fiscal year ending July 31,
1998.
5.5 Related Benefits. Except in connection with Executive's death or
termination by Corporation for Cause or Disability or by voluntary termination
by Executive without Good Reason, Corporation will retain in full force and
effect for the continued benefit of Executive for two years after the
Termination Date all Plans in which Executive was entitled to participate
immediately prior to the Termination Date, provided that Executive's continued
participation is possible under the general terms and provisions of such Plans;
provided, however, that if the participation by Executive in any Plan is barred
by the provisions of such Plan, Corporation will arrange to provide Executive
with benefits substantially similar to those to which Executive is entitled to
receive under such Plan (provided, however, that the cost of such benefits does
not exceed 125 percent of the prevailing cost of similar benefits under
Corporation's Plans).
5.6 No Mitigation. Executive will not be required to mitigate the
amount of any payment provided for in this Section 5 by seeking other employment
or otherwise. However, except in the case of a termination of Executive without
Cause or with Good Reason within two years following a Change in Control of
Corporation, the amount of any payment or related benefit provided for in this
Section 5 will be reduced by any compensation earned or related benefit received
by Executive as a result of either employment by another employer or
self-employment after the Termination Date. Executive
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agrees to provide Corporation with any information reasonably necessary to
determine the amount of such reduction.
5.7 Noncompetition Following Termination. Executive acknowledges that
the agreements and covenants contained in this Section 5.7 are essential to
protect the value of Corporation's business and assets and that, by his current
employment with Corporation and its subsidiaries, Executive has obtained and
will obtain such knowledge, contacts, know-how, training and experience, and
that such knowledge, contacts, know-how, training and experience could be used
to the substantial advantage of a Competitive Entity and to Corporation's
substantial detriment. Therefore Executive agrees that:
(a) In the event Executive's employment is terminated (whether by
Corporation or by Executive) for any reason before the expiration of
the Term, Executive will not, for a period of three years from the
Termination Date, participate (as an owner, employee, officer, partner,
member, shareholder, director, consultant, or otherwise) in any
Competitive Entity. The benefits payable under this Agreement,
including without limitation Corporation's obligation to pay Severance
Benefits pursuant to Section 5.4 of this Agreement, and, if Corporation
so elects, the additional compensation provided in Section 5.3 of this
Agreement, are in consideration of Executive's performance of the
covenants in this Section 5.7.
(b) Executive acknowledges that pursuant to the terms of this
Agreement, he is receiving a "bona fide advancement" in terms of his
employment with Corporation within the meaning of ORS 653.295.
Executive further acknowledges that he is receiving consideration under
this Agreement in addition to such consideration as to which he would
be entitled in the absence of this Agreement, and he acknowledges that
his agreement to the provisions of this Section 5.7 is a necessary
condition for Corporation to enter into this Agreement and pay the
consideration provided for in this Agreement.
(c) Executive acknowledges that Corporation's remedy at law for a
breach by him of the provisions of this Section 5.7 will be inadequate.
Accordingly, in the event of the breach or threatened breach by
Executive of any provision of this Section 5.7, Corporation will be
entitled to injunctive relief in addition to any other remedy it may
have. If any of the provisions of, or covenants contained in, this
Section 5.7 are hereafter construed to be invalid or unenforceable in
any jurisdiction, the same will not affect the remainder of the
provisions or the enforceability thereof in any other jurisdiction,
which will be given full effect, without regard to the invalidity or
unenforceability in such other jurisdiction. If any of the provisions
of, or covenants contained in, this Section 5.7 are held to be
unenforceable in any jurisdiction because of the duration or
geographical scope of such provision or covenant, Executive and
Corporation agree that the court making such determination will have
the power to reduce the duration or geographical scope
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of such provision or covenant and that, in its reduced form, such
provision or covenant will be enforceable; provided, however, that the
determination of such court will not affect the enforceability of this
Section 5.7 in any other jurisdiction.
6. EFFECT OF CHANGE IN CONTROL. The Severance Benefits payable under
Section 5.4 of this Agreement are not conditioned upon a Change in Control of
Corporation but are payable upon any termination described in that Section,
whether or not a Change in Control has occurred. Thus, it is the parties' mutual
intention that the Severance Benefits are not to be treated as payments in
connection with a Change in Control.
7. SUCCESSORS; BINDING EFFECT.
7.1 Corporation. This Agreement will inure to the benefit of, and be
binding upon, any corporate or other successor or assignee of Corporation that
acquires, directly or indirectly, by merger, consolidation or purchase, or
otherwise, all or substantially all the business or assets of Corporation.
Corporation will require any such successor, by an agreement in form and
substance reasonably satisfactory to Executive, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent as Corporation
would be required to perform if no such succession had taken place.
7.2 Executive. This Agreement will inure to the benefit of and be
enforceable by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees, and legatees. If
Executive should die while any amount would still be payable to Executive
hereunder if Executive had continued to live, all such amounts, unless otherwise
provided herein, will be paid in accordance with the terms of this Agreement to
Executive's devisee, legatee, or other designee or, if there is no such
designee, to Executive's estate.
8. WAIVER AND MODIFICATION. Any waiver, alteration, or modification of
any of the terms of this Agreement will be valid only if made in writing and
signed by the parties to this Agreement. No waiver by either of the parties of
its rights under this Agreement will be deemed to constitute a waiver with
respect to any subsequent occurrences or transactions hereunder unless the
waiver specifically states that it is to be construed as a continuing waiver.
9. GOVERNING LAW; SEVERABILITY. The validity, interpretation,
construction, and performance of this Agreement will be governed by and
construed in accordance with the laws of the state of Oregon. Any provision of
this Agreement that is prohibited or unenforceable will be ineffective only to
the extent of that prohibition or unenforceability without invalidating the
remaining provisions of this Agreement.
10. NOTICES. For the purposes of this Agreement, notices and all
communications provided for in this Agreement must be in writing and will be
deemed to have been given upon the earlier of (i) personal delivery or (ii)
three business days after
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being mailed by United States registered mail, return receipt requested, with
postage prepaid, addressed to the respective party at the address set forth
below (or to such other address as either party may have furnished to the other
in writing in accordance with this Section 9, except that notices of change of
address will be effective only upon receipt):
To Corporation: HealthCare Capital Corp.
111 S.W. Fifth Avenue
Suite 2390
Portland, Oregon 97204
Attn: Brian Thompson, Corporate Counsel
To Executive: Brandon M. Dawson
9847 S.E. Westview Court
Happy Valley, Oregon 97266
11. HEADINGS. Headings herein are for convenience only, are not a part
of this Agreement, and are not to be used in construing this Agreement.
12. ARBITRATION. Any dispute or claim that arises out of or that
relates to this Agreement or to the interpretation, breach, or enforcement of
this Agreement, must be resolved by mandatory arbitration in accordance with the
then effective arbitration rules of Arbitration Service of Portland, Inc., and
any judgment upon the award rendered pursuant to such arbitration may be entered
in any court having jurisdiction thereof.
13. ATTORNEYS' FEES. In the event of any suit or action or arbitration
proceeding to enforce or interpret any provision of this Agreement (or which is
based on this Agreement), the prevailing party will be entitled to recover, in
addition to other costs, reasonable attorneys' fees in connection with such
suit, action, arbitration, and in any appeal. The determination of who is the
prevailing party and the amount of reasonable attorneys' fees to be paid to the
prevailing party will be decided by the arbitrator or arbitrators (with respect
to attorneys' fees incurred prior to and during the arbitration proceedings) and
by the court or courts, including any appellate courts, in which the matter is
tried, heard, or decided, including the court which hears any exceptions made to
an arbitration award submitted to it for confirmation as a judgment (with
respect to attorneys' fees incurred in such confirmation proceedings).
14. EFFECT OF TERMINATION OF AGREEMENT. If this Agreement is
terminated, all rights and benefits that have become vested hereunder prior to
termination will remain in full force and effect, and the termination of the
Agreement will not be construed as relieving any party from the performance of
any accrued obligation incurred to the other under this Agreement.
15. ENTIRE AGREEMENT. This Agreement constitutes and embodies the
entire understanding and agreement of the parties hereto relating to the matters
addressed in this Agreement. Except as otherwise provided in this Agreement,
there are no other agreements
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or understandings, written or oral, in effect between the parties relating to
the matters addressed herein.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
effective as of the Effective Date.
Corporation: HEALTHCARE CAPITAL CORP.
By /s/ Edwin J. Kawasaki
EXECUTIVE: /s/ Brandon M. Dawson
Brandon M. Dawson
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into effective November
14, 1997, between HEALTHCARE CAPITAL CORP., an Alberta, Canada corporation
("Corporation"), and EDWIN J. KAWASAKI ("Executive").
RECITALS
A. Executive is currently Vice President - Finance and Chief Financial
Officer of Corporation. Executive is an innovative, highly experienced, and
knowledgeable executive whose creativity, expertise, and effort have been
instrumental in the development of the business and growth of Corporation.
B. Corporation recognizes that the future growth, profitability, and
success of the business of Corporation and its subsidiaries require, and will be
substantially and materially advanced by, the continued employment of Executive.
Corporation desires, therefore, to secure for Corporation and its affiliates the
continued benefit of Executive's experience, ability, and leadership. In order
to retain the services of Executive and to maximize the period of his continued
availability, and in recognition of his continuing contribution to Corporation's
success, Corporation desires to offer Executive the compensation, amenities, and
other benefits that executives of comparable experience and ability generally
receive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms have the
meanings set forth in this Section 1:
"AFFILIATE" - Any person, firm, corporation, association, organization,
or unincorporated trade or business that, now or hereinafter, directly or
indirectly, controls, is controlled by, or is under common control with
Corporation.
"BOARD" - The board of directors of Corporation.
"CAUSE" - Cause for termination of employment means:
(i) A material act of fraud or dishonesty by Executive within the
course of performing his duties for Corporation or its Affiliates;
(ii) Gross negligence or intentional misconduct by Executive in
performing material duties for Corporation or its Affiliates, or
unjustifiable
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neglect by Executive of the performance of material duties for
Corporation or its Affiliates;
(iii) Commission of an act (or failure to take an action)
intentionally against the interest of Corporation or its Affiliates
that causes Corporation or an Affiliate material injury; or
(iv) An act of serious moral turpitude that causes Corporation or
an Affiliate material injury.
Notwithstanding the foregoing, Executive will not be deemed to have been
terminated for Cause unless and until there has been delivered to Executive a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Board (excluding Executive if at the
time he is member of the Board), at a meeting of the Board called and held for
that purpose, finding that, in the good faith opinion of the Board, Executive
was guilty of conduct constituting Cause as defined in this Agreement and
specifying the particulars thereof in detail. Executive must have been given
reasonable notice of such meeting and Executive, together with his counsel, must
have been given an opportunity to be heard before the Board at the meeting. This
provision will not be deemed to restrict the authority, discretion, or power of
the Board, by any action taken in compliance with Corporation's articles of
incorporation and bylaws, to remove Executive as an officer or director of
Corporation, with or without Cause. Rather, the foregoing provisions merely
define, for purposes of Executive's contractual rights and remedies under this
Agreement, the circumstances in which termination of Executive's employment will
constitute termination for Cause.
"CHANGE IN CONTROL" - A change in control of Corporation means:
(i) The acquisition by any Person of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50
percent or more of the combined voting power of the then outstanding
Voting Securities; provided, however, that for purposes of this
paragraph (i), the following acquisitions will not constitute a Change
of Control: (A) any acquisition directly from Corporation, (B) any
acquisition by Corporation, (C) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by Corporation or any
corporation controlled by Corporation, (D) any acquisition by Warburg,
Pincus Ventures, L.P. ("WPV") or by any Person that, now or
hereinafter, directly or indirectly controls, is controlled by, is
under common control with, or is otherwise an affiliate of, WPV, or (E)
any acquisition by any corporation pursuant to a transaction which
complies with clauses (A), (B), and (C) of paragraph (iii) below; or
(ii) individuals who, as of the date of this Agreement, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a
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director subsequent to the date of this Agreement whose election, or
nomination for election by Corporation's shareholders, was approved by
a vote of at least a majority of the directors then comprising the
Incumbent Board will be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board; or
(iii) consummation of a reorganization, merger, or consolidation
or sale or other disposition of all or substantially all of the assets
of Corporation (a "Business Combination") in each case, unless,
following such Business Combination, (A) all or substantially all of
the individuals and entities who were the beneficial owners of the
Voting Securities outstanding immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 50
percent of, respectively, the then outstanding shares of common stock
and the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of such
transaction owns Corporation or all or substantially all of
Corporation's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the Voting
Securities, (B) no Person (excluding any employee benefit plan (or
related trust) of Corporation or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly, 50
percent or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or
the combined voting power of the then outstanding voting securities of
such corporation except to the extent that such ownership existed prior
to the Business Combination and (C) at least a majority of the members
of the board of directors of the corporation resulting from such
Business Combination were members of Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination.
"COMPETITIVE ENTITY" - A Person, firm, or entity engaged in the
national or regional (in the United States or Canada) retail provision of
audiology services and/or dispensing of hearing aids.
"DISABILITY" OR "DISABLED" - Inability to perform duties with
Corporation on a full-time basis by reason of "Total Disability" within the
meaning of Corporation's Group Long Term Disability Insurance Plan or any
successor plan or program maintained by Corporation. In the event Corporation no
longer maintains a similar plan or program,
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Disability or Disabled means inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment.
"EFFECTIVE DATE" - December 24, 1997.
"EXCESS PARACHUTE PAYMENT" - Has the meaning given in Section 280G(b)
of the Code.
"EXCHANGE ACT" - The Securities Exchange Act of 1934, as amended.
"EXCISE TAX" - A tax imposed by Section 4999(a) of the Code, or any
successor provision, with respect to an Excess Parachute Payment.
"GOOD REASON" - For all purposes of this Agreement, termination by
Executive of his employment with Corporation during the Employment Term for
"Good Reason" means termination based on any of the following:
(a) A change in Executive's status or position or positions with
Corporation that represents a material demotion from Executive's status
or position or positions as of the date of this Agreement or a material
change in Executive's duties or responsibilities that is inconsistent
with such status or position or positions;
(b) A reduction by Corporation in Executive's Base Salary (as in
effect on the date of this Agreement or as increased at any time during
the Term of this Agreement);
(c) The failure of Corporation to continue Executive's
participation (on terms comparable to those for other key executives of
Corporation) in any Plans and vacation programs or arrangements in
which other key executives of Corporation are participants (unless such
failure to continue is caused by an action or status of Executive); or
(d) Corporation's requiring Executive to be based more than 35
miles from Corporation's principal executive office, except for
required travel on Corporation's business to an extent substantially
consistent with Executive's business travel obligations as of the date
of this Agreement.
"OTHER AGREEMENT" - A plan, arrangement, or agreement pursuant to which
an Other Payment is made.
"OTHER PAYMENT" - Any payment or benefit payable to Executive in
connection with a Change in Control of Corporation pursuant to any plan,
arrangement, or agreement (other than this Agreement) with Corporation, any
person whose actions result in a change in control of Corporation, or any person
affiliated with Corporation or such person.
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"OUTSIDE TAX COUNSEL" - Outside tax counsel selected by Corporation and
reasonably acceptable to Executive.
"PARACHUTE PAYMENT" - A payment or benefit payable to Executive in
connection with a Change in Control of Corporation that is treated as a
parachute payment within the meaning of Code Section 280G(b)(2).
"PERSON" - Any individual, corporation, partnership, limited liability
company, group, association, or other "person," as such term is used in Section
13(d)(3) or Section 14(d) of the Exchange Act, other than Corporation or any
employee benefit plan or plans sponsored by Corporation.
"PLAN" - Any compensation plan such as a plan providing for incentive
or deferred compensation, stock options or other stock or stock-related grants
or awards, or any employee benefit plan such as a thrift, investment, savings,
pension, profit sharing, medical, disability, accident, life insurance,
cafeteria, or relocation plan or any other plan, policy, or program of
Corporation providing similar types of benefits to employees of Corporation.
"SEVERANCE PAYMENTS" - The severance payments described in Section 5.4
of this Agreement.
"TERM" - The period from the Effective Date through December 24, 2001;
provided, however, that the Term will automatically be extended to December 24,
2002 (and thereafter will be similarly extended in additional one-year
extensions) unless, on or before June 30, 2001 (or, if the term has been
extended, June 30 of the last year of the Term), either Corporation or Executive
gives written notice of non-extension of the Term.
"TERMINATION BENEFITS" - The payments and benefits described in Section
5 of this Agreement.
"TERMINATION DATE" - The date Executive's employment with Corporation
is terminated for any reason by Corporation or by Executive.
"TOTAL PAYMENTS" - All payments or benefits payable to Executive in
connection with a Change in Control of Corporation, including Severance Payments
and Other Payments.
"VOTING SECURITIES" - Corporation's issued and outstanding securities
ordinarily having the right to vote at elections of Corporation's Board.
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2. EMPLOYMENT. Corporation hereby agrees to employ Executive, and
Executive hereby accepts employment with Corporation, during the Term of this
Agreement on the terms and conditions set forth in this Agreement. Corporation's
agreement to employ Executive is subject to the reservations provided in the
definition of "Cause" in Section 1 and in Section 3.3.
3. EXECUTIVE DUTIES.
3.1 Position and Duties. Executive agrees to render services to
Corporation as Vice President and Chief Financial Officer of Corporation and as
an executive officer of such of Corporation's Affiliates as the parties to this
Agreement mutually agree, including Affiliates that may be formed or acquired
subsequent to the Effective Date. As Chief Financial Officer of Corporation,
Executive will have responsibility for all financial and accounting matters
affecting Corporation's business and will have such executive and managerial
duties as Corporation's Chief Executive Officer or President prescribes from
time to time.
3.2 Exclusive Employment. Executive agrees that during the Term of this
Agreement:
(a) Executive will devote substantially all his regular business
time solely and exclusively to the business of Corporation, whether
such business is operated directly by Corporation or through one or
more Affiliates of Corporation;
(b) Executive will diligently carry out his responsibilities under
this Agreement;
(c) Executive will not, directly or indirectly, without the prior
approval of the Board, provide services on behalf of any Competitive
Entity or on behalf of any subsidiary or affiliate of any such
Competitive Entity, as an employee, consultant, independent contractor,
agent, sole proprietor, partner, member, joint venturer, corporate
officer, or director;
(d) Executive will not acquire by reason of purchase the ownership
of more than 1 percent of the outstanding equity interest in any
Competitive Entity; and
(e) Except as expressly set forth above, Executive may engage in
personal business and investment activities.
3.3 Corporation Reserved Rights. Corporation reserves, on its own
behalf and on behalf of its shareholders, the right to elect, from time to time,
any person to its Board, to appoint any person as an officer of Corporation, and
to remove any officer or director, including Executive, in any manner and upon
the basis or bases presently or
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subsequently provided for by its articles of incorporation and bylaws. Nothing
in this Agreement will be deemed to constitute any restriction on the authority,
discretion, or power of the Board, but rather will only give Executive
contractual rights and remedies.
3.4 Nondisclosure. During and after the Term of this Agreement,
Executive agrees not to disclose to any persons with interests adverse or
potentially adverse to Corporation (other than an employee or agent of
Corporation or any Affiliate entitled to receive such information) confidential
information relating to the business of Corporation or any Affiliate and
obtained by Executive while providing services to Corporation or any Affiliate
without the consent of the Board, or until the information ceases to be
confidential. Notwithstanding the foregoing, Executive will not be precluded
from making disclosures respecting Corporation or any Affiliate where the
disclosures are made pursuant to compulsory legal process or when otherwise
required by an appropriate government agency.
4. COMPENSATION AND BENEFITS.
4.1 Base Salary. As compensation for the performance of Executive's
services hereunder, inclusive of services as an officer and director of
Corporation's Affiliates, Corporation will pay to Executive in accordance with
its normal payroll practices an annual salary (the "Base Salary") of $115,000
per year, subject to such increases (but not decreases) as are determined from
time to time by the Board, or a compensation committee designated by the Board.
4.2 Incentive Bonuses.
4.2.1 Initial Bonus. Upon execution of this Agreement, Corporation will
pay Executive a bonus for services performed in Corporation's fiscal year ended
July 31, 1997, in an amount equal to $42,500.
4.2.2 Annual Bonus. During the Term of this Agreement, Executive will
be eligible to receive an incentive bonus for each fiscal year (beginning with
the fiscal year ending July 31, 1998) (an "Annual Bonus") in an amount (as
determined by the Board) up to 50 percent of Executive's Base Salary for such
fiscal year. The Annual Bonus for each fiscal year will be payable no later than
120 days following the end of each fiscal year.
