SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended October 31, 1998
Commission File Number 1-13851
SONUS CORP.
(Exact name of small business issuer as specified in its charter)
Alberta, Canada Not Applicable
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
111 S.W. Fifth Avenue, Suite 1620, Portland, Oregon 97204
(Address of principal executive offices)
Issuer's telephone number, including area code: 503-225-9152
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X . No .
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 6,119,707 Common Shares, without par
or nominal value, outstanding as of December 11, 1998.
Transitional Small Business Disclosure Format. Yes . No X .
--- ---
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FORWARD-LOOKING STATEMENTS
- --------------------------
Statements in this report, to the extent they are not based on
historical events, constitute forward-looking statements. Forward-looking
statements include, without limitation, statements containing the words
"believes," "anticipates," "intends," "expects," and words of similar import.
Investors are cautioned that forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance, or achievements of Sonus Corp. (the "Company") to be
materially different from those described herein. Factors that may result in
such variance, in addition to those accompanying the forward-looking statements,
include economic trends in the Company's market areas, the ability of the
Company to manage its growth and integrate new acquisitions into its network of
hearing care clinics, development of new or improved medical or surgical
treatments for hearing loss or of technological advances in hearing instruments,
changes in the application or interpretation of applicable government laws and
regulations, the ability of the Company to complete additional acquisitions of
hearing care clinics on terms favorable to the Company, the degree of
consolidation in the hearing care industry, the Company's success in attracting
and retaining qualified audiologists and staff to operate its hearing care
clinics, product and professional liability claims brought against the Company
that exceed its insurance coverage, and the availability of and costs associated
with potential sources of financing. The Company disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future events
or developments.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
SONUS CORP.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
October 31, July 31,
1998 1998
---------------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,576 $ 2,720
Short-term investments, available for sale 4,537 6,408
Accounts receivable, net of allowance for doubtful
accounts of $703 and $684, respectively 3,260 3,339
Other receivables 506 515
Inventory 1,048 967
Prepaid expenses 388 270
------------------- ------------------
Total current assets 11,315 14,219
Property and equipment, net 4,468 3,607
Other assets 240 151
Goodwill and covenants not to compete, net 18,030 16,152
------------------- ------------------
$ 34,053 $ 34,129
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans and short-term notes payable $ 23 $ 46
Accounts payable 3,742 2,879
Accrued payroll 923 1,110
Other accrued liabilities 2,256 2,595
Convertible notes payable 1,021 ---
Capital lease obligation, current portion 121 120
Long term debt, current portion 1,492 1,160
------------------- ------------------
Total current liabilities 9,578 7,910
Capital lease obligation, non-current portion 193 223
Long term debt, non-current portion 2,446 1,733
Convertible notes payable --- 1,170
------------------- ------------------
Total liabilities 12,217 11,036
Shareholders' equity:
Series A convertible preferred stock, no par
value per share, 13,333,333 and 0 shares,
respectively, authorized, issued, and outstanding 15,701 15,701
Common stock, no par value per share, unlimited
number of shares authorized, 6,119,707 and 6,079,908
shares, respectively, issued and outstanding 14,921 14,673
Notes receivable from shareholders (283) (283)
Accumulated deficit (8,185) (6,711)
Cumulative translation adjustment (260) (229)
Treasury stock 6,960 shares at cost (58) (58)
------------------- ------------------
Total shareholders' equity 21,836 23,093
------------------- ------------------
$ 34,053 $ 34,129
=================== ==================
</TABLE>
See accompanying notes to consolidated financial statements
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SONUS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
Three months ended
October 31,
-----------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
Net revenues $ 7,701 $ 5,307
Costs and expenses:
Cost of products sold 2,601 1,753
Clinical expenses 4,364 2,244
General and administrative expenses 1,784 1,112
Depreciation and amortization 475 277
--------------- ---------------
Total costs and expenses 9,224 5,386
--------------- ---------------
Loss from continuing operations (1,523) (79)
Other income (expense):
Interest income 104 9
Interest expense (56) (26)
Other, net 1 ---
--------------- ---------------
Net loss $ (1,474) $ (96)
=============== ===============
Per share of common stock:
Basic $(0.24) $(0.02)
Diluted $(0.24) $(0.02)
Average shares outstanding:
Basic 6,083 4,583
Diluted 6,083 4,583
</TABLE>
See accompanying notes to consolidated financial statements.