4.3 Stock Options
4.3.1 Option Limitations. Corporation's common stock is traded on the
Alberta Stock Exchange ("ASE"). The rules of the ASE limit the number of shares
of Corporation's common stock with respect to which its listed companies may
grant stock options. Corporation has granted options up to the maximum permitted
under such rules. Corporation intends to apply for listing on the American Stock
Exchange ("AMEX") when it is able to meet the listing requirements for the AMEX.
At such time as Corporation obtains an AMEX listing, it will be permitted to
grant additional stock options.
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4.3.2 Option Awards. At such time as Corporation is permitted to grant
additional options, Corporation will immediately grant Executive nonqualified
stock option awards (the "Options") under Corporation's Stock Award Plan for the
following number of shares of Corporation's common stock with the following
option exercise prices:
Per Share
Group No. Shares Option Exercise Price(1)
----- ---------- ------------------------
1 640,000 US $1.35
2 160,000 US $2.00
3 200,000 US $2.40
The Options will have the following additional features:
o The number of shares subject to the Options and the respective
option exercise prices will be adjusted to reflect any reverse stock
split or other similar restructuring of Corporation's common stock;
o The effective date of the option grants (the "Grant Date") will
be the date the Board takes action to grant the Options;
o The Options will have a term of the shorter of (a) the maximum
term allowable under the rules of the principal stock exchange or
market system on which shares of Corporation's common stock are traded
on the Grant Date or (b) 10 years, commencing on the Grant Date;
o The Options of each group will become exercisable over four
years at 25 percent per year as follows, based on the anniversaries of
the Grant Date:
Cumulative
Anniversary of Percentage
Grant Date Exercisable
-------------- -----------
Prior to First 0%
First 25%
Second 50%
Third 75%
Fourth 100%
- -------------------
(1) The option exercise prices will be the greater of the fair market value of a
share of common stock on the Grant Date or the minimum prices shown in the table
so that the grant of the Options will not result in any direct charge to
Corporation's reported earnings.
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o The Options will become immediately and fully exercisable in the
event that, within one year following a Change in Control of
Corporation, Executive is terminated without Cause or one of the events
described in the definition of Good Reason in Section 1 of this
Agreement occurs (provided, however, that for this purpose, an
acquisition of more than 50 percent of the Voting Securities by WPV, or
any person that directly or indirectly controls, is controlled by, is
under common control with, or is otherwise affiliated with WPV, will
constitute a Change in Control);
o Corporation agrees to register the shares subject to the Option;
o The Option will be governed by an Award Agreement as approved by
the Board; and
o Vested Options will remain exercisable for 90 days after
termination of employment or, in the case of termination due to death
or Disability, for one year.
4.4 Other Benefits. During the Term of this Agreement, Executive will
be entitled to participate in all Plans (including Plans adopted following the
Effective Date) covering Corporation's key executive and managerial employees
(as described in Corporation's employee manual, as amended from time to time),
including, without limitation, Plans providing medical, disability, and life
insurance benefits, and vacation pay. In addition Corporation will pay up to
$500 per calendar month during the Term of this Agreement for lease of an
automobile for Executive's use (subject to normal Corporation policies regarding
accounting for personal use of such automobile).
4.5 Expenses. Executive is authorized to incur on behalf of
Corporation, and Corporation will directly pay or will fully reimburse Executive
for all customary and reasonable out-of-pocket expenses incurred for promoting,
pursuing, or otherwise furthering the business of Corporation or its affiliates.
5. TERMINATION OF AGREEMENT.
5.1 Death. If Executive dies prior to the expiration of the Term of
this Agreement, Corporation will pay to Executive's representative his Base
Salary through the date of death. All benefits, including death benefits, to
which Executive is then entitled under Plans in which Executive is a participant
will be payable as provided in those Plans. This Agreement will terminate as of
the date of death and Corporation will have no further obligations to Executive
under this Agreement.
5.2 Disability. In the event Executive becomes Disabled during the
Term, the Agreement will remain in effect and Executive will be entitled to
continue to receive the compensation and benefits described in Section 4 until
the expiration of the Term with the following modifications:
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(a) The Annual Bonus, if any, that otherwise would be earned by
Executive for the year in which his employment is terminated by reason
of Disability (the "Disability Year") will be prorated based on the
number of days before and after the Termination Date;
(b) Executive will not be entitled to any Annual Bonus for years
following the Disability Year; and
(c) The amounts otherwise payable to Executive as Base Salary
following the Termination Date will be reduced by the amount, if any,
of benefits paid to Executive under Corporation's Group Long Term
Disability Insurance Plan. To the extent allowable under applicable law
and other Corporation Plans, Executive will be treated as an employee
of Corporation during the period after the Termination Date and through
the end of the Term for purposes of this Agreement and the Plans in
which Executive is a participant.
5.3 Termination for Cause or Voluntary Termination Without Good Reason.
Pending the determination by the Board whether or not Cause exists for
termination of Executive's employment pursuant to the definition of Cause in
Section 1, the Board may suspend Executive or relieve Executive of his duties as
an officer, but may not terminate Executive's employment. Upon such
determination that Cause exists, Corporation may terminate Executive's
employment. If Corporation terminates Executive's employment for Cause or
Executive terminates employment other than for Good Reason, Corporation will pay
Executive his Base Salary through the effective date of such termination and,
only if Corporation elects, additional compensation equal to one-half of
Executive's Base Salary for the period during which Executive is obligated not
to compete pursuant to Section 5.7 of this Agreement. This Agreement will
terminate as of the Termination Date, and Corporation will have no further
obligations to Executive under this Agreement. All accrued benefits to which
Executive is then entitled under Plans in which he is a participant will be
payable as provided in those Plans.
5.4 Termination Without Cause or With Good Reason. If Executive's
employment with Corporation is terminated (other than for Disability or upon
Executive's death) by Corporation without Cause or by Executive with Good
Reason, Corporation will pay Executive the following amounts ("Severance
Payments"):
(a) Executive's Base Salary through the Termination Date; and
(b) In lieu of any further salary payments to Executive for
periods subsequent to the Termination Date, an amount of severance pay
equal to Executive's Base Salary (payable in 12 substantially equal
monthly installments commencing on the first day of the first calendar
month beginning after the Termination Date).
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5.5 Related Benefits. Except in connection with Executive's death or
Termination by Corporation for Cause or Disability or by voluntary Termination
by Executive without Good Reason, Corporation will retain in full force and
effect for the continued benefit of Executive for one year after the Termination
Date all Plans in which Executive was entitled to participate immediately prior
to the Termination Date, provided that Executive's continued participation is
possible under the general terms and provisions of such Plans; provided,
however, that if the participation by Executive in any Plan is barred by the
provisions of such Plan, Corporation will arrange to provide Executive with
benefits substantially similar to those to which Executive is entitled to
receive under such Plan (provided, however, that the cost of such benefits does
not exceed 125 percent of the prevailing cost of similar benefits under
Corporation's Plans).
5.6 No Mitigation. Executive will not be required to mitigate the
amount of any payment provided for in this Section 5 by seeking other employment
or otherwise. However, except in the case of a termination of Executive without
Cause or with Good Reason within one year following a Change in Control of
Corporation, the amount of any payment or related benefit provided for in this
Section 5 will be reduced by any compensation earned or related benefit received
by Executive as a result of either employment by another employer or self-
employment after the Termination Date. Executive agrees to provide Corporation
with any information reasonably necessary to determine the amount of such
reduction.
5.7 Noncompetition Following Termination. Executive acknowledges that
the agreements and covenants contained in this Section 5.7 are essential to
protect the value of Corporation's business and assets and that, by his current
employment with Corporation and its subsidiaries, Executive has obtained and
will obtain such knowledge, contacts, know-how, training and experience, and
that such knowledge, contacts, know-how, training and experience could be used
to the substantial advantage of a Competitive Entity and to Corporation's
substantial detriment. Therefore Executive agrees that:
(a) In the event Executive's employment is terminated (whether by
Corporation or by Executive) for any reason before the expiration of
the Term, Executive will not, for a period of two years from the
Termination Date, participate (as an owner, employee, officer, partner,
member, shareholder, director, consultant, or otherwise) in any
Competitive Entity. The benefits payable under this Agreement,
including without limitation Corporation's obligation to pay Severance
Benefits pursuant to Section 5.4 of this Agreement, and, if Corporation
so elects, the additional compensation provided in Section 5.3 of this
Agreement, are in consideration of Executive's performance of the
covenants in this Section 5.7.
(b) Executive acknowledges that pursuant to the terms of this
Agreement, he is receiving a "bona fide advancement" in terms of his
employment with Corporation within the meaning of ORS 653.295.
Executive further acknowledges that he is receiving consideration under
this Agreement
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in addition to such consideration as to which he would be entitled in
the absence of this Agreement, and he acknowledges that his agreement
to the provisions of this Section 5.7 is a necessary condition for
Corporation to enter into this Agreement and pay the consideration
provided for in this Agreement.
(c) Executive acknowledges that Corporation's remedy at law for a
breach by him of the provisions of this Section 5.7 will be inadequate.
Accordingly, in the event of the breach or threatened breach by
Executive of any provision of this Section 5.7, Corporation will be
entitled to injunctive relief in addition to any other remedy it may
have. If any of the provisions of, or covenants contained in, this
Section 5.7 are hereafter construed to be invalid or unenforceable in
any jurisdiction, the same will not affect the remainder of the
provisions or the enforceability thereof in any other jurisdiction,
which will be given full effect, without regard to the invalidity or
unenforceability in such other jurisdiction. If any of the provisions
of, or covenants contained in, this Section 5.7 are held to be
unenforceable in any jurisdiction because of the duration or
geographical scope of such provision or covenant, Executive and
Corporation agree that the court making such determination will have
the power to reduce the duration or geographical scope of such
provision or covenant and that, in its reduced form, such provision or
covenant will be enforceable; provided, however, that the determination
of such court will not affect the enforceability of this Section 5.7 in
any other jurisdiction.
6. EFFECT OF CHANGE IN CONTROL.
6.1 Treatment of Severance Benefits. The Severance Benefits payable
under Section 5.4 of this Agreement are not conditioned upon a Change in Control
of Corporation but are payable upon any termination described in that Section,
whether or not a Change in Control has occurred. Thus, it is the parties' mutual
intention that the Severance Benefits are not to be treated as Total Payments.
In the event a termination of employment that would otherwise be governed by
Section 5.4 occurs following a Change in Control and the Severance Payments are
deemed to be Total Payments, the Severance Payments will be reduced pursuant to
Section 6.2.
6.2 Reduction in Severance Payments to Avoid Excess Parachute Tax
Payments.
6.2.1 Reduction. In the event that any portion of the Total Payments
received by Executive in connection with a Change in Control of Corporation
would constitute an Excess Parachute Payment that is subject to an Excise Tax,
the Severance Payments otherwise payable under Section 5.4 will be reduced to
the extent necessary to avoid such Excess Tax, until either (i) no portion of
the Total Payments are subject to such Excise Tax or (ii) the Severance Payments
are reduced to zero.
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6.2.2 Application. For purposes of this limitation:
(a) No portion of the Total Payments, the receipts or enjoyment of
which Executive has effectively waived in writing prior to the date of
payment of the Severance Payments, will be taken into account;
(b) No portion of the Total Payments will be taken into account
which, in the opinion of Outside Tax Counsel, does not constitute a
Parachute Payment;
(c) If Executive and Corporation disagree whether any payment of
Severance Payments will result in an Excise Tax, the matter will be
conclusively resolved by an opinion of Outside Tax Counsel;
(d) Executive agrees to provide Outside Tax Counsel with all
financial information necessary to determine the after-tax consequences
of payments of Severance Payments for purposes of determining whether,
or to what extent, Severance Payments are to be reduced pursuant to
this Section 6.2.
(e) The Severance Payments will be reduced only to the extent
necessary so that the Total Payments (other than those referred to in
Section 6.2.2(a) or 6.2.2(b)) in their entirety constitute, in the
opinion of Tax Counsel, reasonable compensation for services actually
rendered within the meaning of Section 280G(b)(4) of the Code; and
(f) The value of any noncash benefit or any deferred payment or
benefit included in the Total Payments, and whether or not all or a
portion of any payment or benefit is a Parachute Payment for purposes
of Section 6.2.2(b), will be determined by Corporation's independent
accountants in accordance with the principles of Section 280(G)(d)(3)
and (4) of the Code.
6.2.3 Effect on Other Agreements. In the event that any Other Agreement
has a provision that requires a reduction in the Other Payment governed by such
Other Agreement to avoid or eliminate an Excess Parachute Payment, the reduction
in Severance Payments pursuant to this Section 6.2 will be given effect before
any reduction in the Other Payment pursuant to the Other Agreement. To the
extent possible, Corporation and Executive agree that reductions in benefits
under any Plan will be reduced in the following order of priority:
(i) Severance Payments under this Agreement;
(ii) Plan benefit continuation; and
(iii) The acceleration in the exercisability of any stock option
or other stock related award granted to Executive by Corporation.
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7. SUCCESSORS; BINDING EFFECT.
7.1 Corporation. This Agreement will inure to the benefit of, and be
binding upon, any corporate or other successor or assignee of Corporation that
acquires, directly or indirectly, by merger, consolidation or purchase, or
otherwise, all or substantially all the business or assets of Corporation.
Corporation will require any such successor, by an agreement in form and
substance reasonably satisfactory to Executive, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent as Corporation
would be required to perform if no such succession had taken place.
7.2 Executive. This Agreement will inure to the benefit of and be
enforceable by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees, and legatees. If
Executive should die while any amount would still be payable to Executive
hereunder if Executive had continued to live, all such amounts, unless otherwise
provided herein, will be paid in accordance with the terms of this Agreement to
Executive's devisee, legatee, or other designee or, if there is no such
designee, to Executive's estate.
8. WAIVER AND MODIFICATION. Any waiver, alteration, or modification of
any of the terms of this Agreement will be valid only if made in writing and
signed by the parties to this Agreement. No waiver by either of the parties of
its rights under this Agreement will be deemed to constitute a waiver with
respect to any subsequent occurrences or transactions hereunder unless the
waiver specifically states that it is to be construed as a continuing waiver.
9. GOVERNING LAW; SEVERABILITY. The validity, interpretation,
construction, and performance of this Agreement will be governed by and
construed in accordance with the laws of the state of Oregon. Any provision of
this Agreement that is prohibited or unenforceable will be ineffective only to
the extent of that prohibition or unenforceability without invalidating the
remaining provisions of this Agreement.
10. NOTICES. For the purposes of this Agreement, notices and all
communications provided for in this Agreement must be in writing and will be
deemed to have been given upon the earlier of (i) personal delivery or (ii)
three business days after being mailed by United States registered mail, return
receipt requested, with postage prepaid, addressed to the respective party at
the address set forth below (or to such other address as either party may have
furnished to the other in writing in accordance with this Section 9, except that
notices of change of address will be effective only upon receipt):
To Corporation: HealthCare Capital Corp.
111 S.W. Fifth Avenue
Suite 2390
Portland, Oregon 97204
Attn: Brandon M. Dawson
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To Executive: Edwin J. Kawasaki
2391 S.W. College View Drive
West Linn, Oregon 97068
11. HEADINGS. Headings herein are for convenience only, are not a part
of this Agreement, and are not to be used in construing this Agreement.
12. ARBITRATION. Any dispute or claim that arises out of or that
relates to this Agreement or to the interpretation, breach, or enforcement of
this Agreement, must be resolved by mandatory arbitration in accordance with the
then effective arbitration rules of Arbitration Service of Portland, Inc., and
any judgment upon the award rendered pursuant to such arbitration may be entered
in any court having jurisdiction thereof.
13. ATTORNEYS' FEES. In the event of any suit or action or arbitration
proceeding to enforce or interpret any provision of this Agreement (or which is
based on this Agreement), the prevailing party will be entitled to recover, in
addition to other costs, reasonable attorneys' fees in connection with such
suit, action, arbitration, and in any appeal. The determination of who is the
prevailing party and the amount of reasonable attorneys' fees to be paid to the
prevailing party will be decided by the arbitrator or arbitrators (with respect
to attorneys' fees incurred prior to and during the arbitration proceedings) and
by the court or courts, including any appellate courts, in which the matter is
tried, heard, or decided, including the court which hears any exceptions made to
an arbitration award submitted to it for confirmation as a judgment (with
respect to attorneys' fees incurred in such confirmation proceedings).
14. EFFECT OF TERMINATION OF AGREEMENT. If this Agreement is
terminated, all rights and benefits that have become vested hereunder prior to
termination will remain in full force and effect, and the termination of the
Agreement will not be construed as relieving any party from the performance of
any accrued obligation incurred to the other under this Agreement.
15. ENTIRE AGREEMENT. This Agreement constitutes and embodies the
entire understanding and agreement of the parties hereto relating to the matters
addressed in this Agreement. Except as otherwise provided in this Agreement,
there are no other agreements or understandings, written or oral, in effect
between the parties relating to the matters addressed herein.
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IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
effective as of the Effective Date.
Corporation: HEALTHCARE CAPITAL CORP.
By /s/ Brandon M. Dawson
EXECUTIVE: /s/ Edwin J. Kawasaki
Edwin J. Kawasaki
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into effective November
14, 1997, between HEALTHCARE CAPITAL CORP., an Alberta, Canada corporation
("Corporation"), and RANDALL E. DRULLINGER ("Executive").
RECITALS
A. Executive is currently Vice President of Marketing of Corporation.
Executive is an innovative, highly experienced, and knowledgeable executive
whose creativity, expertise, and effort have been instrumental in the
development of the business and growth of Corporation.
B. Corporation recognizes that the future growth, profitability, and
success of the business of Corporation and its subsidiaries require, and will be
substantially and materially advanced by, the continued employment of Executive.
Corporation desires, therefore, to secure for Corporation and its affiliates the
continued benefit of Executive's experience, ability, and leadership. In order
to retain the services of Executive and to maximize the period of his continued
availability, and in recognition of his continuing contribution to Corporation's
success, Corporation desires to offer Executive the compensation, amenities, and
other benefits that executives of comparable experience and ability generally
receive.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms have the
meanings set forth in this Section 1:
"AFFILIATE" - Any person, firm, corporation, association, organization,
or unincorporated trade or business that, now or hereinafter, directly or
indirectly, controls, is controlled by, or is under common control with
Corporation.
"BOARD" - The board of directors of Corporation.
"CAUSE" - Cause for termination of employment means:
(i) A material act of fraud or dishonesty by Executive within the
course of performing his duties for Corporation or its Affiliates;
(ii) Gross negligence or intentional misconduct by Executive in
performing material duties for Corporation or its Affiliates, or
unjustifiable
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neglect by Executive of the performance of material duties for
Corporation or its Affiliates;
(iii) Commission of an act (or failure to take an action)
intentionally against the interest of Corporation or its Affiliates
that causes Corporation or an Affiliate material injury; or
(iv) An act of serious moral turpitude that causes Corporation or
an Affiliate material injury.
Notwithstanding the foregoing, Executive will not be deemed to have been
terminated for Cause unless and until there has been delivered to Executive a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Board (excluding Executive if at the
time he is member of the Board), at a meeting of the Board called and held for
that purpose, finding that, in the good faith opinion of the Board, Executive
was guilty of conduct constituting Cause as defined in this Agreement and
specifying the particulars thereof in detail. Executive must have been given
reasonable notice of such meeting and Executive, together with his counsel, must
have been given an opportunity to be heard before the Board at the meeting. This
provision will not be deemed to restrict the authority, discretion, or power of
the Board, by any action taken in compliance with Corporation's articles of
incorporation and bylaws, to remove Executive as an officer or director of
Corporation, with or without Cause. Rather, the foregoing provisions merely
define, for purposes of Executive's contractual rights and remedies under this
Agreement, the circumstances in which termination of Executive's employment will
constitute termination for Cause.
"CHANGE IN CONTROL" - A change in control of Corporation means:
(i) The acquisition by any Person of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50
percent or more of the combined voting power of the then outstanding
Voting Securities; provided, however, that for purposes of this
paragraph (i), the following acquisitions will not constitute a Change
of Control: (A) any acquisition directly from Corporation, (B) any
acquisition by Corporation, (C) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by Corporation or any
corporation controlled by Corporation, (D) any acquisition by Warburg,
Pincus Ventures, L.P. ("WPV") or by any Person that, now or
hereinafter, directly or indirectly controls, is controlled by, is
under common control with, or is otherwise an affiliate of, WPV, or (E)
any acquisition by any corporation pursuant to a transaction which
complies with clauses (A), (B), and (C) of paragraph (iii) below; or
(ii) individuals who, as of the date of this Agreement, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming
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a director subsequent to the date of this Agreement whose election, or
nomination for election by Corporation's shareholders, was approved by
a vote of at least a majority of the directors then comprising the
Incumbent Board will be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board; or
(iii) consummation of a reorganization, merger, or consolidation
or sale or other disposition of all or substantially all of the assets
of Corporation (a "Business Combination") in each case, unless,
following such Business Combination, (A) all or substantially all of
the individuals and entities who were the beneficial owners of the
Voting Securities outstanding immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 50
percent of, respectively, the then outstanding shares of common stock
and the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of such
transaction owns Corporation or all or substantially all of
Corporation's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the Voting
Securities, (B) no Person (excluding any employee benefit plan (or
related trust) of Corporation or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly, 50
percent or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or
the combined voting power of the then outstanding voting securities of
such corporation except to the extent that such ownership existed prior
to the Business Combination and (C) at least a majority of the members
of the board of directors of the corporation resulting from such
Business Combination were members of Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination.