4
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SONUS CORP.
CONSOLIDATED STATEMENTS OF COMPREHESIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
Three months ended
October 31,
--------------------------------
1998 1997
-------------- -------------
Net Income $(1,474) $(96)
Other comprehensive income, net of tax:
Foreign currency translation adjustments (31) (50)
-------------- -------------
Comprehensive income $(1,505) $(146)
============== =============
See accompanying notes to consolidated financial statements.
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<TABLE>
SONUS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<S> <C> <C>
Three months ended
October 31,
-------------------------------------
1998 1997
-------------------------------------
Cash flows from operating activities:
Net loss $ (1,474) $ (96)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for bad debt expense 68 28
Depreciation and amortization 475 277
Changes in non-cash working capital:
Accounts receivable 87 (204)
Other receivables 10 (96)
Inventory (52) (198)
Prepaid expenses (112) (227)
Bank overdraft --- 275
Accounts payable and accrued liabilities 233 (444)
---------------- ----------------
Net cash used in operating activities (765) (685)
---------------- ----------------
Cash flows from investing activities:
Sale of short-term investments 1,870 ---
Purchase of property and equipment (915) (320)
Reduction of (additional) costs related to acquisitions (116) 27
Deferred acquisition costs and other, net (90) (53)
Net cash paid on business acquisitions (950) (388)
---------------- ----------------
Net cash used in investing activities (201) (734)
---------------- ----------------
Cash flows from financing activities:
Net repayments of long term debt
and capital lease obligations (223) (68)
Deferred financing costs, net 1 ---
Advances on (repayments of) bank loans and
short-term notes payable (173) 324
Issuance of common stock for cash, net of costs 248 128
Acquisition of treasury stock --- (14)
---------------- ----------------
Net cash provided by (used in) financing activies (147) 370
---------------- ----------------
Net decrease in cash and cash equivalents (1,113) (1,049)
Effect on cash and cash equivalents of changes
in foreign translation rate (31) (50)
Cash and cash equivalents, beginning of period 2,720 1,099
---------------- ----------------
Cash and cash equivalents, end of period $ 1,576 $ ---
---------------- ----------------
Supplemental disclosure of non-cash investing and financing activities:
Interest paid during the period 56 26
Non-cash financing activities:
Issuance and assumption of long-term debt in acquisitions 1,240 764
See accompanying notes to consolidated financial statements.
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SONUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim Financial Statements
The interim financial statements reflect all adjustments, consisting
only of normal recurring adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods presented.
The results of operations for an interim period are not necessarily indicative
of the results of operations for a full year. Certain amounts in the financial
statements for the three-month period ended October 31, 1997, have been
reclassified in order to conform to the presentation for the three-month period
ended October 31, 1998. Effective February 9, 1998, the Company effected a
one-for-five reverse stock split of the Common Shares of the Company. All share
and per share information appearing in the accompanying financial statements has
been restated to give effect to the reverse stock split. The Company has adopted
Statement of Financial Accounting Standards No.130, "Reporting Comprehensive
Income," for its fiscal year ending July 31, 1999, and therefore the interim
financial statements contain consolidated statements of comprehensive income for
the three months ended October 31, 1998 and 1997.
2. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS No. 128 supersedes APB Opinion No. 15, "Earnings Per Share" and
specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common shares or
potential common shares. It replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS. Basic EPS,
unlike primary EPS, excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common shares were
exercised or converted into common shares or resulted in the issuance of common
shares that would then share in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS under APB Opinion No. 15. All prior
period EPS data have been restated to conform to SFAS No. 128. Common share
equivalents represented by convertible debt and convertible preferred stock have
not been included in the calculation of earnings per share as the effect would
be anti-dilutive.
3. Release of Shares from Escrow
Effective with the listing of the Company's common shares on the
American Stock Exchange on February 10, 1998, 850,000 common shares owned by
certain members of the Company's management were released from escrow by The
Alberta Stock Exchange. The shares, which had previously been excluded from the
calculation of the average shares outstanding during a period, are included in
such calculation for the three-month period ended October 31, 1998.
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4. Acquisitions
During the three months ended October 31, 1998, the Company acquired 13
clinics in five transactions. The aggregate purchase price for the acquisitions
consisted of cash payments of $950,000, promissory notes issued by the Company
of $870,000 payable over three years, and $254,000 in assumed liabilities. As a
result of the acquisitions, the Company recorded $75,000 in accounts receivable,
$29,000 in inventory, $184,000 in property and equipment, $6,000 in other
assets, and $1,780,000 in goodwill, which included costs related to the
acquisitions. The Company also recorded $220,000 for covenants not to compete
payable over three years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Three Months Ended October 31, 1998 Compared to Three Months Ended October 31,
1997
Revenues. Total revenues for the three months ended October 31, 1998,
were $7,701,000, representing a 45% increase over revenues of $5,307,000 for the
comparable period in fiscal 1997. The increase was attributable to the 46
additional clinics that were owned by the Company during the three months ended
October 31, 1998, but not during the comparable period of the prior fiscal year.
Product revenues were $6,646,000 for the three months ended October 31, 1998, up
44% from $4,601,000 for the same period in 1997. Audiological service revenues
of $920,000 represented 12% of total revenues for the three months ended October
31, 1998, as compared to $706,000 or 13% of total revenues for the comparable
period in fiscal 1997.
Product Gross Profit. Product gross profit for the three months ended
October 31, 1998, was $4,045,000 or 61% of revenues, compared to $2,848,000 or
62% of revenues for the comparable period in fiscal 1997. The increase in
product gross profit was attributable to the 46 additional clinics that were
owned by the Company during the three months ended October 31, 1998, but not
during the comparable period of the prior fiscal year. The slight decrease in
product gross profit percentage was due to a shift in product mix toward higher
priced hearing instruments that yield greater gross profits in terms of dollars
despite lower margins.
Clinical Expenses. Clinical expenses include all personnel, marketing,
occupancy and other operating expenses at the clinic level. Clinical expenses
for the three months ended October 31, 1998, were $4,364,000, representing an
increase of 94% over clinical expenses of $2,244,000 for the comparable period
in fiscal 1997. This increase was primarily due to clinical expenses associated
with the 46 additional clinics that were owned by the Company during the three
months ended October 31, 1998, but not during the three-month period ended
October 31, 1997, and increased marketing expenses incurred in connection with
promotion of the recently introduced Sonus private label hearing instruments.
General and Administrative Expenses. General and administrative
expenses increased 60% from $1,112,000 for the three months ended October 31,
1997, to $1,784,000 for the three months ended October 31, 1998, due to planned
increases in corporate staff and other corporate expenses related to the
operation of a larger organization. As a percentage of revenues, general
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and administrative expenses rose to 23% for the three-month period ended October
31, 1998, versus 21% for the same period in the prior fiscal year. The increase
in general and administrative expenses as a percentage of revenues was primarily
due to the acquisition by the Company in late July 1998 of Hear PO Corp., an
independent provider association and hearing care benefit administrator,
operation of the Company's greenhouse training program which began in April
1998, and expenses related to the Company's franchise licensing program, which
is not expected to produce significant revenue until the fourth quarter of
fiscal 1999. Management anticipates that general and administrative expenses
will decrease as a percentage of revenues as the Company's revenue base grows
through its strategic acquisition program and enhanced marketing efforts and as
a result of a recently implemented administrative restructuring and cost-cutting
program.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the three months ended October 31, 1998, was $475,000, an increase
of 71% over the depreciation and amortization expense of $277,000 for the same
period in the prior fiscal year. The increase resulted from the depreciation of
fixed assets and amortization of goodwill and covenants not to compete
associated with the 46 additional clinics operated by the Company during the
three-month period ended October 31, 1998.