"COMPETITIVE ENTITY" - A Person, firm, or entity engaged in the
national or regional (in the United States or Canada) retail provision of
audiology services and/or dispensing of hearing aids.
"DISABILITY" OR "DISABLED" - Inability to perform duties with
Corporation on a full-time basis by reason of "Total Disability" within the
meaning of Corporation's Group Long Term Disability Insurance Plan or any
successor plan or program maintained by Corporation. In the event Corporation no
longer maintains a similar plan or program,
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Disability or Disabled means inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment.
"EFFECTIVE DATE" - December 24, 1997.
"EXCESS PARACHUTE PAYMENT" - Has the meaning given in Section 280G(b)
of the Code.
"EXCHANGE ACT" - The Securities Exchange Act of 1934, as amended.
"EXCISE TAX" - A tax imposed by Section 4999(a) of the Code, or any
successor provision, with respect to an Excess Parachute Payment.
"GOOD REASON" - For all purposes of this Agreement, termination by
Executive of his employment with Corporation during the Employment Term for
"Good Reason" means termination based on any of the following:
(a) A change in Executive's status or position or positions with
Corporation that represents a material demotion from Executive's status
or position or positions as of the date of this Agreement or a material
change in Executive's duties or responsibilities that is inconsistent
with such status or position or positions;
(b) A reduction by Corporation in Executive's Base Salary (as in
effect on the date of this Agreement or as increased at any time during
the Term of this Agreement);
(c) The failure of Corporation to continue Executive's
participation (on terms comparable to those for other key executives of
Corporation) in any Plans and vacation programs or arrangements in
which other key executives of Corporation are participants (unless such
failure to continue is caused by an action or status of Executive); or
(d) Corporation's requiring Executive to be based more than 35
miles from Corporation's principal executive office, except for
required travel on Corporation's business to an extent substantially
consistent with Executive's business travel obligations as of the date
of this Agreement.
"OTHER AGREEMENT" - A plan, arrangement, or agreement pursuant to which
an Other Payment is made.
"OTHER PAYMENT" - Any payment or benefit payable to Executive in
connection with a Change in Control of Corporation pursuant to any plan,
arrangement, or agreement (other than this Agreement) with Corporation, any
person whose actions result in a change in control of Corporation, or any person
affiliated with Corporation or such person.
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"OUTSIDE TAX COUNSEL" - Outside tax counsel selected by Corporation and
reasonably acceptable to Executive.
"PARACHUTE PAYMENT" - A payment or benefit payable to Executive in
connection with a Change in Control of Corporation that is treated as a
parachute payment within the meaning of Code Section 280G(b)(2).
"PERSON" - Any individual, corporation, partnership, limited liability
company, group, association, or other "person," as such term is used in Section
13(d)(3) or Section 14(d) of the Exchange Act, other than Corporation or any
employee benefit plan or plans sponsored by Corporation.
"PLAN" - Any compensation plan such as a plan providing for incentive
or deferred compensation, stock options or other stock or stock-related grants
or awards, or any employee benefit plan such as a thrift, investment, savings,
pension, profit sharing, medical, disability, accident, life insurance,
cafeteria, or relocation plan or any other plan, policy, or program of
Corporation providing similar types of benefits to employees of Corporation.
"SEVERANCE PAYMENTS" - The severance payments described in Section 5.4
of this Agreement.
"TERM" - The period from the Effective Date through December 24, 2001;
provided, however, that the Term will automatically be extended to December 24,
2002 (and thereafter will be similarly extended in additional one-year
extensions) unless, on or before June 30, 2001 (or, if the term has been
extended, June 30 of the last year of the Term), either Corporation or Executive
gives written notice of non-extension of the Term.
"TERMINATION BENEFITS" - The payments and benefits described in Section
5 of this Agreement.
"TERMINATION DATE" - The date Executive's employment with Corporation
is terminated for any reason by Corporation or by Executive.
"TOTAL PAYMENTS" - All payments or benefits payable to Executive in
connection with a Change in Control of Corporation, including Severance Payments
and Other Payments.
"VOTING SECURITIES" - Corporation's issued and outstanding securities
ordinarily having the right to vote at elections of Corporation's Board.
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2. EMPLOYMENT. Corporation hereby agrees to employ Executive, and
Executive hereby accepts employment with Corporation, during the Term of this
Agreement on the terms and conditions set forth in this Agreement. Corporation's
agreement to employ Executive is subject to the reservations provided in the
definition of "Cause" in Section 1 and in Section 3.3.
3. EXECUTIVE DUTIES.
3.1 Position and Duties. Executive agrees to render services to
Corporation as Vice President of Marketing of Corporation and as an executive
officer of such of Corporation's Affiliates as the parties to this Agreement
mutually agree, including Affiliates that may be formed or acquired subsequent
to the Effective Date. As Vice President of Marketing of Corporation, Executive
will have responsibility for all marketing matters affecting Corporation's
business and will have such executive and managerial duties as Corporation's
Chief Executive Officer or President prescribes from time to time.
3.2 Exclusive Employment. Executive agrees that during the Term of this
Agreement:
(a) Executive will devote substantially all his regular business
time solely and exclusively to the business of Corporation, whether
such business is operated directly by Corporation or through one or
more Affiliates of Corporation;
(b) Executive will diligently carry out his responsibilities under
this Agreement;
(c) Executive will not, directly or indirectly, without the prior
approval of the Board, provide services on behalf of any Competitive
Entity or on behalf of any subsidiary or affiliate of any such
Competitive Entity, as an employee, consultant, independent contractor,
agent, sole proprietor, partner, member, joint venturer, corporate
officer, or director;
(d) Executive will not acquire by reason of purchase the ownership
of more than 1 percent of the outstanding equity interest in any
Competitive Entity; and
(e) Except as expressly set forth above, Executive may engage in
personal business and investment activities.
3.3 Corporation Reserved Rights. Corporation reserves, on its own
behalf and on behalf of its shareholders, the right to elect, from time to time,
any person to its Board, to appoint any person as an officer of Corporation, and
to remove any officer or director, including Executive, in any manner and upon
the basis or bases presently or subsequently provided for by its articles of
incorporation and bylaws. Nothing in this
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Agreement will be deemed to constitute any restriction on the authority,
discretion, or power of the Board, but rather will only give Executive
contractual rights and remedies.
3.4 Nondisclosure. During and after the Term of this Agreement,
Executive agrees not to disclose to any persons with interests adverse or
potentially adverse to Corporation (other than an employee or agent of
Corporation or any Affiliate entitled to receive such information) confidential
information relating to the business of Corporation or any Affiliate and
obtained by Executive while providing services to Corporation or any Affiliate
without the consent of the Board, or until the information ceases to be
confidential. Notwithstanding the foregoing, Executive will not be precluded
from making disclosures respecting Corporation or any Affiliate where the
disclosures are made pursuant to compulsory legal process or when otherwise
required by an appropriate government agency.
4. COMPENSATION AND BENEFITS.
4.1 Base Salary. As compensation for the performance of Executive's
services hereunder, inclusive of services as an officer and director of
Corporation's Affiliates, Corporation will pay to Executive in accordance with
its normal payroll practices an annual salary (the "Base Salary") of $104,000
per year, subject to such increases (but not decreases) as are determined from
time to time by the Board, or a compensation committee designated by the Board.
4.2 Annual Bonus. During the Term of this Agreement, Executive will be
eligible to receive an incentive bonus for each fiscal year (beginning with the
fiscal year ending July 31, 1998) (an "Annual Bonus") in an amount (as
determined by the Board) up to 50 percent of Executive's Base Salary for such
fiscal year. The Annual Bonus for each fiscal year will be payable no later than
120 days following the end of each fiscal year.
4.3 Stock Options
4.3.1 Option Limitations. Corporation's common stock is traded on the
Alberta Stock Exchange ("ASE"). The rules of the ASE limit the number of shares
of Corporation's common stock with respect to which its listed companies may
grant stock options. Corporation has granted options up to the maximum permitted
under such rules. Corporation intends to apply for listing on the American Stock
Exchange ("AMEX") when it is able to meet the listing requirements for the AMEX.
At such time as Corporation obtains an AMEX listing, it will be permitted to
grant additional stock options.
4.3.2 Option Awards. At such time as Corporation is permitted to grant
additional options, Corporation will immediately grant Executive nonqualified
stock option awards (the "Options") under Corporation's Stock Award Plan for the
following number of shares of Corporation's common stock with the following
option exercise prices:
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Per Share
Group No. Shares Option Exercise Price(1)
----- ---------- ------------------------
1 220,000 US $1.35
2 80,000 US $2.00
3 100,000 US $2.40
The Options will have the following additional features:
o The number of shares subject to the Options and the respective
option exercise prices will be adjusted to reflect any reverse stock
split or other similar restructuring of Corporation's common stock;
o The effective date of the option grants (the "Grant Date") will
be the date the Board takes action to grant the Options;
o The Options will have a term of the shorter of (a) the maximum
term allowable under the rules of the principal stock exchange or
market system on which shares of Corporation's common stock are traded
on the Grant Date or (b) 10 years, commencing on the Grant Date;
o The Options of each group will become exercisable over four
years at 25 percent per year as follows, based on the anniversaries of
the Grant Date:
Cumulative
Anniversary of Percentage
Grant Date Exercisable
-------------- -----------
Prior to First 0%
First 25%
Second 50%
Third 75%
Fourth 100%
o The Options will become immediately and fully exercisable in the
event that, within one year following a Change in Control of
Corporation, Executive is terminated without Cause or one of the events
described in the definition of Good Reason in Section 1 of this
Agreement occurs (provided, however, that for this purpose, an
acquisition of more than 50 percent of the
- --------
(1) The option exercise prices will be the greater of the fair market value of a
share of common stock on the Grant Date or the minimum prices shown in the table
so that the grant of the Options will not result in any direct charge to
Corporation's reported earnings.
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Voting Securities by WPV, or any person that directly or indirectly
controls, is controlled by, is under common control with, or is
otherwise affiliated with WPV, will constitute a Change in Control);
o Corporation agrees to register the shares subject to the Option;
o The Option will be governed by an Award Agreement as approved by
the Board; and
o Vested Options will remain exercisable for 90 days after
termination of employment or, in the case of termination due to death
or Disability, for one year.
4.4 Other Benefits. During the Term of this Agreement, Executive will
be entitled to participate in all Plans (including Plans adopted following the
Effective Date) covering Corporation's key executive and managerial employees
(as described in Corporation's employee manual as amended from time to time)
including, without limitation, Plans providing medical, disability, and life
insurance benefits, and vacation pay. In addition Corporation will pay up to
$500 per calendar month during the Term of this Agreement for lease of an
automobile for Executive's use (subject to normal Corporation policies regarding
accounting for personal use of such automobile).
4.5 Expenses. Executive is authorized to incur on behalf of
Corporation, and Corporation will directly pay or will fully reimburse Executive
for all customary and reasonable out-of-pocket expenses incurred for promoting,
pursuing, or otherwise furthering the business of Corporation or its affiliates.
5. TERMINATION OF AGREEMENT.
5.1 Death. If Executive dies prior to the expiration of the Term of
this Agreement, Corporation will pay to Executive's representative his Base
Salary through the date of death. All benefits, including death benefits, to
which Executive is then entitled under Plans in which Executive is a participant
will be payable as provided in those Plans. This Agreement will terminate as of
the date of death and Corporation will have no further obligations to Executive
under this Agreement.
5.2 Disability. In the event Executive becomes Disabled during the
Term, the Agreement will remain in effect and Executive will be entitled to
continue to receive the compensation and benefits described in Section 4 until
the expiration of the Term with the following modifications:
(a) The Annual Bonus, if any, that otherwise would be earned by
Executive for the year in which his employment is terminated by reason
of Disability (the "Disability Year") will be prorated based on the
number of days before and after the Termination Date;
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(b) Executive will not be entitled to any Annual Bonus for years
following the Disability Year; and
(c) The amounts otherwise payable to Executive as Base Salary
following the Termination Date will be reduced by the amount, if any,
of benefits paid to Executive under Corporation's Group Long Term
Disability Insurance Plan. To the extent allowable under applicable law
and other Corporation Plans, Executive will be treated as an employee
of Corporation during the period after the Termination Date and through
the end of the Term for purposes of this Agreement and the Plans in
which Executive is a participant.
5.3 Termination for Cause or Voluntary Termination Without Good Reason.
Pending the determination by the Board whether or not Cause exists for
termination of Executive's employment pursuant to the definition of Cause in
Section 1, the Board may suspend Executive or relieve Executive of his duties as
an officer, but may not terminate Executive's employment. Upon such
determination that Cause exists, Corporation may terminate Executive's
employment. If Corporation terminates Executive's employment for Cause or
Executive terminates employment other than for Good Reason, Corporation will pay
Executive his Base Salary through the effective date of such termination and,
only if Corporation elects, additional compensation equal to one-half of
Executive's Base Salary for the period during which Executive is obligated not
to compete pursuant to Section 5.7 of this Agreement. This Agreement will
terminate as of the Termination Date, and Corporation will have no further
obligations to Executive under this Agreement. All accrued benefits to which
Executive is then entitled under Plans in which he is a participant will be
payable as provided in those Plans.
5.4 Termination Without Cause or With Good Reason. If Executive's
employment with Corporation is terminated (other than for Disability or upon
Executive's death) by Corporation without Cause or by Executive with Good
Reason, Corporation will pay Executive the following amounts ("Severance
Payments"):
(a) Executive's Base Salary through the Termination Date; and
(b) In lieu of any further salary payments to Executive for
periods subsequent to the Termination Date, an amount of severance pay
equal to Executive's Base Salary (payable in 12 substantially equal
monthly installments commencing on the first day of the first calendar
month beginning after the Termination Date).
5.5 Related Benefits. Except in connection with Executive's death or
Termination by Corporation for Cause or Disability or by voluntary Termination
by Executive without Good Reason, Corporation will retain in full force and
effect for the continued benefit of Executive for one year after the Termination
Date all Plans in which Executive was entitled to participate immediately prior
to the Termination Date, provided
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that Executive's continuedparticipation is possible under the general terms and
provisions of such Plans; provided, however, that if the participation by
Executive in any Plan is barred by the provisions of such Plan, Corporation will
arrange to provide Executive with benefits substantially similar to those to
which Executive is entitled to receive under such Plan (provided, however, that
the cost of such benefits does not exceed 125 percent of the prevailing cost of
similar benefits under Corporation's Plans).
5.6 No Mitigation. Executive will not be required to mitigate the
amount of any payment provided for in this Section 5 by seeking other employment
or otherwise. However, except in the case of a termination of Executive without
Cause or with Good Reason within one year following a Change in Control of
Corporation, the amount of any payment or related benefit provided for in this
Section 5 will be reduced by any compensation earned or related benefit received
by Executive as a result of either employment by another employer or self-
employment after the Termination Date. Executive agrees to provide Corporation
with any information reasonably necessary to determine the amount of such
reduction.
5.7 Noncompetition Following Termination. Executive acknowledges that
the agreements and covenants contained in this Section 5.7 are essential to
protect the value of Corporation's business and assets and that, by his current
employment with Corporation and its subsidiaries, Executive has obtained and
will obtain such knowledge, contacts, know-how, training and experience, and
that such knowledge, contacts, know-how, training and experience could be used
to the substantial advantage of a Competitive Entity and to Corporation's
substantial detriment. Therefore Executive agrees that:
(a) In the event Executive's employment is terminated (whether by
Corporation or by Executive) for any reason before the expiration of
the Term, Executive will not, for a period of two years from the
Termination Date, participate (as an owner, employee, officer, partner,
member, shareholder, director, consultant, or otherwise) in any
Competitive Entity. The benefits payable under this Agreement,
including without limitation Corporation's obligation to pay Severance
Benefits pursuant to Section 5.4 of this Agreement, and, if Corporation
so elects, the additional compensation provided in Section 5.3 of this
Agreement, are in consideration of Executive's performance of the
covenants in this Section 5.7.
(b) Executive acknowledges that pursuant to the terms of this
Agreement, he is receiving a "bona fide advancement" in terms of his
employment with Corporation within the meaning of ORS 653.295.
Executive further acknowledges that he is receiving consideration under
this Agreement in addition to such consideration as to which he would
be entitled in the absence of this Agreement, and he acknowledges that
his agreement to the provisions of this Section 5.7 is a necessary
condition for Corporation to enter into this Agreement and pay the
consideration provided for in this Agreement.
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(c) Executive acknowledges that Corporation's remedy at law for a
breach by him of the provisions of this Section 5.7 will be inadequate.
Accordingly, in the event of the breach or threatened breach by
Executive of any provision of this Section 5.7, Corporation will be
entitled to injunctive relief in addition to any Other remedy it may
have. If any of the provisions of, or covenants contained in, this
Section 5.7 are hereafter construed to be invalid or unenforceable in
any jurisdiction, the same will not affect the remainder of the
provisions or the enforceability thereof in any other jurisdiction,
which will be given full effect, without regard to the invalidity or
unenforceability in such other jurisdiction. If any of the provisions
of, or covenants contained in, this Section 5.7 are held to be
unenforceable in any jurisdiction because of the duration or
geographical scope of such provision or covenant, Executive and
Corporation agree that the court making such determination will have
the power to reduce the duration or geographical scope of such
provision or covenant and that, in its reduced form, such provision or
covenant will be enforceable; provided, however, that the determination
of such court will not affect the enforceability of this Section 5.7 in
any other jurisdiction.
6. EFFECT OF CHANGE IN CONTROL.
6.1 Treatment of Severance Benefits. The Severance Benefits payable
under Section 5.4 of this Agreement are not conditioned upon a Change in Control
of Corporation but are payable upon any termination described in that Section,
whether or not a Change in Control has occurred. Thus, it is the parties' mutual
intention that the Severance Benefits are not to be treated as Total Payments.
In the event a termination of employment that would otherwise be governed by
Section 5.4 occurs following a Change in Control and the Severance Payments are
deemed to be Total Payments, the Severance Payments will be reduced pursuant to
Section 6.2.
6.2 Reduction in Severance Payments to Avoid Excess Parachute Tax
Payments.
6.2.1 Reduction. In the event that any portion of the Total Payments
received by Executive in connection with a Change in Control of Corporation
would constitute an Excess Parachute Payment that is subject to an Excise Tax,
the Severance Payments otherwise payable under Section 5.4 will be reduced to
the extent necessary to avoid such Excess Tax, until either (i) no portion of
the Total Payments are subject to such Excise Tax or (ii) the Severance Payments
are reduced to zero.
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6.2.2 Application. For purposes of this limitation:
(a) No portion of the Total Payments, the receipts or enjoyment of
which Executive has effectively waived in writing prior to the date of
payment of the Severance Payments, will be taken into account;
(b) No portion of the Total Payments will be taken into account
which, in the opinion of Outside Tax Counsel, does not constitute a
Parachute Payment;
(c) If Executive and Corporation disagree whether any payment of
Severance Payments will result in an Excise Tax, the matter will be
conclusively resolved by an opinion of Outside Tax Counsel;
(d) Executive agrees to provide Outside Tax Counsel with all
financial information necessary to determine the after-tax consequences
of payments of Severance Payments for purposes of determining whether,
or to what extent, Severance Payments are to be reduced pursuant to
this Section 6.2.
(e) The Severance Payments will be reduced only to the extent
necessary so that the Total Payments (other than those referred to in
Section 6.2.2(a) or 6.2.2(b)) in their entirety constitute, in the
opinion of Tax Counsel, reasonable compensation for services actually
rendered within the meaning of Section 280G(b)(4) of the Code; and
(f) The value of any noncash benefit or any deferred payment or
benefit included in the Total Payments, and whether or not all or a
portion of any payment or benefit is a Parachute Payment for purposes
of Section 6.2.2(b), will be determined by Corporation's independent
accountants in accordance with the principles of Section 280(G)(d)(3)
and (4) of the Code.
6.2.3 Effect on Other Agreements. In the event that any Other Agreement
has a provision that requires a reduction in the Other Payment governed by such
Other Agreement to avoid or eliminate an Excess Parachute Payment, the reduction
in Severance Payments pursuant to this Section 6.2 will be given effect before
any reduction in the Other Payment pursuant to the Other Agreement. To the
extent possible, Corporation and Executive agree that reductions in benefits
under any Plan will be reduced in the following order of priority:
(i) Severance Payments under this Agreement;
(ii) Plan benefit continuation; and
(iii) The acceleration in the exercisability of any stock option
or other stock related award granted to Executive by Corporation.