Interest Income and Expense. Interest income for the three months ended
October 31, 1998, increased to $104,000 from $9,000 for the same period in the
prior fiscal year. The increase was due to higher balances of cash and
short-term investments held by the Company as a result of the sale of preferred
stock in December 1997. Interest expense for the three months ended October 31,
1998, was $56,000 compared to $26,000 for the three months ended October 31,
1997, reflecting higher balances of long-term debt incurred in connection with
acquisitions.
LIQUIDITY AND CASH RESERVES
For the three months ended October 31, 1998, net cash used in operating
activities was $765,000 compared to $685,000 for the three months ended October
31, 1997. The Company invested cash of $950,000 in business acquisitions and
$915,000 in property and equipment, and sold $1,870,000 of short-term
investments for the three months ended October 31, 1998, compared to $388,000,
$320,000, and $0, respectively, for the three months ended October 31, 1997. The
Company repaid long-term debt of $224,000 during the three months ended October
31, 1998, compared to repayments of $68,000 during the comparable period in the
prior fiscal year. The Company also repaid bank loans and short-term notes
payable totaling $173,000 during the three months ended October 31, 1998, versus
receiving advances on bank loans and short-term notes payable of $324,000 for
the three months ended October 31, 1997. During the three months ended October
31, 1998, the Company received cash of $248,000 for the issuance of Common
Shares in connection with the exercise of warrants issued in December 1996.
At October 31, 1998, the Company had working capital of $1,737,000 and
cash and short-term investments totaling $6,113,000. The Company believes that
its cash and short-term investments, along with cash generated from operations,
will provide it with sufficient capital to fund its operations until the end of
the Company's current fiscal year. The Company's capital expenditures during
fiscal 1999 are budgeted to be approximately $1,700,000, with approximately
$920,000 committed as of October 31, 1998. Additional funding will be needed to
finance operations and planned capital expenditure beyond July 31, 1999, and to
fund the Company's strategy to acquire additional hearing care clinics. These
funding requirements may
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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 any such financing will be available to the
Company or will be available on terms acceptable to the Company.
YEAR 2000
The "Year 2000 problem" refers to the possibility that computer and
other systems could fail or not work properly as a result of these systems using
only the last two digits of a year to refer to that year and therefore being
unable to properly recognize a year that begins with "20" instead of "19". The
Company has undertaken a review of the potential effects of the Year 2000
problem on its business on a system by system basis.
With respect to its information technology ("IT") systems, the Company
believes that the computer hardware and system software of its IBM AS/400
computer, on which its patient management system and accounting system operate,
are Year 2000 compliant. Unrelated to Year 2000 issues, the Company is currently
developing new patient management system software that its development
contractor has represented will meet Year 2000 standards. Development of the
software, including related hardware upgrades, is expected to cost approximately
$700,000, of which $340,000 had been incurred as of November 30, 1998. The new
software is scheduled to be completed by the end of December 1998, with
implementation during the following six months. The Company originally planned
to install a new release of its accounting and financial reporting software in
November 1998, which the vendor represents is Year 2000 compliant, but has
delayed the installation until March 1999. The cost for installing the new
release is expected to be less than $10,000. In the first six months of calendar
year 1999, the Company will be surveying all of its servers, personal computers,
and network hardware to determine compliance with Year 2000 standards. All
equipment found to be deficient will be replaced. The Company estimates that the
cost of replacement equipment will be less than $50,000.
The Company is currently reviewing its non-IT systems (primarily voice
communications) for Year 2000 compliance and expects that this review will be
completed by January 1999. The Company estimates that its cost to replace any
non-IT systems that are found to be non-compliant with Year 2000 standards will
not exceed $125,000
The Company also faces the risk that vendors from which the Company
purchases goods and services, such as hearing instrument manufacturers, utility
providers, the banks that maintain the Company's depository accounts and process
its credit card transactions, and the Company's payroll processor, may have
systems that are not Year 2000 compliant. Significant disruptions in the
operations of its vendors may have a material adverse effect on the Company. The
Company plans to monitor the progress of its major vendors in achieving Year
2000 compliance. However, the Company presently does not anticipate the
occurrence of major interruptions in its business due to Year 2000 issues.