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7. SUCCESSORS; BINDING EFFECT.
7.1 Corporation. This Agreement will inure to the benefit of, and be
binding upon, any corporate or other successor or assignee of Corporation that
acquires, directly or indirectly, by merger, consolidation or purchase, or
otherwise, all or substantially all the business or assets of Corporation.
Corporation will require any such successor, by an agreement in form and
substance reasonably satisfactory to Executive, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent as Corporation
would be required to perform if no such succession had taken place.
7.2 Executive. This Agreement will inure to the benefit of and be
enforceable by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees, and legatees. If
Executive should die while any amount would still be payable to Executive
hereunder if Executive had continued to live, all such amounts, unless otherwise
provided herein, will be paid in accordance with the terms of this Agreement to
Executive's devisee, legatee, or other designee or, if there is no such
designee, to Executive's estate.
8. WAIVER AND MODIFICATION. Any waiver, alteration, or modification of
any of the terms of this Agreement will be valid only if made in writing and
signed by the parties to this Agreement. No waiver by either of the parties of
its rights under this Agreement will be deemed to constitute a waiver with
respect to any subsequent occurrences or transactions hereunder unless the
waiver specifically states that it is to be construed as a continuing waiver.
9. GOVERNING LAW; SEVERABILITY. The validity, interpretation,
construction, and performance of this Agreement will be governed by and
construed in accordance with the laws of the state of Oregon. Any provision of
this Agreement that is prohibited or unenforceable will be ineffective only to
the extent of that prohibition or unenforceability without invalidating the
remaining provisions of this Agreement.
10. NOTICES. For the purposes of this Agreement, notices and all
communications provided for in this Agreement must be in writing and will be
deemed to have been given upon the earlier of (i) personal delivery or (ii)
three business days after being mailed by United States registered mail, return
receipt requested, with postage prepaid, addressed to the respective party at
the address set forth below (or to such other address as either party may have
furnished to the other in writing in accordance with this Section 9, except that
notices of change of address will be effective only upon receipt):
To Corporation: HealthCare Capital Corp.
111 S.W. Fifth Avenue
Suite 2390
Portland, Oregon 97204
Attn: Brandon M. Dawson
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To Executive: Randall E. Drullinger
14134 S.W. Warbler Place
Portland, Oregon 97236
11. HEADINGS. Headings herein are for convenience only, are not a part
of this Agreement, and are not to be used in construing this Agreement.
12. ARBITRATION. Any dispute or claim that arises out of or that
relates to this Agreement or to the interpretation, breach, or enforcement of
this Agreement, must be resolved by mandatory arbitration in accordance with the
then effective arbitration rules of Arbitration Service of Portland, Inc., and
any judgment upon the award rendered pursuant to such arbitration may be entered
in any court having jurisdiction thereof.
13. ATTORNEYS' FEES. In the event of any suit or action or arbitration
proceeding to enforce or interpret any provision of this Agreement (or which is
based on this Agreement), the prevailing party will be entitled to recover, in
addition to other costs, reasonable attorneys' fees in connection with such
suit, action, arbitration, and in any appeal. The determination of who is the
prevailing party and the amount of reasonable attorneys' fees to be paid to the
prevailing party will be decided by the arbitrator or arbitrators (with respect
to attorneys' fees incurred prior to and during the arbitration proceedings) and
by the court or courts, including any appellate courts, in which the matter is
tried, heard, or decided, including the court which hears any exceptions made to
an arbitration award submitted to it for confirmation as a judgment (with
respect to attorneys' fees incurred in such confirmation proceedings).
14. EFFECT OF TERMINATION OF AGREEMENT. If this Agreement is
terminated, all rights and benefits that have become vested hereunder prior to
termination will remain in full force and effect, and the termination of the
Agreement will not be construed as relieving any party from the performance of
any accrued obligation incurred to the other under this Agreement.
15. ENTIRE AGREEMENT. This Agreement constitutes and embodies the
entire understanding and agreement of the parties hereto relating to the matters
addressed in this Agreement. Except as otherwise provided in this Agreement,
there are no other agreements or understandings, written or oral, in effect
between the parties relating to the matters addressed herein.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
effective as of the Effective Date.
Corporation: HEALTHCARE CAPITAL CORP.
By /s/ Brandon M. Dawson
EXECUTIVE: /s/ Randall E. Drullinger
Randall E. Drullinger
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STOCK PURCHASE AND SALE AGREEMENT
---------------------------------
(INGLEWOOD)
AGREEMENT dated as of January 5, 1998, by and between the individuals
named in Section 1.1 below (referred to herein individually as "Seller" and
collectively as "Sellers") and SONUS-USA, INC., a Washington corporation
("Purchaser").
RECITALS
--------
A. Hearing Care Associates-Inglewood, Inc., a California corporation
(the "Company"), operates an audiology and hearing aid clinic in Inglewood,
California, which performs testing and evaluation of patients' hearing,
prescribes and fits hearing aids, and provides related services and products.
B. Sellers own all shares of the issued and outstanding capital stock
of the Company (the "Shares").
C. Purchaser and Sellers desire that Purchaser acquire ownership of the
Company through a purchase of the Shares.
TERMS
-----
In consideration of the premises and of the mutual covenants,
representations, warranties and agreements contained herein, the parties agree
as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
1.1 Ownership of Shares. The Shares are owned by Sellers as follows:
Sellers Shares Percentage
------- ------ ----------
Gregory J. Frazer 50 50
Rhonda Jespersen 50 50
--- ---
100 100
1.2 Purchase and Sale of Shares. At the Closing (as defined in Section
2.1), on the terms and subject to the conditions set forth in this Agreement,
Sellers shall sell and deliver to Purchaser, and Purchaser shall purchase the
Shares from Sellers.
1.3 Purchase Price. Subject to adjustment as set forth in Section 1.4
hereof, the purchase price for the Shares (the "Purchase Price") shall be a
total of $197,000 payable to Sellers as follows:
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Sellers
-------
Gregory J. Frazer 98,500
Rhonda Jespersen 98,500
-------
$197,000
At the Closing, Purchaser shall pay the Purchase Price to Sellers by delivering
(i) to each Seller a certified check in the amount of $50,000, and (ii) to
Sellers jointly, a promissory note in the amount of $97,000, bearing interest at
the rate of 6 percent per annum with quarterly payments of not less than
$8,892.96 in the form of Schedule 1.3 attached hereto, which note shall be
subject to adjustment as set forth in Section 1.4 hereof.
1.4 Purchase Price Adjustment. Sellers acknowledge that the Purchase
Price was negotiated on the assumption that Company would have no long-term
liabilities, including debt at Closing. In the event that at Closing Company has
long-term liabilities, the $97,000 note payable to Sellers shall be reduced by
the total amount of such long term liabilities or at Sellers' election Sellers
may pay to Purchaser, on a pro rata basis, an amount equal to the total of any
such long-term liabilities.
ARTICLE II
CLOSING
2.1 Closing. The closing of the transaction provided for herein (the
"Closing") shall occur on such date on or before January ---, 1998, and at such
time and place as the parties shall mutually agree.
2.2 Closing Transactions. The following actions shall be taken at
Closing, each of which shall be conditional on completion of all the others and
all of which shall be deemed to have taken place simultaneously:
(a) Deliveries by Sellers. Sellers shall deliver to Purchaser:
(i) Certificates representing the Shares;
(ii) The stock and minute books of the Company; and
(iii) All consents required in connection with the
transactions contemplated hereunder.
(b) Deliveries by Purchaser. Purchaser shall deliver to
Sellers the checks and note provided for in Section 1.3.
(c) Joint Delivery.
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<PAGE>
(i) Purchaser and Sellers shall execute and deliver
counterparts of the Noncompetition Agreements provided for in
Section 6.5(a) hereof; and
(ii) Purchaser and Rhonda Jespersen shall execute and
deliver to each other counterparts of the Employment Agreement
provided for in Subsection 6.5(b) hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Except as otherwise set forth in the Disclosure Statement attached
hereto as Schedule III, Sellers represent and warrant to Purchaser as set forth
below in this Article III. Subject to the limitations set forth in Section
8.1(a), the Sellers shall be jointly and severally liable for breaches of such
representations and warranties except to the extent otherwise expressly set
forth in Section 3.1(b) hereof.
3.1 Corporate.
(a) Organization. The Company is a corporation duly organized
and existing under the laws of the state of California.
(b) Capitalization. The authorized capital stock of the
Company consists of a single class of common stock, of which 100 shares are
issued and outstanding. All issued and outstanding Shares have been validly
issued and are fully paid and nonassessable. Each Seller separately warrants
that such Seller is the owner of the number of shares shown in Section 1.1
hereof (beneficially and of record) free and clear of all liens, claims, and
encumbrances whatsoever. The Shares constitute all the outstanding shares of
capital stock of the Company. Except for a Buy-Out Agreement to which the
Sellers are parties, no person has any agreement, option or other right, present
or future, to purchase or otherwise acquire any of the shares of Company. Such
Buy-Out Agreement will be terminated effective as of the Closing date.
(c) Corporate Power. The Company has all requisite corporate
power and authority to own, operate and lease its properties and to
carry on its business as and where such is now being conducted.
(d) No Subsidiaries. The Company does not own an interest in
any corporation, partnership or other entity.
(e) Articles of Incorporation; Bylaws. The copies of Company's
articles of incorporation (certified by the Secretary of State of
California) and bylaws (certified by Company's secretary) which have
heretofore been delivered to Purchaser are complete and correct as
amended or restated to the date hereof.
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<PAGE>
3.2 No Violation. Neither the execution and delivery of this Agreement
or the other documents and instruments to be executed and delivered by the
Sellers pursuant hereto, nor the consummation by the Sellers of the transactions
contemplated hereby and thereby (a) will violate any statute or law or any rule,
regulation, order, writ, injunction or decree of any court or governmental
authority, (b) will require any authorization, consent, approval, exemption or
other action by or notice to any court, administrative or governmental agency,
instrumentality, commission, authority, board or body or (c) will violate or
conflict with, or constitute a default (or an event which, with notice or lapse
of time, or both, would constitute a default) under, or will result in the
termination of, or accelerate the performance required by, or result in the
creation of any material Lien (as defined in Section 3.8(b)) upon any of the
assets of the Company under, any term or provision of the articles of
incorporation or bylaws of the Company or of any material contract, commitment,
understanding, arrangement, agreement or restriction of any kind or character to
which the Company is a party or by which the Company or any of the Company's
assets or properties or the shares of the Company may be bound or affected.
3.3 Financial Statements. The Sellers have heretofore delivered to
Purchaser the following financial statements of the Company including balance
sheets and statements of income (the "Financial Statements"):
(a) Financial Statements for the Company's fiscal years ended
December 31, 1994, 1995, and 1996; and
(b) Financial Statements for the interim period ended November
30, 1997.
The Financial Statements are correct and complete in all material respects and
fairly present the financial condition of the Company at the dates indicated and
results of its operations and changes in its financial position for the periods
then ended.
3.4 Absence of Certain Changes. Since the date of the most recent
balance sheet included in the Financial Statements, there has not been:
3.4(a) Adverse Change. Any material adverse change in the
financial condition, assets, liabilities, business, prospects or
operations of the Company;
3.4(b) Damage. Any material loss, damage or destruction,
whether covered by insurance or not, affecting the Company's business
or assets;
3.4(c) Increase in Compensation. Any increase in the
compensation, salaries or wages payable or to become payable to any
employee or agent of the Company (including, without limitation, any
increase or change pursuant to any bonus, pension, profit sharing,
retirement or other plan or commitment), or any bonus or other employee
benefit granted, made or accrued;
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<PAGE>
3.4(d) Labor Disputes. Any labor dispute or disturbance, other
than routine individual grievances which are not material to the
business, financial condition or results of operations of the Company;
3.4(e) Commitments. Any commitment or transaction by the
Company (including, without limitation, any capital expenditure) other
than in the ordinary course of business consistent with past practice;
3.4(f) Dividends. Any declaration, setting aside, or payment
of any dividend or any other distribution in respect of the Company's
capital stock; any redemption, purchase or other acquisition by the
Company of any capital stock of the Company, or any security relating
thereto; or any other payment to any Shareholder as a shareholder;
3.4(g) Disposition of Property. Except as set forth on
Schedule 3.4(g), any sale, lease or other transfer or disposition of
any properties or assets of the Company except for sales of inventory,
consumption of supplies, and nonmaterial dispositions of worn or broken
parts and equipment in the ordinary course of business;
3.4(h) Indebtedness. Any indebtedness for borrowed money
incurred, assumed or guaranteed by the Company other than changes in
the Company's line of credit in the ordinary course of business;
3.4(i) Amendment of Contracts. Any entering into, amendment or
termination by the Company of any contract, or any waiver of material
rights thereunder, other than in the ordinary course of business;
3.4(j) Loans, Advances, or Credit. Any loan or advance or any
grant of credit by the Company; or
3.4(k) Unusual Events. Any other event or condition
specifically related to the Company not in the ordinary course of
business which would have a material adverse effect on the assets or
the business of the Company.
3.5 Absence of Undisclosed Liabilities. Except as and to the extent
specifically disclosed in the most recent balance sheet included in the
Financial Statements or this Agreement, the Company does not have any
liabilities other than commercial liabilities and obligations incurred since the
date of such balance sheet in the ordinary course of business consistent with
past practices none of which has or will have a material adverse effect on the
business, financial condition or results of operations of the Company.
3.6 No Litigation. There is no action, suit, arbitration, proceeding,
investigation or inquiry pending or to the knowledge of the Sellers threatened
against the Company, its directors (in such capacity), its business or any of
its assets, nor do the Sellers know of any such proceeding, investigation or
inquiry threatened against the Company. The Disclosure
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<PAGE>
Schedule identifies all actions, suits, proceedings, investigations and
inquiries to which the Company has been a party since January 1, 1993. Neither
the Company nor its business or assets are subject to any judgment, order, writ
or injunction of any court, arbitrator or federal, state, foreign, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality.
3.7 Compliance With Laws.
3.7(a) Compliance. Except as set forth in Section 3.7(a) of
the Disclosure Schedule, the Company (including each and all of its
operations, practices, properties and assets) is in material compliance
with all applicable federal, state, local and foreign laws, ordinances,
orders, rules and regulations (collectively, "Laws"), including,
without limitation, those applicable to discrimination in employment,
occupational safety and health, trade practices, environmental
protection, competition and pricing, product warranties, zoning,
building and sanitation, employment, retirement and labor relations,
and product advertising except to the extent any noncompliance would
not have a material adverse effect upon the assets or the business of
the Company taken as a whole. The Company has not received notice of
any violation or alleged violation of, and is not subject to liability
for past or continuing violation of, any Laws. All reports and returns
required to be filed by the Company with any governmental authority
have been filed, and were accurate and complete when filed except to
the extent any deficiency would not have a material adverse effect upon
the assets or the business of the Company taken as whole.
3.7(b) Licenses and Permits. The Company has obtained all
licenses, permits, approvals, authorizations and consents of all
governmental and regulatory authorities and all certification
organizations required for the conduct of its businesses (as presently
conducted) except to the extent failure to do so would not have a
material adverse effect upon the assets or the business of the Company
taken as a whole. All such licenses, permits, approvals, authorizations
and consents are described in the Disclosure Schedule and are in full
force and effect. The Company (including its operations, properties and
assets) is and has been in compliance with all such permits and
licenses, approvals, authorizations and consents, except to the extent
any noncompliance would not have a material adverse effect upon the
assets or the business of the Company taken as a whole.
3.8 Title to and Condition of Properties.
3.8(a) Real Property. Except as set forth on the Disclosure
Schedule, the Company does not own any interest in any real property
other than the leases referred to in Section 3.10(a) hereof.
3.8(b) Personal Property. The Company has good and marketable
title to all its assets, free and clear of all mortgages, liens
(statutory or otherwise), security interests, claims, pledges,
equities, options, conditional sales contracts, assessments,
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<PAGE>
levies, easements, covenants, reservations, restrictions, exceptions,
limitations, charges or encumbrances of any nature whatsoever
(collectively, "Liens"). All the Company's tangible assets are located
at the business premises leased by the Company. No personal property
owned by Sellers is located at Company's business premises.
3.8(c) Condition. All the Company's tangible assets are, taken
as a whole, in good operating condition and repair, normal wear and
tear excepted.
3.8(d) Land Use Regulations. There are no condemnation,
environmental, zoning, land use, or other regulatory proceedings,
pending or, to the knowledge of the Sellers, planned to be instituted,
that could detrimentally affect the ownership, use, or occupancy of the
real property presently occupied by the Company or the continued
operation of the Company's business as it is presently being conducted.
3.9 Insurance. The Company maintain policies of fire, liability,
product liability, workers compensation, health and other forms of insurance
with such coverage limits and deductible amounts as are reasonable and prudent
in light of the nature of its assets and the risks of its business.
3.10 Contracts and Commitments.
3.10(a) Leases. Set forth in Schedule 3.10(a) of the
Disclosure Schedule is a list of all real and personal property leases
to which the Company is a party. Complete and correct copies of each
lease listed on the schedule, and all amendments thereto, have
heretofore been made available to Purchaser.
3.10(b) Purchase Commitments. Set forth in Schedule 3.10(b) of
the Disclosure Schedule is a list of all agreements (written or oral)
between the Company and third parties for the purchase of goods and
supplies by the Company which individually call for the payment by the
Company after the date hereof of more than $1,000 or which obligate the
Company for a period of more than 90 days from the date hereof.
Complete and correct copies of all such written agreements have
heretofore been made available to Purchaser.
3.10(c) Sales Commitments. Set forth in Schedule 3.10(c) of
the Disclosure Schedule is a list and description of all presently
effective agreements (written or oral) between the Company and third
parties for the distribution and sale of its products. Complete and
correct copies of all such written contracts have heretofore been made
available to Purchaser.
3.10(d) Contracts With Sellers and Certain Others. Except for
the employment relationships which exist between the Sellers and the
Company, the Company has no agreement, understanding, contract or
commitment (written or oral) with any Seller, or any relative of a
Seller.
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<PAGE>
3.10(e) Collective Bargaining Agreements. The Company is not a
party to any collective bargaining agreement with any union.
3.10(f) Loan Agreements. Except as set forth on the Disclosure
Schedule, the Company is not obligated under any loan agreement,
promissory note, letter of credit, or other evidence of indebtedness as
signatories, guarantors or otherwise.
3.10(g) Guarantees. The Company has not under any instrument
which is presently effective guaranteed the payment or performance of
any person, firm or corporation, agreed to indemnify any person or act
as a surety, or otherwise agreed to be contingently or secondarily
liable for the obligations of any person.
3.10(h) Restrictive Agreements. The Company is not a party to
nor is it bound by any agreement requiring it to assign any interest in
any trade secret or proprietary information, or prohibiting or
restricting it from competing in any business or geographical area or
soliciting customers or otherwise restricting it from carrying on its
business anywhere in the world.
3.10(i) Other Material Contracts. The Company is not a party
to any lease, license, contract (including without limitation contracts
with health maintenance organizations) or commitment of any nature
involving consideration or other expenditure in excess of $1,000, or
involving performance over a period of more than 90 days from the date
hereof, or which is otherwise individually material to the operations
of the Company, except as set forth in Schedule 3.10(i) of the
Disclosure Schedule.
3.10(j) No Default. The Company is not in default under any
lease, agreement, contract or commitment, nor has any event or omission
occurred which through the passage of time or the giving of notice, or
both, would constitute a default thereunder or cause the acceleration
of any of the Company's obligations or result in the creation of any
Lien on any of the assets owned, used or occupied by the Company. To
the knowledge of the Sellers, no third party is in default under any
lease, agreement, contract or commitment to which the Company is a
party, nor has any event or omission occurred which, through the
passage of time or the giving of notice, or both, would constitute a
default thereunder or give rise to an automatic termination, or the
right of discretionary termination thereof.
3.11 Employee Benefit Plans. Set forth in Schedule 3.11 of the
Disclosure Schedule, is a description of all pension, profit sharing,
retirement, bonus, executive or deferred compensation, hospitalization and other
similar fringe or employee benefit plans, programs and arrangements, and any
employment or consulting contracts, "golden parachutes," severance agreements or
plans, vacation and sick leave plans including, without limitation, all
"employee benefit plans" (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), all employee manuals, and
all written or binding oral statements of policies, practices or understandings
relating to
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<PAGE>
employment, which are provided to, for the benefit of, or relate to, any persons
employed by the Company. The items described in the foregoing sentence are
hereinafter sometimes referred to collectively as "Employee Plans/Agreements."
True and correct copies of all written Employee Plans/Agreements, including all
amendments thereto, have heretofore been provided to Purchaser. The Company is
in compliance with and have made all payments due under all Employee
Plans/Agreements and with respect thereto the Company is in compliance with all
applicable federal and state laws and regulations. The Company is not a
contributor to any multi-employer pension plan which has an unfunded liability
with respect to benefits due its participants.
3.12 Employment Compensation. Set forth in Schedule 3.12 of the
Disclosure Schedule is a true and correct list of:
(a) All employees to whom the Company is paying compensation;
and in the case of salaried employees such list identifies the current
annual rate of compensation for each employee and in the case of hourly
or commission employees identifies certain reasonable ranges of rates
and the number of employees falling within each such range;
(b) All amounts owed to employees of the Company (including
the Sellers) for accrued sick pay, vacation pay, and bonus pay.
3.13 Patents, Trademarks, etc. Set forth in Schedule 3.13 of the
Disclosure Schedule attached hereto is a list of all United States and foreign
trademarks, service marks, trade names, brand names, copyrights, including
registrations and applications, patent and patent applications, and employee
covenants and agreements respecting intellectual property ("Trade Rights") in
which the Company now has any interest, specifying the basis on which such Trade
Rights are owned, controlled, used or held (under license or otherwise) by the
Company, and also indicating which of such Trade Rights are registered. All
Trade Rights shown as registered in Schedule 3.13 of the Disclosure Schedule
have been properly registered, all pending registrations and applications have
been properly made and filed and all annuity, maintenance, renewal and other
fees relating to registrations or applications are current. In order to conduct
the business of the Company, as such is currently being conducted, the Company
does not require any Trade Rights that it does not already have. The Company is
not infringing and has not infringed on any Trade Rights of another in the
operation of its business, nor to the knowledge of the Sellers is any other
person infringing on the Trade Rights of the Company. The Company has not
granted any license or made any assignment of any Trade Right and no other
person has any right to use any Trade Right owned or held by the Company. The
Company does not pay any royalties or other consideration for the right to use
any Trade Rights of others. Except as set forth in Schedule 3.13 of the
Disclosure Schedule, to the knowledge of Sellers, there are no inquiries,
investigations or claims or litigation challenging or threatening to challenge
the Company's right, title and interest with respect to its continued use and
right to preclude others from using any Trade Rights of the Company. To the
knowledge of Sellers, all Trade
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Rights of the Company are valid, enforceable and in good standing, and there are
no equitable defenses to enforcement based on any act or omission of the
Company.
3.14 Product Warranty and Product Liability. Set forth in Schedule 3.14
of the Disclosure Schedule is a true, correct and complete copy of the Company's
standard warranty or warranties for sales of its products.
3.15 Tax Matters. The Company has properly completed and filed in
correct form all federal, state, and other tax returns (including Forms 1099 and
other informational returns) of every nature required to be filed by it and has
paid all taxes (whether or not requiring the filing of returns) including all
deficiencies, assessments, additions to tax, penalties and interest of which
notice has been received to the extent such amounts have become due. The Company
has obtained all required Forms W-9. Complete and correct copies of the
Company's federal and California income tax returns for 1994, 1995, and 1996
have been delivered by the Sellers to Purchaser. All tax liabilities have been
fully and properly reflected in the Financial Statements. The income tax returns
of the Company have not been examined by the Internal Revenue Service. There are
no outstanding agreements or waivers extending the statutory period of
limitation for any federal or state tax return of the Company for any period.
The Company has made all required deductions and payments and has properly
prepared and delivered all required documents in connection with the withholding
of taxes from the wages and other compensation of its employees. The Company has
filed all sales/use tax returns and have paid all such taxes for all states in
which they have responsibility to do so. The Company has obtained and maintains,
to the extent required by law, a current sales and use tax exemption certificate
for each customer to which it makes tax-exempt sales.
3.16 Key Employees; Bank; Etc. Set forth in Schedule 3.16 of the
Disclosure Schedule is a list showing:
(a) The names of all the Company's officers and directors;
(b) The name of each bank at which the Company has (i) an
account and the numbers of all accounts, (ii) a line of credit, or
(iii) a safe deposit box and the name of each person authorized to draw
thereon or have access thereto; and
(c) The name of each person holding a power of attorney from
the Company and a summary of the terms thereof.
3.17 Records. The books of account of the Company fairly reflect the
items of income and expense and the assets, liabilities, and accruals of its
business and operations.
3.18 Disclosure. No representation or warranty by the Sellers in this
Agreement, nor any statement, certificate, schedule or exhibit hereto furnished
or to be furnished by or on behalf of the Sellers pursuant to this Agreement,
nor any document or certificate delivered
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to Purchaser pursuant to this Agreement or in connection with transactions
contemplated hereby, contains or shall contain any untrue statement of material
fact or omits or shall omit a material fact necessary to make the statements
contained therein not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to the Sellers as follows:
4.1 Corporate.
(a) Organization. Purchaser is a corporation duly organized
and validly existing under the laws of the state of Washington.
(b) Corporate Power. Purchaser has all requisite corporate
power and authority to own, operate and lease its properties, to carry
on its business as and where such is now being conducted, to enter into
this Agreement and the other documents and instruments to be executed
and delivered by Purchaser pursuant hereto and to carry out the
transactions contemplated hereby and thereby.
(c) Authority. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been
duly authorized by the board of directors of HealthCare. This Agreement
constitutes the valid and binding agreement of Purchaser, enforceable
against Purchaser in accordance with its terms.
(d) Qualification. Purchaser is duly licensed or qualified to
do business as a foreign corporation, and is in good standing, in each
jurisdiction wherein the character of the properties owned or leased by
it, or the nature of its business, makes such licensing or
qualification necessary.
4.2 No Violation. Neither the execution and delivery of this Agreement
or the other documents and instruments to be executed and delivered by Purchaser
pursuant hereto, nor the consummation by Purchaser of the transactions
contemplated hereby and thereby (a) will violate any statute or law or any rule,
regulation, order, writ, injunction or decree of any court or governmental
authority, (b) will require any authorization, consent, approval, exemption or
other action by or notice to any court, administrative or governmental agency,
instrumentality, commission, authority, board or body, or (c) will violate or
conflict with, or constitute a default (or an event which, with notice or lapse
of time, or both, would constitute a default) under, or will result in the
termination of, or accelerate the performance required by, or result in the
creation of any material Lien upon any of the assets of Purchaser under, any
term or provision of the Articles of Incorporation or By-laws of Purchaser or of
any material contract, commitment, understanding, arrangement, agreement
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or restriction of any kind or character to which Purchaser is a party or by
which Purchaser or any of its assets or properties may be bound or affected.
4.3 Disclosure. No representation or warranty by Purchaser in this
Agreement nor any statement, certificate, schedule or exhibit hereto furnished
or to be furnished by or on behalf of Purchaser pursuant to this Agreement, nor
any document or certificate delivered to Purchaser pursuant to this Agreement or
in connection with transactions contemplated hereby, contains or shall contain
any untrue statement of material fact or omits or shall omit a material fact
necessary to make the statements contained therein not misleading.
ARTICLE V
COVENANTS
5.1 Covenants of Sellers.
(a) Access to Information and Records. The Sellers agree that
during the period after the date hereof and prior to the Closing,
Purchaser, its counsel, accountants and other representatives shall be
provided (i) reasonable access during normal business hours to all of
the properties, books, records, contracts and documents of the Company
for the purpose of such inspection, investigation and testing as
Purchaser deems appropriate (and Sellers shall furnish or cause to be
furnished to Purchaser and its representatives all information with
respect to the business and affairs of the Company as Purchaser may
reasonably request); (ii) reasonable access to employees and agents of
the Company for such meetings and communications as Purchaser
reasonably desires; and (iii) with the prior consent of the Company in
each instance (which consent shall not be unreasonably withheld),
access to vendors, customers, and others having business dealings with
the Company.
(b) Conduct of Business Pending the Closing. The Sellers agree
that from the date hereof until the Closing, except as otherwise
approved in writing by Purchaser:
(i) No Changes. The Company will carry on its
business diligently and in the same manner as heretofore and
will not make or institute any changes in its methods of
purchase, sale, management, accounting or operation.
(ii) Maintain Organization. The Company will use its
best efforts to maintain, preserve, renew and keep in force
and effect the existence, rights and franchises of the Company
and to preserve the business organization of the Company
intact, to keep available to Purchaser the present officers
and employees of the Company, and to preserve for Purchaser
its present relationships with suppliers and customers and
others having business relationships with the Company.
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(iii) No Breach. The Company will use its best
efforts to avoid any act, or any omission to act, which may
cause a breach of any material contract, commitment or
obligation, or any breach of any representation, warranty,
covenant or agreement made by the Sellers.
(iv) No Material Contracts. No contract or commitment
will be entered into, and no purchase of assets (tangible or
intangible) will be made, by or on behalf of the Company,
except contracts, commitments, purchases or sales which are in
the ordinary course of business and consistent with past
practice.
(v) No Corporate Changes. The Company shall not amend
its Articles of Incorporation or Bylaws or make any changes in
its authorized or issued capital stock; the Company shall not
grant any option or other right to acquire any share of its
authorized capital stock;
(vi) Maintenance of Insurance. The Company shall
maintain all of its insurance in effect as of the date hereof
or replace such insurance with comparable coverage and shall
procure such additional insurance as shall be reasonably
requested by Purchaser at Purchaser's expense.
(vii) Maintenance of Property. The Company shall use,
operate, maintain and repair all its assets and properties in
a normal business manner consistent with the Company's past
practices.
(viii) Interim Financials. The Company will provide
Purchaser with interim monthly financial statements and other
management reports as and when they are available.
(ix) No Dividends. The Company shall not declare or
pay any dividend (whether in cash, stock or property) or make
any other distribution to the Sellers, except for the
repayment of loans made by the Sellers to the Company.
(x) Compensation. The Company shall not increase the
compensation or benefits of any of its employees nor make any
other change in the terms of their employment.
(c) Repayment of Sellers' Loans. As of the date hereof, the
Company is indebted to the Sellers as set forth on Schedule 5.1(c).
Notwithstanding any other provision of this Agreement, on or prior to
the Closing date, Sellers shall have the right to cause the Company to
repay such indebtedness to the extent the Company has funds available
for such purposes. To the extent any such debts are not paid prior to
Closing, the total amount thereof shall be deemed to have been
contributed to the capital of Company as of the Closing date.
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(d) Reimbursement of Sick and Vacation Pay. In preparing the
Statement of Net Working Capital it has been agreed that no accrual
shall be made for sick and vacation pay entitlements for employees of
Company. In consideration of this exclusion, Sellers agree to reimburse
Purchaser for any sick or vacation pay payments Purchaser is required
to make to former employees of Company who become employees of
Purchaser and whose employment terminates for any reason within the
first six months following the Closing date to the extent such payments
relate to accruals of sick or vacation pay prior to the Closing date.
5.2 Release of Sellers' Personal Guarantees. Certain Sellers have
provided personal guarantees or have otherwise become individually liable with
respect to certain leases, line of credit agreements, purchase agreements with
manufacturers, or other agreements for the benefit for the Company, including,
without limitation, those described on Schedule 5.2. Following the Closing,
Purchaser will use its best efforts to obtain the release of the Sellers from
all such personal liabilities. To the extent that any such release cannot be
obtained, Purchaser will indemnify and hold the Sellers harmless with respect to
any loss, cost, or expense the Sellers may incur as a result of not being
released.
ARTICLE VI
CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS
Each and every obligation of Purchaser to be performed at Closing shall
be subject to the satisfaction prior to or at the Closing (or the waiver by
Purchaser) of each of the following conditions:
6.1 Representations and Warranties True at Closing. Each of the
representations and warranties made by the Sellers in this Agreement, or in any
instrument, schedule, list, certificate or writing delivered by Sellers pursuant
to this Agreement, shall be true and correct when made and shall be true and
correct in all material respects at and as of the Closing as though such
representations and warranties were made as of the Closing.
6.2 Compliance With Agreement. The Sellers shall have in all material
respects performed and complied with all of their agreements and obligations
under this Agreement which are to be performed or complied with by them prior to
or on the Closing, including the delivery of the closing documents specified in
Section 2.2(a) hereof.
6.3 Absence of Suit. No action, suit, investigation or proceeding
before any court or any governmental authority shall have been commenced or
threatened, against Purchaser, the Company or any of the affiliates, officers or
directors of any of them, seeking to restrain, prevent or change the
transactions contemplated hereby, or questioning the validity or legality of any
such transactions, or seeking damages in connection with, or imposing any
condition on, any such transactions; provided that the obligations of Purchaser
shall not be affected unless there is a reasonable likelihood that as a result
of such action, suit, investigation, or proceeding Purchaser will be unable to
retain substantially all the practical benefits of the transaction to which it
is entitled under this Agreement.
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6.4 Approvals; Consents. All consents, permits, approvals, licenses or
orders from any governmental or regulatory body or other third party required to
be obtained by Sellers for the consummation of the transactions contemplated by
this Agreement shall have been obtained except where failure to obtain such
consents, permits, approvals, licenses or orders would not have a material
adverse effect (whether or not such effect is referred to or described in any
Schedule) on the business, prospects, financial conditions, assets, reserves or
operations of the Company taken as a whole.
6.5 Agreements.
(a) Noncompetition Agreements. Both Sellers shall have
executed and delivered to Purchaser a Noncompetition Agreement
substantially in the form attached hereto as Schedule 6.5(a).
(b) Employment Agreement. Rhonda Jespersen shall have executed
and delivered to Purchaser an Employment Agreement substantially in the
form of Schedule 6.5(b) hereto.
ARTICLE VII
CONDITIONS PRECEDENT TO THE SELLERS' OBLIGATIONS
Each and every obligation of the Sellers to be performed at Closing
shall be subject to the satisfaction prior to or at the Closing (or the waiver
by the Sellers) of the following conditions:
7.1 Representations and Warranties True at Closing. Each of the
representations and warranties made by Purchaser in this Agreement, or in any
instrument, list, certificate or writing delivered by Purchaser pursuant to this
Agreement, shall be true and correct when made and shall be true and correct at
and as of the Closing as though such representations and warranties were made as
of the Closing.
7.2 Compliance With Agreement. Purchaser shall have in all material
respects performed and complied with all of Purchaser's agreements and
obligations under this Agreement which are to be performed or complied with by
Purchaser prior to or on the Closing, including the delivery of the closing
documents specified in Section 2.2(b) hereof.
7.3 Absence of Suit. No action, suit, investigation, or proceeding
before any court or any governmental authority shall have been commenced or
threatened against Purchaser, the Company or any of the affiliates, officers or
directors of any of them, seeking to restrain, prevent or change the
transactions contemplated hereby, or questioning the validity or legality of any
such transactions, or seeking damages in connection with, or imposing any
condition on, any such transactions; provided that the obligations of the
Sellers shall not be affected unless there is a reasonable likelihood that as a
result of such action, suit, proceeding or investigation, the Sellers will be
unable to retain substantially all the consideration to which they are entitled
under this Agreement.
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7.4 Agreements.
(a) Noncompetition Agreements. Purchaser shall have executed
and delivered to each Seller a Noncompetition Agreement substantially
in the form attached hereto as Schedule 6.5(a).
(b) Employment Agreement. Purchaser shall have executed and
delivered to Rhonda Jespersen an Employment Agreement substantially in
the form attached hereto as Schedule 6.5(b).
ARTICLE VIII
INDEMNIFICATION; SURVIVAL OF REPRESENTATIONS
8.1 Indemnification by the Sellers.
(a) The Sellers hereby agree to indemnify, defend, and hold
Purchaser (and its directors, officers, shareholders, employees,
affiliates, agents and assigns) harmless from and against all Claims
(as defined below) asserted against, resulting to, imposed upon, or
incurred by Purchaser directly or indirectly by reason of, arising out
of, or resulting from (a) the inaccuracy or breach of any
representation or warranty of the Sellers contained in or made pursuant
to this Agreement or (b) the non-performance or breach of any covenant,
term or provision to be performed by the Sellers contained in this
Agreement. The indemnification obligation of Sellers hereunder is with
respect to the full amount of the Claims (as defined below). As used in
this Article VIII, the term "Claim" shall include any and all losses,
liabilities, damages, deficiencies, assessments, judgments, awards,
settlements, costs, and expenses including without limitation
penalties, court costs, and attorney fees and expenses at trial and on
appeal. Notwithstanding the foregoing, Sellers' indemnity obligations
shall be subject to the following limitations:
(i) Sellers shall be responsible for indemnifying
Purchaser only to the extent Claims in the aggregate exceed
the sum of $5,000.
(ii) Each Seller shall be solely responsible for
indemnification with respect to such Seller's warranty of
title regarding Seller's Shares and such Seller's warranty
regarding the absence of liens and encumbrances applicable to
such Shares;
(iii) Each Seller's liability with respect to a Claim
shall be limited to a percentage of such Claim equal to such
Seller's percentage ownership of the Shares as set forth in
Section 1.1; and
(iv) Each Seller's maximum liability to Purchaser for
indemnification shall not exceed an amount equal the portion
of the Purchase Price being paid to such Seller as set forth
in Section 1.3 hereof.
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(v) Any Claims shall be asserted by Purchaser jointly
against Sellers on a uniform basis and any waiver, compromise
or settlement of a Claim offered by Purchaser shall be offered
on the same terms to both Sellers.
(b) Purchaser shall be entitled, at its option, to set off any
amount due from Sellers to Purchaser under this Section 8.1 against any
amount Purchaser is obligated to pay Sellers under the notes provided
for in Section 1.3 hereof, under the Noncompetition Agreements provided
for in Section 6.5(a) hereof or otherwise.
(c) Purchaser's right to indemnification as provided in this
Section 8.1 shall not be eliminated, reduced or modified in any way as
a result of the fact that (i) Purchaser had notice of a breach or
inaccuracy of any representation, warranty or covenant contained herein
(except as set forth in the Disclosure Schedule), (ii) Purchaser had
been provided with access, as requested by Purchaser, to officers and
employees of the Company and such of Company's books, documents,
contracts and records as has been provided to Purchaser in response to
Purchaser's requests.
8.2 Indemnification by Purchaser. Purchaser hereby agrees to indemnify,
defend, and hold harmless the Sellers from and against all Claims asserted
against, resulting to, imposed upon, or incurred by the Sellers directly or
indirectly by reason of, arising out of, or resulting from (a) the inaccuracy or
breach of any representation or warranty of Purchaser contained in or made
pursuant to this Agreement or in any of the documents delivered pursuant hereto,
or (b) the non-performance or breach of any covenant, term or provision to be
performed by Purchaser contained in this Agreement or in any of the documents
delivered pursuant hereto. The indemnification obligation of Purchaser hereunder
is with respect to the full amount of the Claims.
8.3 Notice; Defense of Claims. If a claim is to be made by a party
entitled to indemnification hereunder, the party entitled to such
indemnification shall give written notice to the indemnifying party immediately
after the party entitled to indemnification becomes aware of any fact, condition
or event which may give rise to a matter for which indemnification may be
sought; provided that the failure of any indemnified party to give timely notice
shall not affect the rights to indemnification hereunder except to the extent
that the indemnifying party demonstrates actual damage caused by such failure.
If any lawsuit or enforcement action is filed against any party entitled to the
benefit of indemnity hereunder, and if the indemnifying party shall acknowledge
in writing to the indemnified party that the indemnifying party shall be
obligated under the terms of its indemnity hereunder in connection with such
lawsuit, action or claim, then the indemnifying party shall be entitled, if it
so elects, to take control of the defense and investigation of such lawsuit or
action and to employ and engage attorneys of its own choice to handle and defend
the same, at the indemnifying party's cost, risk and expense provided that the
indemnifying party and its counsel shall proceed with diligence and in good
faith with respect thereto. The indemnified party shall cooperate in all
reasonable respects with the indemnifying party and such attorneys in the
investigation, trial and defense of such lawsuit or action and any appeal
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arising therefrom; provided, however, that the indemnified party may, at its own
cost, participate in the investigation, trial and defense of such lawsuit or
action and any appeal arising therefrom.
8.4 Survival of Representations. All representations and warranties
made by the parties in this Agreement are made only as of the date of this
Agreement but will survive the consummation of the transactions contemplated by
this Agreement until October 31, 1999 (except for the representations and
warranties of the Sellers set forth in Section 3.10 hereof which shall expire 90
days after the applicable statutes of limitation shall have run with respect to
all tax returns filed by the Company for all periods ended on or before the
Closing), after which all such representations and warranties shall expire
except with respect to claims asserted in writing prior to such date.