The Company has not established a contingency plan to address potential
Year 2000 noncompliance with respect to the Company's systems or those of its
major vendors and is currently considering the extent to which such a plan is
necessary. Due to the Company's dependence on systems outside its control, such
as telecommunications, transportation, and
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power supplies, there can be no assurance that the Company will not face
unexpected problems associated with the Year 2000 issue that may affect its
operations, business, and financial condition.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
At July 31, 1998, the Company had outstanding share purchase warrants
to purchase 1,093,482 of its common shares, without nominal or par value
("Common Shares") at an exercise price of $10.00 per share (the "September
Warrants"). The September Warrants expired on August 31, 1998, without being
exercised. The Company also had outstanding at July 31, 1998, 99,180 warrants to
purchase Common Shares at an exercise price of $6.25 per share (the "Agent
Warrants"). During August 1998, the Company issued 39,799 Common Shares pursuant
to the exercise of a portion of the Agent Warrants and the remaining Agent
Warrants expired on August 31, 1998, without being exercised. The Company relied
on the exemption from registration provided by Section 4(2) under the Securities
Act of 1933 (the "1933 Act") with respect to the issuance of Common Shares upon
exercise of the Agent Warrants. In October 1998, the Company issued 25,000
options to purchase Common Shares at an option price of $6.06 to a financial
consultant in payment for certain services. The Company relied on the exemption
from registration provided by Section 4(2) under the 1933 Act with respect to
the issuance of such options
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits filed as part of this report or incorporated by
reference herein are listed in the accompanying exhibit index.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the fiscal quarter ended October 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONUS CORP.
By: /s/ Edwin J. Kawasaki
---------------------
Edwin J. Kawasaki
Vice President-Finance
(Principal Financial Officer)
DATED: December 14, 1998
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EXHIBIT INDEX
-------------
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.1 Employment Agreement dated October 30, 1998, between the Company and
Scott Klein.
10.2 Promissory Note of Scott Klein dated December 7, 1998.
10.3 Second Amended and Restated Stock Award Plan (as amended October 26,
1998).
27 Financial Data Schedule.
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into this 30th day of
October 1998, between SONUS CORP., an Alberta, Canada corporation
("Corporation"), and SCOTT KLEIN ("Executive").
Recitals
A. Corporation is hiring Executive as Executive Vice President and
Chief Operating Officer.
B. Corporation and Executive are entering into this Agreement to
confirm the terms of Executive's employment with Corporation and Executive's
compensation and benefits package.
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 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.
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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 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
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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.
"COMPENSATION 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.
"COMPETITIVE ENTITY" - A Person, firm, or entity primarily engaged (in
the United States or Canada) in the national or regional retail provision or
franchising of audiology services and/or dispensing of hearing aids or in any
managed-care for hearing health benefits.
"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.
"EFFECTIVE DATE" - November 1, 1998.
"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 for "Good Reason" during the Term
means termination based on any of the following:
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<PAGE>
(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); or
(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).
"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.
"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.
"SEVERANCE PAYMENTS" - The severance payments described in Section 5.4
of this Agreement.
"TERM" - The period commencing on the Effective Date and ending on
October 31, 2002.
"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.
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<PAGE>
"VOTING SECURITIES" - Corporation's issued and outstanding securities
ordinarily having the right to vote at elections of Corporation's Board.
2. Employment
Corporation hereby agrees to employ Executive, and Executive hereby
accepts employment with Corporation during the Term on the terms and conditions
set forth in this Agreement. Notwithstanding any other provision of this
Agreement, Executive is an employee at will of Corporation and Corporation
reserves the right to terminate Executive's employment at any time for any
reason or for no reason. The provisions of this Agreement dealing with
termination without Cause or for Good Reason are intended to provide contractual
benefits and do not limit Corporation's power to treat Executive as an employee
at will.