ARTICLE IX
MISCELLANEOUS
9.1 Termination.
(a) Right of Termination Without Breach. This Agreement may be
terminated without further liability of any party at any time prior to
the Closing:
(i) By mutual written agreement of the parties, or
(ii) By either Purchaser or the Sellers if the
Closing shall not have occurred on or before the 90th day
after the date hereof, provided the terminating party has not,
through breach of a representation, warranty or covenant,
prevented the Closing from occurring on or before such date.
(b) Termination for Breach.
(i) Termination by Purchaser. If there has been a
material breach by the Sellers of any of their agreements,
representations or warranties contained in this Agreement
which has not been waived in writing by Purchaser, then
Purchaser may, by written notice to Sellers at any time prior
to the Closing that such breach is continuing, terminate this
Agreement with the effect set forth in Section 9.1(b)(iii)
hereof.
(ii) Termination by Sellers. If there has been a
material breach by Purchaser of any of its agreements,
representations or warranties contained in this Agreement
which has not been waived in writing by the Sellers, then the
Sellers may, by written notice to Purchaser at any time prior
to the Closing that such breach is continuing, terminate this
Agreement with the effect set forth in Section 9.1(b)(iii).
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(iii) Effect of Termination. Termination of this
Agreement pursuant to this Section 9.1 shall not in any way
terminate, limit or restrict the rights and remedies of any
party hereto against any other party which has breached or
failed to perform any of the representations, warranties,
covenants, or agreements of this Agreement prior to
termination hereof.
9.2 Waiver. Sellers or Purchaser may (a) extend the time for the
performance of any of the obligations or other acts of the other, (b) waive any
inaccuracies in the representations and warranties of the other contained herein
or in any document delivered pursuant hereto and (c) waive compliance with any
of the agreements of the other or satisfaction of any of the conditions to its
obligations contained herein. Any extension or waiver made pursuant to this
Section 9.2 must be by an instrument in writing signed on behalf of the party
granting the extension or waiver. A waiver by any party of any provision hereof
or breach hereof shall not operate or be construed as the waiver of any other
provision or any subsequent breach.
9.3 Binding Effect; No Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
legal representatives. This Agreement is not assignable and any purported
assignment shall be null and void. Nothing contained in this Agreement shall be
deemed to confer any right or benefit upon any person other than the parties
hereto to the extent herein provided.
9.4 Dollars. "Dollars" and "$" mean lawful money of the United States
of America, which shall be legal tender on the date of payment for all public
and private debts.
9.5 Brokers and Finders. Sellers on the one hand and Purchaser on the
other, each agree to indemnify and hold the other harmless from and against any
claim made for a broker's or a finder's fee or other similar compensation (and
all related costs and expenses) asserted against an indemnified party which
arises out of or results from an action taken by an indemnifying party.
9.6 Headings; Severability. The headings in this Agreement are for
reference only, and shall not affect the interpretation of this Agreement. Each
and every provision of this Agreement shall be treated as separate and distinct
and, in the event of any provision hereof being declared invalid, such invalid
provision shall be deemed to be severable and all other provisions hereof shall
remain in full force and effect.
9.7 Schedules. The Schedules are a part of this Agreement as if fully
set forth herein.
9.8 Disclosures and Announcements. Both the timing and the content of
all disclosures to third parties and public announcements concerning the
transactions provided for in this Agreement by either Sellers or Purchaser shall
be subject to the approval of the other in all essential respects, except that
the Sellers' approval shall not be required as to any
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announcements or filings Purchaser may be required to make under applicable laws
or regulations.
9.9 Expenses. Sellers agree that all fees and expenses incurred by them
in connection with this Agreement shall be borne by Sellers including, without
limitation, all fees of counsel and accountants; and Purchaser agrees that all
fees and expenses incurred by it in connection with this Agreement shall be
borne by it, including, without limitation, all fees of counsel and accountants.
9.10 Notice. All notices, requests, demands and other communications
hereunder shall be given in writing and shall be: (a) personally delivered; (b)
sent by telecopier, facsimile transmission or other electronic means of
transmitting written documents; or (c) sent to the parties at their respective
addresses indicated herein by private overnight courier service. The respective
addresses and telephone numbers to be used for all such notices, demands or
requests are as follows:
If to Purchaser: SONUS-USA, Inc.
111 S.W. Fifth Avenue, Suite 2390
Portland, Oregon 97204
Attn: President
Personal & Confidential
Facsimile: (503) 225-9309
with a copy to: Miller, Nash, Wiener, Hager & Carlsen
111 S.W. Fifth Avenue, Suite 3500
Portland, Oregon 97204
Attn: G. Todd Norvell
Facsimile: (503) 224-0155
If to Sellers: Rhonda Jespersen-PERSONAL & CONFIDENTIAL
318 East Hillcrest Blvd., #5
Inglewood, California 90301
with a copy to: Richard P. Manson
Graham & James
801 S. Figueroa St., 14 Fl.
Los Angeles, California 90017
Facsimile: (213) 623-4581
and to: Gregory J. Frazer
1477 Dwight Drive
Glendale, California 91207
Facsimile (818) 244-8889
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with a copy to: Ms. Nancy Borders
Gardner, Carton & Douglas
321 N. Clark Street, Ste. 3400
Chicago, Illinois 60610
Facsimile: (312) 644-3381
If personally delivered, such communication shall be deemed delivered
upon actual receipt; if electronically transmitted, such communication shall be
deemed delivered the next business day after transmission (and the sender shall
bear the burden of proof of delivery); if sent by overnight courier pursuant to
this paragraph, such communication shall be deemed delivered upon receipt. Any
party to this Agreement may change its address for the purposes of this
Agreement by giving notice thereof in accordance with this section.
9.11 Resolution of Disputes.
(a) Arbitration. Any dispute, controversy or claim arising out
of or relating to this Agreement or the performance by the parties of
its terms shall be settled by binding arbitration held in Los Angeles,
California, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect, except as specifically
otherwise provided in this Section 9.11.
(b) Arbitrators. If the matter in controversy (exclusive of
attorney fees and expenses) shall appear, as at the time of the demand
for arbitration, to exceed $50,000, then the panel to be appointed
shall consist of three neutral arbitrators; otherwise, one neutral
arbitrator.
(c) Procedures; No Appeal. The arbitrator(s) shall allow such
discovery as the arbitrator(s) determine appropriate under the
circumstances and shall resolve the dispute as expeditiously as
practicable, and if reasonably practicable, within 120 days after the
selection of the arbitrator(s). The arbitrator(s) shall give the
parties written notice of the decision, with the reasons therefor set
out, and shall have thirty (30) days thereafter to reconsider and
modify such decision if any party so requests within ten (10) days
after the decision. Thereafter, the decision of the arbitrator(s) shall
be final, binding, and nonappealable with respect to all persons,
including (without limitation) persons who have failed or refused to
participate in the arbitration process. If the amount in controversy
exceeds $10,000, the arbitrator's decision shall include a written
statement specifying the basis for and compensation of any monetary
amount.
(d) Authority. The arbitrator(s) shall have authority to award
relief under legal or equitable principles, including interim or
preliminary relief, and to allocate responsibility for the costs of the
arbitration and to award recovery of attorney fees and expenses in such
manner as is determined to be appropriate by the arbitrator(s).
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(e) Entry of Judgment. Judgment upon the award rendered by the
arbitrator(s) may be entered in any court having in personam and
subject matter jurisdiction. The Shareholders and HealthCare hereby
submit to the in personam jurisdiction of the federal and state courts
in California for the purpose of confirming any such award and entering
judgment thereon.
(f) Confidentiality. All proceedings under this Section 9.11,
and all evidence given or discovered pursuant hereto, shall be
maintained in confidence by all parties.
(g) Continued Performance. The fact that the dispute
resolution procedures specified in this Section 13 shall have been or
may be invoked shall not excuse any party from performing its
obligations under this Agreement, and during the pendency of any such
procedure all parties shall continue to perform their respective
obligations in good faith, subject to any rights to terminate this
Agreement that may be available to any party.
9.12 Governing Law. This Agreement may not be modified or terminated
orally, and shall be construed and interpreted according to the internal law of
the state of California, excluding any choice of law rules that may direct the
application of the laws of another jurisdiction.
9.13 Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
9.14 Entire Agreement. This instrument embodies the entire agreement
between the parties hereto with respect to the transactions contemplated herein,
and there have been and are no agreements, representations or warranties between
the parties other than those set forth or provided for herein.
9.15 Further Assurances. Both before and after the Closing, each party
will cooperate in good faith with the others and will take all appropriate
action and execute any documents, instruments, or conveyances of any kind that
may be reasonable necessary or desirable to carry out any of the transactions
contemplated hereunder.
9.16 Sellers Action. Whenever in this Agreement the Sellers are given
the discretion to take or not to take any action, the decision of the Sellers
shall be made pursuant to the vote of the Sellers holding a majority of the
Shares.
9.17 Termination of Restrictions. Upon the consummation of the
transactions provided for herein, any restrictions on the transfer of the Shares
shall be waived by Sellers and shall become void and of no further effect.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement effective as of the date first above written.
SELLERS: PURCHASER:
SONUS-USA, Inc., a Washington corporation
/s/ Rhonda Jespersen By: /s/ Edwin J. Kawasaki
Rhonda Jespersen Edwin J. Kawasaki
Vice President
/s/ Gregory J. Frazer
Gregory J. Frazer
The undersigned, being the spouse of a Seller named in the foregoing Stock
Purchase and Sale Agreement, hereby relinquish all right, title, and interest,
including, without limitation, any community property rights under California
law to the Shares (as defined in such Agreement) and hereby consent and agree to
the transfer of such Shares pursuant to such Agreement.
/s/ Carissa Bennett
Carissa Bennett
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SCHEDULES
Schedule 1.3 Note Payable to Sellers
Schedule III Disclosure Schedule
Schedule 3.4(g) Disposition of Property
Schedule 3.7(a) Compliance with laws
Schedule 3.10(a) Leases
Schedule 3.10(b) Purchase Commitments
Schedule 3.10(c) Sales Commitments
Schedule 3.10(i) Other Material Contracts
Schedule 3.11 Employee Benefit Plans
Schedule 3.12 Employee Compensation
Schedule 3.13 Patents, Trademarks
Schedule 3.14 Product Warranty
Schedule 3.16 Key Employees; Banks
Schedule 5.1(c) Sellers' Loans
Schedule 5.2 Sellers' Personal Guarantees
Schedule 6.5(a) Noncompetition Agreement
Schedule 6.5(b) Employment Agreement
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STOCK PURCHASE AND SALE AGREEMENT
(MONTCLAIR)
AGREEMENT dated as of February 12, 1998, by and between the individuals
named in Section 1.1 below (referred to herein individually as "Seller" and
collectively as "Sellers") and SONUS-USA, INC., a Washington corporation
("Purchaser").
RECITALS
--------
A. Hearing Care Associates-Montclair, Inc., a California corporation
(the "Company"), operates an audiology and hearing aid clinic in Montclair,
California, which performs testing and evaluation of patients' hearing,
prescribes and fits hearing aids, and provides related services and products.
B. Sellers own all shares of the issued and outstanding capital stock
of the Company (the "Shares").
C. Purchaser and Sellers desire that Purchaser acquire ownership of the
Company through a purchase of the Shares.
TERMS
-----
In consideration of the premises and of the mutual covenants,
representations, warranties and agreements contained herein, the parties agree
as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
1.1 Ownership of Shares. The Shares are owned by Sellers as follows:
Sellers Shares Percentage
------- ------ ----------
Gregory J. Frazer 50 50
Donal M. Welch 50 50
--- ---
100 100
1.2 Purchase and Sale of Shares. At the Closing (as defined in Section
2.1), on the terms and subject to the conditions set forth in this Agreement,
Sellers shall sell and deliver to Purchaser, and Purchaser shall purchase the
Shares from Sellers.
1.3 Purchase Price. Subject to adjustment as set forth in Section 1.4
hereof, the purchase price for the Shares (the "Purchase Price") shall be a
total of $76,000 payable to Sellers as follows:
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Sellers
-------
Gregory J. Frazer 38,000
Donal M. Welch 38,000
------
$76,000
At the Closing, Purchaser shall pay the Purchase Price to Sellers by delivering
(i) to each Seller a certified check in the amount of $25,000, and (ii) to
Sellers jointly, a three-year promissory note (the "Note") in the amount of
$26,000, bearing interest at the rate of 6 percent per annum with annual
payments of not less than $8,666.67 plus accrued interest due on March 31, 1999,
2000, and 2001. The note shall be in the form of Schedule 1.3 attached hereto
and shall be subject to adjustment as set forth in Sections 1.4 and 1.5 hereof.
1.4 Purchase Price Adjustment. Sellers acknowledge that the Purchase
Price was negotiated on the assumption that at Closing Company would have
long-term liabilities, including debt of $15,000 or less. In the event that at
Closing Company has long-term liabilities in excess of $15,000, the Note shall
be reduced by the amount of the excess and the amount of the reduction shall
offset payments due under the Note until the amount thereof has been fully
offset.
1.5 EBITDA Adjustment. For years ending January 31, 1999, 2000, and
2001, the earnings of the clinic owned by Company, before deductions for
interest, taxes, depreciation, and amortization, less a corporate overhead
charge of 6 percent of revenues ("EBITDA"), shall be calculated. To the extent
EBITDA is less than $30,000 for any such year, an amount equal to the deficiency
shall be deducted from the Note payment due on the following March 31. If the
amount to be deducted cannot be fully recovered from the Note payment due on the
next March 31, the unrecovered portion shall be recovered as provided in Section
1.6 below and Section 3.2 of the employment agreement provided for in subsection
6.5 hereof (the "Employment Agreement"). To the extent that after such further
recoveries have been made, there remains a final amount which has not been
recovered, it shall be carried over and recovered from subsequent Note payments
and to the extent permitted in Section 1.6 below and Section 3.2 of the
Employment Agreement in the next year.
1.6 Seller Reimbursement. In the event that an amount Purchaser is
entitled to recover pursuant to Section 1.5 above exceeds the Note payment due
in 1999 or 2000, Gregory J. Fraser shall pay to Purchaser one-half of the excess
up to a maximum of $5,000 on the Note payment date in each of such years.
1.7 Adjustment Reconciliation. Not later than March 31, 2001, Purchaser
shall compute total EBITDA for years ending January 31, 1999, 2000, and 2001. To
the extent Purchaser has recovered, pursuant to Sections 1.5 and 1.6 above and
Section 3.2 of the Employment Agreement an amount which exceeds the difference
between such total and $90,000, the excess shall be refunded pro rata to
Shareholders.
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<PAGE>
1.8 Accounts Receivable Payments. During the 365-day period following
the Closing date, purchaser shall use commercially reasonable efforts to collect
Company's accounts receivable as of the Closing date. Within 10 days after the
90th, 180th, 270th, and 365th days following the Closing date, Purchaser shall
pay to Shareholders in equal amounts one-half of such Company's accounts
receivable collected during the period just ended. Donal M. Welch shall
reasonably be permitted to participate in the collection of such receivables.
ARTICLE II
CLOSING
2.1 Closing. The closing of the transaction provided for herein (the
"Closing") shall occur on such date on or before February ---, 1998, and at such
time and place as the parties shall mutually agree.
2.2 Closing Transactions. The following actions shall be taken at
Closing, each of which shall be conditional on completion of all the others and
all of which shall be deemed to have taken place simultaneously:
(a) Deliveries by Sellers. Sellers shall deliver to Purchaser:
(i) Certificates representing the Shares;
(ii) The stock and minute books of the Company; and
(iii) All consents required in connection with the
transactions contemplated hereunder.
(b) Deliveries by Purchaser. Purchaser shall deliver to
Sellers the checks and note provided for in Section 1.3.
(c) Joint Delivery.
(i) Purchaser and Sellers shall execute and deliver
counterparts of the Noncompetition Agreements provided for in
Section 6.5(a) hereof; and
(ii) Purchaser and Donal M. Welch shall execute and
deliver to each other counterparts of the Employment Agreement
provided for in Subsection 6.5(b) hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Except as otherwise set forth in the Disclosure Statement attached
hereto as Schedule III, Sellers represent and warrant to Purchaser as set forth
below in this Article III. Subject to the limitations set forth in Section
8.1(a), the Sellers shall be jointly and severally
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<PAGE>
liable for breaches of such representations and warranties except to the extent
otherwise expressly set forth in Section 3.1(b) hereof.
3.1 Corporate.
(a) Organization. The Company is a corporation duly organized
and existing under the laws of the state of California.
(b) Capitalization. The authorized capital stock of the
Company consists of a single class of common stock, of which 100 shares are
issued and outstanding. All issued and outstanding Shares have been validly
issued and are fully paid and nonassessable. Each Seller separately warrants
that such Seller is the owner of the number of shares shown in Section 1.1
hereof (beneficially and of record) free and clear of all liens, claims, and
encumbrances whatsoever. The Shares constitute all the outstanding shares of
capital stock of the Company. Except for a Buy-Out Agreement to which the
Sellers are parties, no person has any agreement, option or other right, present
or future, to purchase or otherwise acquire any of the shares of Company. Such
Buy-Out Agreement will be terminated effective as of the Closing date.
(c) Corporate Power. The Company has all requisite corporate
power and authority to own, operate and lease its properties and to
carry on its business as and where such is now being conducted.
(d) No Subsidiaries. The Company does not own an interest in
any corporation, partnership or other entity.
(e) Articles of Incorporation; Bylaws. The copies of Company's
articles of incorporation (certified by the Secretary of State of
California) and bylaws (certified by Company's secretary) which have
heretofore been delivered to Purchaser are complete and correct as
amended or restated to the date hereof.
3.2 No Violation. Neither the execution and delivery of this Agreement
or the other documents and instruments to be executed and delivered by the
Sellers pursuant hereto, nor the consummation by the Sellers of the transactions
contemplated hereby and thereby (a) will violate any statute or law or any rule,
regulation, order, writ, injunction or decree of any court or governmental
authority, (b) will require any authorization, consent, approval, exemption or
other action by or notice to any court, administrative or governmental agency,
instrumentality, commission, authority, board or body or (c) will violate or
conflict with, or constitute a default (or an event which, with notice or lapse
of time, or both, would constitute a default) under, or will result in the
termination of, or accelerate the performance required by, or result in the
creation of any material Lien (as defined in Section 3.8(b)) upon any of the
assets of the Company under, any term or provision of the articles of
incorporation or bylaws of the Company or of any material contract, commitment,
understanding, arrangement, agreement or restriction of any kind or character to
which the Company is a party or by which the Company or any of the Company's
assets or properties or the shares of the Company may be bound or affected.
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3.3 Financial Statements. The Sellers have heretofore delivered to
Purchaser the following financial statements of the Company including balance
sheets and statements of income (the "Financial Statements") for the Company's
fiscal years ended December 31, 1995, 1996, and 1997.
The Financial Statements are correct and complete in all material respects and
fairly present the financial condition of the Company at the dates indicated and
results of its operations and changes in its financial position for the periods
then ended.
3.4 Absence of Certain Changes. Since the date of the most recent
balance sheet included in the Financial Statements, there has not been:
3.4(a) Adverse Change. Any material adverse change in the
financial condition, assets, liabilities, business, prospects or
operations of the Company;
3.4(b) Damage. Any material loss, damage or destruction,
whether covered by insurance or not, affecting the Company's business
or assets;
3.4(c) Increase in Compensation. Any increase in the
compensation, salaries or wages payable or to become payable to any
employee or agent of the Company (including, without limitation, any
increase or change pursuant to any bonus, pension, profit sharing,
retirement or other plan or commitment), or any bonus or other employee
benefit granted, made or accrued;
3.4(d) Labor Disputes. Any labor dispute or disturbance, other
than routine individual grievances which are not material to the
business, financial condition or results of operations of the Company;
3.4(e) Commitments. Any commitment or transaction by the
Company (including, without limitation, any capital expenditure) other
than in the ordinary course of business consistent with past practice;
3.4(f) Dividends. Any declaration, setting aside, or payment
of any dividend or any other distribution in respect of the Company's
capital stock; any redemption, purchase or other acquisition by the
Company of any capital stock of the Company, or any security relating
thereto; or any other payment to any Shareholder as a shareholder;
3.4(g) Disposition of Property. Except as set forth on
Schedule 3.4(g), any sale, lease or other transfer or disposition of
any properties or assets of the Company except for sales of inventory,
consumption of supplies, and nonmaterial dispositions of worn or broken
parts and equipment in the ordinary course of business;
3.4(h) Indebtedness. Any indebtedness for borrowed money
incurred, assumed or guaranteed by the Company other than changes in
the Company's line of credit in the ordinary course of business;
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<PAGE>
3.4(i) Amendment of Contracts. Any entering into, amendment or
termination by the Company of any contract, or any waiver of material
rights thereunder, other than in the ordinary course of business;
3.4(j) Loans, Advances, or Credit. Any loan or advance or any
grant of credit by the Company; or
3.4(k) Unusual Events. Any other event or condition
specifically related to the Company not in the ordinary course of
business which would have a material adverse effect on the assets or
the business of the Company.