3. Executive Duties.
3.1 Position and Duties. Executive agrees to render services to
---------------------
Corporation as Executive Vice President and Chief Operating 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 Operating Officer
of Corporation, Executive will have responsibility for all operational aspects
of Corporation's business and will have such executive and managerial duties as
Corporation's Chief Executive Officer or President prescribes from time to time.
Executive will report directly to Corporation's President and Chief
Executive Officer. Initially, Corporation's Vice President of Finance and Chief
Financial Officer, Vice President of Marketing, Vice President of Operations,
and Assistant Vice President of Human Resources will report directly to
Executive. The Board and Corporation's Chief Executive Officer may, from time to
time, adjust reporting responsibilities of officers who initially report to
Executive.
3.2 Exclusive Employment. Executive agrees that during the Term:
--------------------
(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
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<PAGE>
(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 Proprietary Information. Executive acknowledges in the course of
------------------------
Executive's employment with Corporation, Executive will learn trade secrets and
confidential information of Corporation, which if known to competitors could
damage the business of Corporation. Such confidential information includes, but
is not limited to, some or all of the following categories of non-public
information ("Proprietary Information"):
(a) Financial information including, but not limited to
information relating to assets, revenues, expenses, prices, pricing
structures, volume of purchases or sales or other financial data of
Corporation, or to particular products, services, geographic areas, or
time periods;
(b) Supply and service information including, but not limited to
information relating to suppliers' names and addresses, terms of supply
and service contracts or of particular transactions, and related
information about potential suppliers to the extent that such
information is not generally known to the public, and to the extent
that the combination of suppliers or use of a particular supplier,
though generally known or available, yields advantages to Corporation
the details of which are not generally known;
(c) Marketing information including, but not limited to
information relating to details of ongoing or proposed marketing
programs or agreements by or on behalf of Corporation, sales forecasts,
advertising formats and methods or results of marketing efforts or
information about impending transactions;
(d) Personnel information including, but not limited to
information relating to personal or medical histories, compensation or
other terms of employment, actual or proposed promotions, hirings,
resignations, disciplinary actions, terminations or reasons therefore,
training methods, performance, or other information concerning
Executives of Corporation; and
(e) The names and addresses, and all background information
regarding affiliated audiologists and managed care organizations having
relationships with Corporation and the terms and conditions of
agreements with such parties.
Executive agrees to keep all Proprietary Information confidential.
Except as may be necessary in the performance of Executive's duties on behalf of
Corporation, Executive will make no use of and will not communicate or divulge
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<PAGE>
to any party whatsoever any Proprietary Information. Executive will not at any
time after Executive's employment with Corporation terminates use any
Proprietary Information for Executive's own benefit or on behalf of any person,
firm, partnership, association, corporation, or other party whatsoever. This
covenant shall not apply to any information that by means other than Executive's
deliberate or inadvertent disclosure becomes well known to the public or to
disclosure compelled by judicial or administrative proceedings after Executive
notifies and affords Corporation the opportunity to seek confidential treatment
of compelled disclosures.
4. Compensation and Benefits.
4.1 Base Salary. As compensation for the performance of Executive's
-----------
services during the Term, 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 $175,000
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,
-------------
Corporationagrees to pay Executive a first year bonus ( the "Initial Bonus") for
services to be performed in Corporation's fiscal year ending July 31, 1999, in
an amount equal to $87,500, payable in four installments (without interest) on
the first day of November 1998 and February, May, and August 1999.
Notwithstanding any provision of Section 5, a prorated portion of the Initial
Bonus will be payable even if Executive dies, becomes disabled, or is terminated
without Cause or for Good Reason within such fiscal year.
4.2.2 Annual Bonus. During the Term of this Agreement,
-------------
beginning with Corporation's fiscal year beginning August 1, 1999, Executive
will be eligible to receive an incentive bonus for each fiscal year (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 Awards. Corporation will grant Executive
---------------
nonqualified stock option awards for 300,000 shares of Corporation's common
stock (the "Option") under Corporation's Stock Award Plan (the "Plan").
The Option will have the following additional features:
o The effective date of the option grant (the "Grant Date") will
be the date the Board takes action to grant the Option;
o The option purchase price will be $5.88;
o The Option will have a term of 10 years, commencing on the Grant
Date;
o The Option will be exercisable as follows:
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<PAGE>
|X| The Option will be immediately exercisable as to 50,000
shares; and
|X| The Option will become exercisable as to an additional
16,667 shares on the first day of each calendar quarter beginning
April 1, 1999.
o The Option will become immediately and fully exercisable in the
event that, at any time 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 The Option will be governed by an Award Agreement (as defined in
the Plan) 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 Compensation Plans (including Compensation
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, Compensation Plans
providing medical, disability, and life insurance benefits, and vacation pay.
4.5 Moving Expenses. Corporation will reimburse up to $55,000 in
----------------
moving expenses for Executive and his family, including amounts actually paid
for travel costs associated with selecting a new home, closing costs and real
estate commissions related to sale of Executive's prior residence and purchasing
a new residence in Portland, and moving and transfer costs. In addition,
Corporation agrees to (a) loan Executive $100,000 secured by the equity in
Executive's Minneapolis residence, with an interest rate of 8 percent per annum,
with principal and interest payable upon the earlier of the sale of such
residence or October 31, 1999, and (b) reimburse Executive for the monthly
mortgage payments on Executive's Minneapolis residence up to $2,800 per month
(subject to applicable payroll withholding) until the earlier of the sale of
such residence or October 31, 1999.
4.6 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.
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<PAGE>
5. TERMINATION OF AGREEMENT.
5.1 Death. If Executive dies during the Term, 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
Compensation Plans in which Executive is a participant will be payable as
provided in those Compensation 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, Executive will remain an employee of Corporation and be entitled to
receive his Base Salary until Executive becomes eligible to receive benefits
under Corporation's Group Long Term Disability Insurance Policy (the "Disability
Benefits Date"). All benefits, including disability benefits, to which Executive
is then entitled under Compensation Plans in which Executive is a participant
will be payable as provided in those Compensation Plans. The Agreement will
terminate as of the Disability Benefits Date and Corporation will have no
further obligations to Executive under this Agreement.
5.3 Termination for Cause or Voluntary Termination Without Good
------------------------------------------------------------------
Reason. During the Term of this Agreement, 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 during the Term Corporation
terminates Executive's employment for Cause or Executive voluntarily terminates
employment other than for Good Reason, Corporation will pay Executive his Base
Salary through the effective date of such termination. Executive will not be
entitled to any Annual Bonus, or any prorated portion of any Annual Bonus, for
the fiscal year in which the Termination Date occurs. 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 Compensation Plans in which he is a participant
will be payable as provided in those Compensation 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) during the Term 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) An amount of severance pay equal to Executive's Base Salary.
5.5 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 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
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<PAGE>
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.
5.6 Noncompetition Following Termination. Executive acknowledges that
------------------------------------
the agreements and covenants contained in this Section 5.6 are essential to
protect the value of Corporation's business and assets and that, by his
employment with Corporation and its subsidiaries, Executive 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, Executive will not, for a
period of one year 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 are
in consideration of Executive's performance of the covenants in this
Section 5.6.
(b) Executive acknowledges that this Agreement is being entered
into in connection with the initial employment of Executive with
Corporation. 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 5.6
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 5.6 will be inadequate.
Accordingly, in the event of the breach or threatened breach by
Executive of any provision of this Section 5.6, 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 5.6 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 5.6 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 5.6 in
any other jurisdiction.
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<PAGE>
6. EFFECT OF CHANGE IN CONTROL.
The Severance Payments 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 Payments
are not to be treated as Total Payments.
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
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<PAGE>
accordance with this Section 9, except that notices of change of address will be
effective only upon receipt):
To Corporation: Sonus Corp.
111 S.W. Fifth Avenue
Suite 2390
Portland, Oregon 97204
Attn: Brandon M. Dawson
To Executive: Scott Klein
[Address]
--------------------------
--------------------------
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 the American Arbitration Association 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.