3.5 Absence of Undisclosed Liabilities. Except as and to the extent
specifically disclosed in the most recent balance sheet included in the
Financial Statements or this Agreement, the Company does not have any
liabilities other than commercial liabilities and obligations incurred since the
date of such balance sheet in the ordinary course of business consistent with
past practices none of which has or will have a material adverse effect on the
business, financial condition or results of operations of the Company.
3.6 No Litigation. There is no action, suit, arbitration, proceeding,
investigation or inquiry pending or to the knowledge of the Sellers threatened
against the Company, its directors (in such capacity), its business or any of
its assets, nor do the Sellers know of any such proceeding, investigation or
inquiry threatened against the Company. The Disclosure Schedule identifies all
actions, suits, proceedings, investigations and inquiries to which the Company
has been a party since January 1, 1993. Neither the Company nor its business or
assets are subject to any judgment, order, writ or injunction of any court,
arbitrator or federal, state, foreign, municipal or other governmental
department, commission, board, bureau, agency or instrumentality.
3.7 Compliance With Laws.
3.7(a) Compliance. Except as set forth in Schedule 3.7(a) of
the Disclosure Schedule, the Company (including each and all of its
operations, practices, properties and assets) is in material compliance
with all applicable federal, state, local and foreign laws, ordinances,
orders, rules and regulations (collectively, "Laws"), including,
without limitation, those applicable to discrimination in employment,
occupational safety and health, trade practices, environmental
protection, competition and pricing, product warranties, zoning,
building and sanitation, employment, retirement and labor relations,
and product advertising except to the extent any noncompliance would
not have a material adverse effect upon the assets or the business of
the Company taken as a whole. The Company has not received notice of
any violation or alleged violation of, and is not subject to liability
for past or continuing violation of, any Laws. All reports and returns
required to be filed by the Company with any governmental authority
have been filed, and were accurate and complete when filed except to
the extent any deficiency would not have a material adverse effect upon
the assets or the business of the Company taken as whole.
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<PAGE>
3.7(b) Licenses and Permits. The Company has obtained all
licenses, permits, approvals, authorizations and consents of all
governmental and regulatory authorities and all certification
organizations required for the conduct of its businesses (as presently
conducted) except to the extent failure to do so would not have a
material adverse effect upon the assets or the business of the Company
taken as a whole. All such licenses, permits, approvals, authorizations
and consents are described in the Disclosure Schedule and are in full
force and effect. The Company (including its operations, properties and
assets) is and has been in compliance with all such permits and
licenses, approvals, authorizations and consents, except to the extent
any noncompliance would not have a material adverse effect upon the
assets or the business of the Company taken as a whole.
3.8 Title to and Condition of Properties.
3.8(a) Real Property. Except as set forth on the Disclosure
Schedule, the Company does not own any interest in any real property
other than the leases referred to in Section 3.10(a) hereof.
3.8(b) Personal Property. The Company has good and marketable
title to all its assets, free and clear of all mortgages, liens
(statutory or otherwise), security interests, claims, pledges,
equities, options, conditional sales contracts, assessments, levies,
easements, covenants, reservations, restrictions, exceptions,
limitations, charges or encumbrances of any nature whatsoever
(collectively, "Liens"). All the Company's tangible assets are located
at the business premises leased by the Company. No personal property
owned by Sellers is located at Company's business premises.
3.8(c) Condition. All the Company's tangible assets are, taken
as a whole, in good operating condition and repair, normal wear and
tear excepted.
3.8(d) Land Use Regulations. There are no condemnation,
environmental, zoning, land use, or other regulatory proceedings,
pending or, to the knowledge of the Sellers, planned to be instituted,
that could detrimentally affect the ownership, use, or occupancy of the
real property presently occupied by the Company or the continued
operation of the Company's business as it is presently being conducted.
3.9 Insurance. The Company maintain policies of fire, liability,
product liability, workers compensation, health and other forms of insurance
with such coverage limits and deductible amounts as are reasonable and prudent
in light of the nature of its assets and the risks of its business.
3.10 Contracts and Commitments.
3.10(a) Leases. Set forth in Schedule 3.10(a) of the
Disclosure Schedule is a list of all real and personal property leases
to which the Company is a party.
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<PAGE>
Complete and correct copies of each lease listed on the schedule, and
all amendments thereto, have heretofore been made available to
Purchaser.
3.10(b) Purchase Commitments. Set forth in Schedule 3.10(b) of
the Disclosure Schedule is a list of all agreements (written or oral)
between the Company and third parties for the purchase of goods and
supplies by the Company which individually call for the payment by the
Company after the date hereof of more than $1,000 or which obligate the
Company for a period of more than 90 days from the date hereof.
Complete and correct copies of all such written agreements have
heretofore been made available to Purchaser.
3.10(c) Sales Commitments. Set forth in Schedule 3.10(c) of
the Disclosure Schedule is a list and description of all presently
effective agreements (written or oral) between the Company and third
parties for the distribution and sale of its products. Complete and
correct copies of all such written contracts have heretofore been made
available to Purchaser.
3.10(d) Contracts With Sellers and Certain Others. Except for
the employment relationships which exist between the Sellers and the
Company, the Company has no agreement, understanding, contract or
commitment (written or oral) with any Seller, or any relative of a
Seller.
3.10(e) Collective Bargaining Agreements. The Company is not a
party to any collective bargaining agreement with any union.
3.10(f) Loan Agreements. Except as set forth on the Disclosure
Schedule, the Company is not obligated under any loan agreement,
promissory note, letter of credit, or other evidence of indebtedness as
signatories, guarantors or otherwise.
3.10(g) Guarantees. The Company has not under any instrument
which is presently effective guaranteed the payment or performance of
any person, firm or corporation, agreed to indemnify any person or act
as a surety, or otherwise agreed to be contingently or secondarily
liable for the obligations of any person.
3.10(h) Restrictive Agreements. The Company is not a party to
nor is it bound by any agreement requiring it to assign any interest in
any trade secret or proprietary information, or prohibiting or
restricting it from competing in any business or geographical area or
soliciting customers or otherwise restricting it from carrying on its
business anywhere in the world.
3.10(i) Other Material Contracts. The Company is not a party
to any lease, license, contract (including without limitation contracts
with health maintenance organizations) or commitment of any nature
involving consideration or other expenditure in excess of $1,000, or
involving performance over a period of more than 90 days from the date
hereof, or which is otherwise individually material to the
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operations of the Company, except as set forth in Schedule 3.10(i) of
the Disclosure Schedule.
3.10(j) No Default. The Company is not in default under any
lease, agreement, contract or commitment, nor has any event or omission
occurred which through the passage of time or the giving of notice, or
both, would constitute a default thereunder or cause the acceleration
of any of the Company's obligations or result in the creation of any
Lien on any of the assets owned, used or occupied by the Company. To
the knowledge of the Sellers, no third party is in default under any
lease, agreement, contract or commitment to which the Company is a
party, nor has any event or omission occurred which, through the
passage of time or the giving of notice, or both, would constitute a
default thereunder or give rise to an automatic termination, or the
right of discretionary termination thereof.
3.11 Employee Benefit Plans. Set forth in Schedule 3.11 of the
Disclosure Schedule, is a description of all pension, profit sharing,
retirement, bonus, executive or deferred compensation, hospitalization and other
similar fringe or employee benefit plans, programs and arrangements, and any
employment or consulting contracts, "golden parachutes," severance agreements or
plans, vacation and sick leave plans including, without limitation, all
"employee benefit plans" (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), all employee manuals, and
all written or binding oral statements of policies, practices or understandings
relating to employment, which are provided to, for the benefit of, or relate to,
any persons employed by the Company. The items described in the foregoing
sentence are hereinafter sometimes referred to collectively as "Employee
Plans/Agreements." True and correct copies of all written Employee
Plans/Agreements, including all amendments thereto, have heretofore been
provided to Purchaser. The Company is in compliance with and have made all
payments due under all Employee Plans/Agreements and with respect thereto the
Company is in compliance with all applicable federal and state laws and
regulations. The Company is not a contributor to any multi-employer pension plan
which has an unfunded liability with respect to benefits due its participants.
3.12 Employment Compensation. Set forth in Schedule 3.12 of the
Disclosure Schedule is a true and correct list of:
(a) All employees to whom the Company is paying compensation;
and in the case of salaried employees such list identifies the current
annual rate of compensation for each employee and in the case of hourly
or commission employees identifies certain reasonable ranges of rates
and the number of employees falling within each such range;
(b) All amounts owed to employees of the Company (including
the Sellers) for accrued sick pay, vacation pay, and bonus pay.
3.13 Patents, Trademarks, etc. Set forth in Schedule 3.13 of the
Disclosure Schedule attached hereto is a list of all United States and foreign
trademarks, service marks,
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trade names, brand names, copyrights, including registrations and applications,
patent and patent applications, and employee covenants and agreements respecting
intellectual property ("Trade Rights") in which the Company now has any
interest, specifying the basis on which such Trade Rights are owned, controlled,
used or held (under license or otherwise) by the Company, and also indicating
which of such Trade Rights are registered. All Trade Rights shown as registered
in Schedule 3.13 of the Disclosure Schedule have been properly registered, all
pending registrations and applications have been properly made and filed and all
annuity, maintenance, renewal and other fees relating to registrations or
applications are current. In order to conduct the business of the Company, as
such is currently being conducted, the Company does not require any Trade Rights
that it does not already have. The Company is not infringing and has not
infringed on any Trade Rights of another in the operation of its business, nor
to the knowledge of the Sellers is any other person infringing on the Trade
Rights of the Company. The Company has not granted any license or made any
assignment of any Trade Right and no other person has any right to use any Trade
Right owned or held by the Company. The Company does not pay any royalties or
other consideration for the right to use any Trade Rights of others. Except as
set forth in Schedule 3.13 of the Disclosure Schedule, to the knowledge of
Sellers, there are no inquiries, investigations or claims or litigation
challenging or threatening to challenge the Company's right, title and interest
with respect to its continued use and right to preclude others from using any
Trade Rights of the Company. To the knowledge of Sellers, all Trade Rights of
the Company are valid, enforceable and in good standing, and there are no
equitable defenses to enforcement based on any act or omission of the Company.
3.14 Product Warranty and Product Liability. Set forth in Schedule 3.14
of the Disclosure Schedule is a true, correct and complete copy of the Company's
standard warranty or warranties for sales of its products.
3.15 Tax Matters. The Company has properly completed and filed in
correct form all federal, state, and other tax returns (including Forms 1099 and
other informational returns) of every nature required to be filed by it and has
paid all taxes (whether or not requiring the filing of returns) including all
deficiencies, assessments, additions to tax, penalties and interest of which
notice has been received to the extent such amounts have become due. The Company
has obtained all required Forms W-9. Complete and correct copies of the
Company's federal and California income tax returns for 1994, 1995, and 1996
have been delivered by the Sellers to Purchaser. All tax liabilities have been
fully and properly reflected in the Financial Statements. The income tax returns
of the Company have not been examined by the Internal Revenue Service. There are
no outstanding agreements or waivers extending the statutory period of
limitation for any federal or state tax return of the Company for any period.
The Company has made all required deductions and payments and has properly
prepared and delivered all required documents in connection with the withholding
of taxes from the wages and other compensation of its employees. The Company has
filed all sales/use tax returns and have paid all such taxes for all states in
which they have responsibility to do so. The Company has obtained and maintains,
to the extent required by law, a current sales and use tax exemption certificate
for each customer to which it makes tax-exempt sales.
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3.16 Key Employees; Bank; Etc. Set forth in Schedule 3.16 of the
Disclosure Schedule is a list showing:
(a) The names of all the Company's officers and directors;
(b) The name of each bank at which the Company has (i) an
account and the numbers of all accounts, (ii) a line of credit, or
(iii) a safe deposit box and the name of each person authorized to draw
thereon or have access thereto; and
(c) The name of each person holding a power of attorney from
the Company and a summary of the terms thereof.
3.17 Records. The books of account of the Company fairly reflect the
items of income and expense and the assets, liabilities, and accruals of its
business and operations.
3.18 Fraud and Abuse Disclaimer. Neither Company nor any employee of
Company has in the operation of Company's business committed a violation of the
Medicare and Medicaid fraud and abuse provisions of the Social Security Act or
any similar provisions of other federal, state, or local laws relating to
kickbacks, illegal referrals, illegal billings, or the like.
3.19 Disclosure. No representation or warranty by the Sellers in this
Agreement, nor any statement, certificate, schedule or exhibit hereto furnished
or to be furnished by or on behalf of the Sellers pursuant to this Agreement,
nor any document or certificate delivered to Purchaser pursuant to this
Agreement or in connection with transactions contemplated hereby, contains or
shall contain any untrue statement of material fact or omits or shall omit a
material fact necessary to make the statements contained therein not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to the Sellers as follows:
4.1 Corporate.
(a) Organization. Purchaser is a corporation duly organized
and validly existing under the laws of the state of Washington.
(b) Corporate Power. Purchaser has all requisite corporate
power and authority to own, operate and lease its properties, to carry
on its business as and where such is now being conducted, to enter into
this Agreement and the other documents and instruments to be executed
and delivered by Purchaser pursuant hereto and to carry out the
transactions contemplated hereby and thereby.
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(c) Authority. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been
duly authorized by the board of directors of HealthCare. This Agreement
constitutes the valid and binding agreement of Purchaser, enforceable
against Purchaser in accordance with its terms.
(d) Qualification. Purchaser is duly licensed or qualified to
do business as a foreign corporation, and is in good standing, in each
jurisdiction wherein the character of the properties owned or leased by
it, or the nature of its business, makes such licensing or
qualification necessary.
4.2 No Violation. Neither the execution and delivery of this Agreement
or the other documents and instruments to be executed and delivered by Purchaser
pursuant hereto, nor the consummation by Purchaser of the transactions
contemplated hereby and thereby (a) will violate any statute or law or any rule,
regulation, order, writ, injunction or decree of any court or governmental
authority, (b) will require any authorization, consent, approval, exemption or
other action by or notice to any court, administrative or governmental agency,
instrumentality, commission, authority, board or body, or (c) will violate or
conflict with, or constitute a default (or an event which, with notice or lapse
of time, or both, would constitute a default) under, or will result in the
termination of, or accelerate the performance required by, or result in the
creation of any material Lien upon any of the assets of Purchaser under, any
term or provision of the Articles of Incorporation or By-laws of Purchaser or of
any material contract, commitment, understanding, arrangement, agreement or
restriction of any kind or character to which Purchaser is a party or by which
Purchaser or any of its assets or properties may be bound or affected.
4.3 Disclosure. No representation or warranty by Purchaser in this
Agreement nor any statement, certificate, schedule or exhibit hereto furnished
or to be furnished by or on behalf of Purchaser pursuant to this Agreement, nor
any document or certificate delivered to Purchaser pursuant to this Agreement or
in connection with transactions contemplated hereby, contains or shall contain
any untrue statement of material fact or omits or shall omit a material fact
necessary to make the statements contained therein not misleading.
ARTICLE V
COVENANTS
5.1 Covenants of Sellers.
(a) Access to Information and Records. The Sellers agree that
during the period after the date hereof and prior to the Closing,
Purchaser, its counsel, accountants and other representatives shall be
provided (i) reasonable access during normal business hours to all of
the properties, books, records, contracts and documents of the Company
for the purpose of such inspection, investigation and testing as
Purchaser deems appropriate (and Sellers shall furnish or cause to be
furnished to Purchaser and its representatives all information with
respect to the business and affairs of the Company as Purchaser may
reasonably request); (ii)
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reasonable access to employees and agents of the Company for such
meetings and communications as Purchaser reasonably desires; and (iii)
with the prior consent of the Company in each instance (which consent
shall not be unreasonably withheld), access to vendors, customers, and
others having business dealings with the Company.
(b) Conduct of Business Pending the Closing. The Sellers agree
that from the date hereof until the Closing, except as otherwise
approved in writing by Purchaser:
(i) No Changes. The Company will carry on its
business diligently and in the same manner as heretofore and
will not make or institute any changes in its methods of
purchase, sale, management, accounting or operation.
(ii) Maintain Organization. The Company will use its
best efforts to maintain, preserve, renew and keep in force
and effect the existence, rights and franchises of the Company
and to preserve the business organization of the Company
intact, to keep available to Purchaser the present officers
and employees of the Company, and to preserve for Purchaser
its present relationships with suppliers and customers and
others having business relationships with the Company.
(iii) No Breach. The Company will use its best
efforts to avoid any act, or any omission to act, which may
cause a breach of any material contract, commitment or
obligation, or any breach of any representation, warranty,
covenant or agreement made by the Sellers.
(iv) No Material Contracts. No contract or commitment
will be entered into, and no purchase of assets (tangible or
intangible) will be made, by or on behalf of the Company,
except contracts, commitments, purchases or sales which are in
the ordinary course of business and consistent with past
practice.
(v) No Corporate Changes. The Company shall not amend
its Articles of Incorporation or Bylaws or make any changes in
its authorized or issued capital stock; the Company shall not
grant any option or other right to acquire any share of its
authorized capital stock;
(vi) Maintenance of Insurance. The Company shall
maintain all of its insurance in effect as of the date hereof
or replace such insurance with comparable coverage and shall
procure such additional insurance as shall be reasonably
requested by Purchaser at Purchaser's expense.
(vii) Maintenance of Property. The Company shall use,
operate, maintain and repair all its assets and properties in
a normal business manner consistent with the Company's past
practices.
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<PAGE>
(viii) Interim Financials. The Company will provide
Purchaser with interim monthly financial statements and other
management reports as and when they are available.
(ix) No Dividends. The Company shall not declare or
pay any dividend (whether in cash, stock or property) or make
any other distribution to the Sellers, except for the
repayment of loans made by the Sellers to the Company.
(x) Compensation. The Company shall not increase the
compensation or benefits of any of its employees nor make any
other change in the terms of their employment.
(c) Repayment of Sellers' Loans. As of the date hereof, the
Company is indebted to the Sellers as set forth on Schedule 5.1(c).
Notwithstanding any other provision of this Agreement, on or prior to
the Closing date, Sellers shall have the right to cause the Company to
repay such indebtedness to the extent the Company has funds available
for such purposes. To the extent any such debts are not paid prior to
Closing, the total amount thereof shall be deemed to have been
contributed to the capital of Company as of the Closing date.
(d) Sick and Vacation Pay. Sellers shall cause Company to pay
on the Closing Date all amounts due employees of Company for sick and
vacation pay accrued through the date of Closing. Sellers shall
indemnify and hold Purchaser harmless from and against any claims by
employees of Company, including Sellers, for sick and vacation pay
which may have accrued prior to the Closing Date.
5.2 Release of Sellers' Personal Guarantees. Sellers have provided
personal guarantees or have otherwise become individually liable with respect to
certain leases, line of credit agreements, purchase agreements with
manufacturers, or other agreements for the benefit for the Company, including,
without limitation, those described on Schedule 5.2. Following the Closing,
Purchaser will use its best efforts to obtain the release of the Sellers from
all such personal liabilities. To the extent that any such release cannot be
obtained, Purchaser will indemnify and hold the Sellers harmless with respect to
any loss, cost, or expense the Sellers may incur as a result of not being
released.
ARTICLE VI
CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS
Each and every obligation of Purchaser to be performed at Closing shall
be subject to the satisfaction prior to or at the Closing (or the waiver by
Purchaser) of each of the following conditions:
6.1 Representations and Warranties True at Closing. Each of the
representations and warranties made by the Sellers in this Agreement, or in any
instrument, schedule, list,
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certificate or writing delivered by Sellers pursuant to this Agreement, shall be
true and correct when made and shall be true and correct in all material
respects at and as of the Closing as though such representations and warranties
were made as of the Closing.
6.2 Compliance With Agreement. The Sellers shall have in all material
respects performed and complied with all of their agreements and obligations
under this Agreement which are to be performed or complied with by them prior to
or on the Closing, including the delivery of the closing documents specified in
Section 2.2(a) hereof.
6.3 Absence of Suit. No action, suit, investigation or proceeding
before any court or any governmental authority shall have been commenced or
threatened, against Purchaser, the Company or any of the affiliates, officers or
directors of any of them, seeking to restrain, prevent or change the
transactions contemplated hereby, or questioning the validity or legality of any
such transactions, or seeking damages in connection with, or imposing any
condition on, any such transactions; provided that the obligations of Purchaser
shall not be affected unless there is a reasonable likelihood that as a result
of such action, suit, investigation, or proceeding Purchaser will be unable to
retain substantially all the practical benefits of the transaction to which it
is entitled under this Agreement.