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<PAGE>
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.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
effective as of the Effective Date.
Corporation: SONUS CORP.
By /s/ Brandon M. Dawson
-------------------------------
Brandon M. Dawson, President
EXECUTIVE: /s/ Scott Klein
-------------------------------
Scott Klein
$100,000.00 December 7, 1998
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned ("Maker") promises to pay to the order of
Sonus-USA, Inc. (hereinafter referred to as "Holder"), the principal sum of One
Hundred Thousand and no/100 Dollars ($100,000.00) with interest thereon at the
rate of eight percent (8%) per annum. Principal and interest shall be payable in
lawful money of the United States of America at 111 S.W. Fifth Avenue, Suite
1620 or at such other place as Holder may designate in writing. Principal and
interest shall be due upon the closing of the sale of Maker's former residence
located at 2051 Timberwood Drive, Chanhassen, Minnesota, 55317, or October 31,
1999, whichever shall first occur.
Maker agrees to pay all costs of collection of any amounts due hereunder when
incurred, including, without limitation, attorney's fees and expenses, including
on any appeal. Such costs shall be added to the balance of principal and
interest then due.
Maker, for himself and his successors and assigns, hereby waives presentment,
demand, notice and protest and any defense by reason of extension of time for
payment or other indulgences. Failure of the Holder to assert any right herein
shall not be deemed to be waiver hereof.
This Promissory Note shall be governed by and construed and enforced in
accordance with the laws of the state of Oregon.
Maker:
/s/ Scott E. Klein
---------------------------
Scott E. Klein
SONUS CORP.
SECOND AMENDED AND RESTATED
STOCK AWARD PLAN
(as amended October 26, 1998)
ARTICLE 1
ESTABLISHMENT AND PURPOSE
1.1 Establishment; Amendment and Restatement. Sonus Corp.
----------------------------------------
("Corporation") established the Sonus 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, was further amended effective December 18, 1997, and most recently has
been amended to increase the number of Shares issuable hereunder from 1,800,000
Shares to 2,300,000 Shares, subject to shareholder approval at Corporation's
1998 annual meeting of shareholders.
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.
- 1 -
<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 Sonus Corp., an Alberta, Canada, corporation as
-----------
it may be continued to the Yukon Territories, 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.
- 2 -
<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 Sonus 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.
"Stock Option Plan" means the Corporation's incentive stock option plan
-----------------
adopted effective November 18, 1993.
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<PAGE>
"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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<PAGE>
(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 Sonus 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.
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.
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<PAGE>
4.2.2 Maximum Number of Shares. The maximum number of Shares for which
------------------------
Awards may be granted under the Plan is 2,300,000 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.
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
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<PAGE>
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 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:
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<PAGE>
(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 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:
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<PAGE>
(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.
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
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<PAGE>
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.
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
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<PAGE>
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 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
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<PAGE>
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.
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.
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<PAGE>
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 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.
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<PAGE>
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.
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.
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<PAGE>
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 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
- 15 -
<PAGE>
Stock Option Plan and such plan will immediately terminate; provided that such
termination will have no effect on any options previously granted thereunder.
- 16 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for Sonus Corp. and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0001029260
<NAME> Sonus Corp.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 1,576
<SECURITIES> 4,537
<RECEIVABLES> 3,963
<ALLOWANCES> (703)
<INVENTORY> 1,048
<CURRENT-ASSETS> 11,315
<PP&E> 4,468
<DEPRECIATION> 0
<TOTAL-ASSETS> 34,053
<CURRENT-LIABILITIES> 9,578
<BONDS> 2,639
0
15,701
<COMMON> 14,921
<OTHER-SE> (8,786)
<TOTAL-LIABILITY-AND-EQUITY> 34,053
<SALES> 7,701
<TOTAL-REVENUES> 7,701
<CGS> 2,601
<TOTAL-COSTS> 9,224
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 68
<INTEREST-EXPENSE> 56
<INCOME-PRETAX> (1,474)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,474)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,474)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