6.4 Approvals; Consents. All consents, permits, approvals, licenses or
orders from any governmental or regulatory body or other third party required to
be obtained by Sellers for the consummation of the transactions contemplated by
this Agreement shall have been obtained except where failure to obtain such
consents, permits, approvals, licenses or orders would not have a material
adverse effect (whether or not such effect is referred to or described in any
Schedule) on the business, prospects, financial conditions, assets, reserves or
operations of the Company taken as a whole.
6.5 Agreements.
(a) Noncompetition Agreements. Both Sellers shall have
executed and delivered to Purchaser a Noncompetition Agreement
substantially in the form attached hereto as Schedule 6.5(a).
(b) Employment Agreement. Donal M. Welch shall have executed
and delivered to Purchaser an Employment Agreement substantially in the
form of Schedule 6.5(b) hereto.
ARTICLE VII
CONDITIONS PRECEDENT TO THE SELLERS' OBLIGATIONS
Each and every obligation of the Sellers to be performed at Closing
shall be subject to the satisfaction prior to or at the Closing (or the waiver
by the Sellers) of the following conditions:
7.1 Representations and Warranties True at Closing. Each of the
representations and warranties made by Purchaser in this Agreement, or in any
instrument, list, certificate or
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<PAGE>
writing delivered by Purchaser pursuant to this Agreement, shall be true and
correct when made and shall be true and correct at and as of the Closing as
though such representations and warranties were made as of the Closing.
7.2 Compliance With Agreement. Purchaser shall have in all material
respects performed and complied with all of Purchaser's agreements and
obligations under this Agreement which are to be performed or complied with by
Purchaser prior to or on the Closing, including the delivery of the closing
documents specified in Section 2.2(b) hereof.
7.3 Absence of Suit. No action, suit, investigation, or proceeding
before any court or any governmental authority shall have been commenced or
threatened against Purchaser, the Company or any of the affiliates, officers or
directors of any of them, seeking to restrain, prevent or change the
transactions contemplated hereby, or questioning the validity or legality of any
such transactions, or seeking damages in connection with, or imposing any
condition on, any such transactions; provided that the obligations of the
Sellers shall not be affected unless there is a reasonable likelihood that as a
result of such action, suit, proceeding or investigation, the Sellers will be
unable to retain substantially all the consideration to which they are entitled
under this Agreement.
7.4 Agreements.
(a) Noncompetition Agreements. Purchaser shall have executed
and delivered to each Seller a Noncompetition Agreement substantially
in the form attached hereto as Schedule 6.5(a).
(b) Employment Agreement. Purchaser shall have executed and
delivered to Donal M. Welch an Employment Agreement substantially in
the form attached hereto as Schedule 6.5(b).
ARTICLE VIII
INDEMNIFICATION; SURVIVAL OF REPRESENTATIONS
8.1 Indemnification by the Sellers.
(a) The Sellers hereby agree to indemnify, defend, and hold
Purchaser (and its directors, officers, shareholders, employees,
affiliates, agents and assigns) harmless from and against all Claims
(as defined below) asserted against, resulting to, imposed upon, or
incurred by Purchaser directly or indirectly by reason of, arising out
of, or resulting from (a) the inaccuracy or breach of any
representation or warranty of the Sellers contained in or made pursuant
to this Agreement or (b) the non-performance or breach of any covenant,
term or provision to be performed by the Sellers contained in this
Agreement. The indemnification obligation of Sellers hereunder is with
respect to the full amount of the Claims (as defined below). As used in
this Article VIII, the term "Claim" shall include any and all losses,
liabilities, damages, deficiencies, assessments, judgments, awards,
settlements, costs, and expenses including without limitation
penalties, court costs, and attorney fees and
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expenses at trial and on appeal. Notwithstanding the foregoing,
Sellers' indemnity obligations shall be subject to the following
limitations:
(i) Sellers shall be responsible for indemnifying
Purchaser only to the extent Claims in the aggregate exceed
the sum of $2,500.
(ii) Each Seller shall be solely responsible for
indemnification with respect to such Seller's warranty of
title regarding Seller's Shares and such Seller's warranty
regarding the absence of liens and encumbrances applicable to
such Shares;
(iii) Each Seller's liability with respect to a Claim
shall be limited to a percentage of such Claim equal to such
Seller's percentage ownership of the Shares as set forth in
Section 1.1; and
(iv) Each Seller's maximum liability to Purchaser for
indemnification shall not exceed an amount equal the portion
of the Purchase Price being paid to such Seller as set forth
in Section 1.3 hereof.
(v) Any Claims shall be asserted by Purchaser jointly
against Sellers on a uniform basis and any waiver, compromise
or settlement of a Claim offered by Purchaser shall be offered
on the same terms to both Sellers.
(b) Purchaser shall be entitled, at its option, to set off any
amount due from Sellers to Purchaser under this Section 8.1 against any
amount Purchaser is obligated to pay Sellers under the notes provided
for in Section 1.3 hereof, under the Noncompetition Agreements provided
for in Section 6.5(a) hereof or otherwise.
(c) Purchaser's right to indemnification as provided in this
Section 8.1 shall not be eliminated, reduced or modified in any way as
a result of the fact that (i) Purchaser had notice of a breach or
inaccuracy of any representation, warranty or covenant contained herein
(except as set forth in the Disclosure Schedule), (ii) Purchaser had
been provided with access, as requested by Purchaser, to officers and
employees of the Company and such of Company's books, documents,
contracts and records as has been provided to Purchaser in response to
Purchaser's requests.
8.2 Indemnification by Purchaser. Purchaser hereby agrees to indemnify,
defend, and hold harmless the Sellers from and against all Claims asserted
against, resulting to, imposed upon, or incurred by the Sellers directly or
indirectly by reason of, arising out of, or resulting from (a) the inaccuracy or
breach of any representation or warranty of Purchaser contained in or made
pursuant to this Agreement or in any of the documents delivered pursuant hereto,
or (b) the non-performance or breach of any covenant, term or provision to be
performed by Purchaser contained in this Agreement or in any of the documents
delivered pursuant hereto. The indemnification obligation of Purchaser hereunder
is with respect to the full amount of the Claims.
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<PAGE>
8.3 Notice; Defense of Claims. If a claim is to be made by a party
entitled to indemnification hereunder, the party entitled to such
indemnification shall give written notice to the indemnifying party immediately
after the party entitled to indemnification becomes aware of any fact, condition
or event which may give rise to a matter for which indemnification may be
sought; provided that the failure of any indemnified party to give timely notice
shall not affect the rights to indemnification hereunder except to the extent
that the indemnifying party demonstrates actual damage caused by such failure.
If any lawsuit or enforcement action is filed against any party entitled to the
benefit of indemnity hereunder, and if the indemnifying party shall acknowledge
in writing to the indemnified party that the indemnifying party shall be
obligated under the terms of its indemnity hereunder in connection with such
lawsuit, action or claim, then the indemnifying party shall be entitled, if it
so elects, to take control of the defense and investigation of such lawsuit or
action and to employ and engage attorneys of its own choice to handle and defend
the same, at the indemnifying party's cost, risk and expense provided that the
indemnifying party and its counsel shall proceed with diligence and in good
faith with respect thereto. The indemnified party shall cooperate in all
reasonable respects with the indemnifying party and such attorneys in the
investigation, trial and defense of such lawsuit or action and any appeal
arising therefrom; provided, however, that the indemnified party may, at its own
cost, participate in the investigation, trial and defense of such lawsuit or
action and any appeal arising therefrom.
8.4 Survival of Representations. All representations and warranties
made by the parties in this Agreement are made only as of the date of this
Agreement but will survive the consummation of the transactions contemplated by
this Agreement until October 31, 1999 (except for the representations and
warranties of the Sellers set forth in Section 3.10 hereof which shall expire 90
days after the applicable statutes of limitation shall have run with respect to
all tax returns filed by the Company for all periods ended on or before the
Closing), after which all such representations and warranties shall expire
except with respect to claims asserted in writing prior to such date.
ARTICLE IX
MISCELLANEOUS
9.1 Termination.
(a) Right of Termination Without Breach. This Agreement may be
terminated without further liability of any party at any time prior to
the Closing:
(i) By mutual written agreement of the parties, or
(ii) By either Purchaser or the Sellers if the
Closing shall not have occurred on or before the 90th day
after the date hereof, provided the terminating party has not,
through breach of a representation, warranty or covenant,
prevented the Closing from occurring on or before such date.
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(b) Termination for Breach.
(i) Termination by Purchaser. If there has been a
material breach by the Sellers of any of their agreements,
representations or warranties contained in this Agreement
which has not been waived in writing by Purchaser, then
Purchaser may, by written notice to Sellers at any time prior
to the Closing that such breach is continuing, terminate this
Agreement with the effect set forth in Section 9.1(b)(iii)
hereof.
(ii) Termination by Sellers. If there has been a
material breach by Purchaser of any of its agreements,
representations or warranties contained in this Agreement
which has not been waived in writing by the Sellers, then the
Sellers may, by written notice to Purchaser at any time prior
to the Closing that such breach is continuing, terminate this
Agreement with the effect set forth in Section 9.1(b)(iii).
(iii) Effect of Termination. Termination of this
Agreement pursuant to this Section 9.1 shall not in any way
terminate, limit or restrict the rights and remedies of any
party hereto against any other party which has breached or
failed to perform any of the representations, warranties,
covenants, or agreements of this Agreement prior to
termination hereof.
9.2 Waiver. Sellers or Purchaser may (a) extend the time for the
performance of any of the obligations or other acts of the other, (b) waive any
inaccuracies in the representations and warranties of the other contained herein
or in any document delivered pursuant hereto and (c) waive compliance with any
of the agreements of the other or satisfaction of any of the conditions to its
obligations contained herein. Any extension or waiver made pursuant to this
Section 9.2 must be by an instrument in writing signed on behalf of the party
granting the extension or waiver. A waiver by any party of any provision hereof
or breach hereof shall not operate or be construed as the waiver of any other
provision or any subsequent breach.
9.3 Binding Effect; No Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
legal representatives. This Agreement is not assignable and any purported
assignment shall be null and void. Nothing contained in this Agreement shall be
deemed to confer any right or benefit upon any person other than the parties
hereto to the extent herein provided.
9.4 Dollars. "Dollars" and "$" mean lawful money of the United States
of America, which shall be legal tender on the date of payment for all public
and private debts.
9.5 Brokers and Finders. Sellers on the one hand and Purchaser on the
other, each agree to indemnify and hold the other harmless from and against any
claim made for a broker's or a finder's fee or other similar compensation (and
all related costs and expenses) asserted against an indemnified party which
arises out of or results from an action taken by an indemnifying party.
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<PAGE>
9.6 Headings; Severability. The headings in this Agreement are for
reference only, and shall not affect the interpretation of this Agreement. Each
and every provision of this Agreement shall be treated as separate and distinct
and, in the event of any provision hereof being declared invalid, such invalid
provision shall be deemed to be severable and all other provisions hereof shall
remain in full force and effect.
9.7 Schedules. The Schedules are a part of this Agreement as if fully
set forth herein.
9.8 Disclosures and Announcements. Both the timing and the content of
all disclosures to third parties and public announcements concerning the
transactions provided for in this Agreement by either Sellers or Purchaser shall
be subject to the approval of the other in all essential respects, except that
the Sellers' approval shall not be required as to any announcements or filings
Purchaser may be required to make under applicable laws or regulations.
9.9 Expenses. Sellers agree that all fees and expenses incurred by them
in connection with this Agreement shall be borne by Sellers including, without
limitation, all fees of counsel and accountants; and Purchaser agrees that all
fees and expenses incurred by it in connection with this Agreement shall be
borne by it, including, without limitation, all fees of counsel and accountants.
9.10 Notice. All notices, requests, demands and other communications
hereunder shall be given in writing and shall be: (a) personally delivered; (b)
sent by telecopier, facsimile transmission or other electronic means of
transmitting written documents; or (c) sent to the parties at their respective
addresses indicated herein by private overnight courier service. The respective
addresses and telephone numbers to be used for all such notices, demands or
requests are as follows:
If to Purchaser: SONUS-USA, Inc.
111 S.W. Fifth Avenue, Suite 2390
Portland, Oregon 97204
Attn: President
Personal & Confidential
Facsimile: (503) 225-9309
with a copy to: Miller, Nash, Wiener, Hager & Carlsen
111 S.W. Fifth Avenue, Suite 3500
Portland, Oregon 97204
Attn: G. Todd Norvell
Facsimile: (503) 224-0155
If to Sellers: Donal M. Welch-PERSONAL & CONFIDENTIAL
1292 Tam O'Shanter
Azusa, California 91702
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<PAGE>
with a copy to: Richard P. Manson
Graham & James
801 S. Figueroa St., 14 Fl.
Los Angeles, California 90017
Facsimile: (213) 623-4581
and to: Gregory J. Frazer
1477 Dwight Drive
Glendale, California 91207
Facsimile (818) 244-8889
with a copy to: Ms. Nancy Borders
Gardner, Carton & Douglas
321 N. Clark Street, Ste. 3400
Chicago, Illinois 60610
Facsimile: (312) 644-3381
If personally delivered, such communication shall be deemed delivered
upon actual receipt; if electronically transmitted, such communication shall be
deemed delivered the next business day after transmission (and the sender shall
bear the burden of proof of delivery); if sent by overnight courier pursuant to
this paragraph, such communication shall be deemed delivered upon receipt. Any
party to this Agreement may change its address for the purposes of this
Agreement by giving notice thereof in accordance with this section.
9.11 Resolution of Disputes.
(a) Arbitration. Any dispute, controversy or claim arising out
of or relating to this Agreement or the performance by the parties of
its terms shall be settled by binding arbitration held in Los Angeles,
California, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect, except as specifically
otherwise provided in this Section 9.11.
(b) Arbitrators. If the matter in controversy (exclusive of
attorney fees and expenses) shall appear, as at the time of the demand
for arbitration, to exceed $50,000, then the panel to be appointed
shall consist of three neutral arbitrators; otherwise, one neutral
arbitrator.
(c) Procedures; No Appeal. The arbitrator(s) shall allow such
discovery as the arbitrator(s) determine appropriate under the
circumstances and shall resolve the dispute as expeditiously as
practicable, and if reasonably practicable, within 120 days after the
selection of the arbitrator(s). The arbitrator(s) shall give the
parties written notice of the decision, with the reasons therefor set
out, and shall have thirty (30) days thereafter to reconsider and
modify such decision if any party so requests within ten (10) days
after the decision. Thereafter, the decision of the arbitrator(s) shall
be final, binding, and nonappealable with respect to all persons,
including
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<PAGE>
(without limitation) persons who have failed or refused to participate
in the arbitration process. If the amount in controversy exceeds
$10,000, the arbitrator's decision shall include a written statement
specifying the basis for and compensation of any monetary amount.
(d) Authority. The arbitrator(s) shall have authority to award
relief under legal or equitable principles, including interim or
preliminary relief, and to allocate responsibility for the costs of the
arbitration and to award recovery of attorney fees and expenses in such
manner as is determined to be appropriate by the arbitrator(s).
(e) Entry of Judgment. Judgment upon the award rendered by the
arbitrator(s) may be entered in any court having in personam and
subject matter jurisdiction. The Shareholders and HealthCare hereby
submit to the in personam jurisdiction of the federal and state courts
in California for the purpose of confirming any such award and entering
judgment thereon.
(f) Confidentiality. All proceedings under this Section 9.11,
and all evidence given or discovered pursuant hereto, shall be
maintained in confidence by all parties.
(g) Continued Performance. The fact that the dispute
resolution procedures specified in this Section 13 shall have been or
may be invoked shall not excuse any party from performing its
obligations under this Agreement, and during the pendency of any such
procedure all parties shall continue to perform their respective
obligations in good faith, subject to any rights to terminate this
Agreement that may be available to any party.
9.12 Governing Law. This Agreement may not be modified or terminated
orally, and shall be construed and interpreted according to the internal law of
the state of California, excluding any choice of law rules that may direct the
application of the laws of another jurisdiction.
9.13 Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
9.14 Entire Agreement. This instrument embodies the entire agreement
between the parties hereto with respect to the transactions contemplated herein,
and there have been and are no agreements, representations or warranties between
the parties other than those set forth or provided for herein.
9.15 Further Assurances. Both before and after the Closing, each party
will cooperate in good faith with the others and will take all appropriate
action and execute any documents, instruments, or conveyances of any kind that
may be reasonable necessary or desirable to carry out any of the transactions
contemplated hereunder.
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<PAGE>
9.16 Sellers Action. Whenever in this Agreement the Sellers are given
the discretion to take or not to take any action, the decision of the Sellers
shall be made pursuant to the vote of the Sellers holding a majority of the
Shares.
9.17 Termination of Restrictions. Upon the consummation of the
transactions provided for herein, any restrictions on the transfer of the Shares
shall be waived by Sellers and shall become void and of no further effect.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement effective as of the date first above written.
SELLERS: PURCHASER:
SONUS-USA, Inc., a Washington corporation
/s/ Donal M. Welch By: /s/ Randall E. Drullinger
Donal M. Welch Randall E. Drullinger
Vice President
/s/ Gregory J. Frazer
Gregory J. Frazer
The undersigned, being the spouse of a Seller named in the foregoing Stock
Purchase and Sale Agreement, hereby relinquish all right, title, and interest,
including, without limitation, any community property rights under California
law to the Shares (as defined in such Agreement) and hereby consent and agree to
the transfer of such Shares pursuant to such Agreement.
- ----------------------------
Carissa Bennett
- 23 -
<PAGE>
SCHEDULES
Schedule 1.3 Note Payable to Sellers
Schedule III Disclosure Schedule
Schedule 3.4(g) Disposition of Property
Schedule 3.7(a) Compliance with laws
Schedule 3.10(a) Leases
Schedule 3.10(b) Purchase Commitments
Schedule 3.10(c) Sales Commitments
Schedule 3.10(i) Other Material Contracts
Schedule 3.11 Employee Benefit Plans
Schedule 3.12 Employee Compensation
Schedule 3.13 Patents, Trademarks
Schedule 3.14 Product Warranty
Schedule 3.16 Key Employees; Banks
Schedule 5.1(c) Sellers' Loans
Schedule 5.2 Sellers' Personal Guarantees
Schedule 6.5(a) Noncompetition Agreement
Schedule 6.5(b) Employment Agreement
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SHIKAZE RALSTON
CHARTERED ACCOUNTANTS
February 27, 1998
The Board of Directors
Sonus Corp.
RE: POST-EFFECTIVE AMENDMENT TO REGISTRATION STATEMENT ON FORM SB-2
Dear Sirs:
We consent to the use of our reports included herein and to the references to
our firm under the heading "Experts".
Yours very truly,
/s/ Shikaze Ralston
Shikaze Ralston
Chartered Accountants
Consent of Independent Certified Accountants
The Board of Directors
Sonus Corporation:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
/S/ KPMG PEAT MARWICK LLP
Portland, Oregon
March 4, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the person whose signature appears
below constitutes and appoints Brandon M. Dawson and Edwin J. Kawasaki, and each
of them, such person's true and lawful attorneys-in-fact and agents, with full
power of substitution and re-substitution, for such person and in his or her
name, place and stead, in such person's capacity as a director of Sonus Corp.,
an Alberta, Canada corporation (the "Company"), to sign any and all
post-effective amendments to the registration statement on Form SB-2 relating to
the registration of the Company's common shares and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or each of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this power of attorney has been executed by the
undersigned as of this 27th day of February, 1998.
Signature Title
--------- -----
/s/ Joel Ackerman Director
Joel Ackerman
<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 OCTOBER 31, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> JUL-31-1997 JUL-31-1998
<PERIOD-START> AUG-01-1996 AUG-01-1997
<PERIOD-END> JUL-31-1997 OCT-31-1997
<CASH> 1,099 0
<SECURITIES> 0 0
<RECEIVABLES> 2,875 3,107
<ALLOWANCES> (361) 393
<INVENTORY> 425 626
<CURRENT-ASSETS> 4,612 4,241
<PP&E> 2,976 2,490
<DEPRECIATION> 699 0
<TOTAL-ASSETS> 16,544 16,646
<CURRENT-LIABILITIES> 6,512 6,841
<BONDS> 1,197 1,002
0 0
0 0
<COMMON> 11,131 11,259
<OTHER-SE> (2,296) (2,456)
<TOTAL-LIABILITY-AND-EQUITY> 16,544 16,646
<SALES> 11,627 5,307
<TOTAL-REVENUES> 13,462 5,307
<CGS> 5,010 1,753
<TOTAL-COSTS> 10,995 3,997
<OTHER-EXPENSES> 4,200 1,389
<LOSS-PROVISION> 47 0
<INTEREST-EXPENSE> 47 (26)
<INCOME-PRETAX> (1,701) (96)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,701) (96)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,701) (96)
<EPS-PRIMARY> (0.08) 0
<EPS-DILUTED> (0.08) 0
</TABLE>
