SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
Amendment No. 1
FORM 10-KSB/A
(Mark one)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended July 31, 1998
OR
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from -------- to --------
COMMISSION FILE NO. 1-13851
SONUS CORP.
(Name of small business issuer in its charter)
ALBERTA, CANADA NOT APPLICABLE
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
111 S.W. FIFTH AVENUE, SUITE 2390
PORTLAND, OREGON 97204
(Address of principal executive office) (Zip code)
(503) 225-9152
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
<TABLE>
<S> <C>
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
</TABLE>
COMMON SHARES, WITHOUT NOMINAL OR PAR VALUE AMERICAN STOCK EXCHANGE
Securities registered under Section 12(g) of the Exchange Act: NONE
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
preceding 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 [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year:
$22,368,000.
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant, computed by reference to the
price at which the common equity was sold, or the average bid and asked price of
such common equity, as of October 1, 1998: $37,100,723
State the number of shares outstanding of each of the issuer's classes
of common equity: Common Shares, without nominal or par value, 6,119,707 shares,
as of October 1, 1998.
Transitional Small Business Disclosure. Format: Yes---- No X
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the issuer's definitive Management Information Circular and
Proxy Statement dated November 12, 1998, are incorporated by reference into Part
III of this Form 10-KSB.
<PAGE>
<TABLE>
TABLE OF CONTENTS
PAGE
<S> <C>
PART I
None.
PART II
ITEM 6. Management's Discussion and Analysis or Plan of Operation..............................1
ITEM 7. Financial Statements...................................................................5
PART III
ITEM 13. Exhibits and Reports on Form 8-K.....................................................23
</TABLE>
-i-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
During the fiscal year ended July 31, 1998, the Company achieved significant
growth in revenues, primarily due to the acquisition and operation of additional
hearing care clinics. For the fiscal year ended July 31, 1998, the Company
generated total revenues of $22.4 million. As of July 31, 1998, the Company's
cumulative deficit was $6.7 million and its total shareholders' equity was $23.1
million. For the fiscal year ended July 31, 1998, the Company incurred a net
loss of $4.6 million, compared to a net loss of $1.7 million for the 1997 fiscal
year.
ACQUISITIONS
During the fiscal year ended July 31, 1998, the Company acquired 33 clinics and
one hearing care benefit administrator in 18 transactions. The aggregate
purchase price consisted of cash payments of $3,650,000, promissory notes issued
by the Company of $1,781,000 generally payable over three years, and $3,072,000
in assumed liabilities. In addition, $1,405,000 will be paid and 22,936 Common
Shares that have been issued and are held by the Company will be released over a
three-year period if certain annual net revenue targets are met. As a result of
the acquisitions, the Company recorded approximately $1,186,000 in accounts
receivable, $137,000 in inventory, $629,000 in property and equipment, $96,000
in other assets and $6,455,000 in goodwill, which included costs related to
acquisitions. The Company also recorded $623,000 for covenants not to compete,
of which $157,000 was paid in cash at the time of closing, with the balance
payable over three years.
The 34 hearing care businesses acquired by the Company during the fiscal year
ended July 31, 1998, have combined historical revenues for their immediately
preceding fiscal years of approximately $11.5 million. The Company expects these
clinics to contribute to the Company's future revenues consistent with their
historical revenues, as well as have a positive effect on cash flow and future
liquidity.
As of July 31, 1998, the Company had recorded $15,611,000 in goodwill and
$1,578,000 in covenants not to compete. The amortization of the unamortized
balance totaling $16,152,000 at July 31, 1998, which represented approximately
47% of the Company's total assets, will result in an annual non-cash charge to
earnings of approximately $854,000 in each of the next 20 years. If all of the
covenants not to compete referred to above were currently in effect, an
additional non-cash charge to earnings of approximately $500,000 in each of the
current and next two fiscal years would also be incurred.
RESULTS OF OPERATIONS
Year Ended July 31, 1998, Compared to Year Ended July 31, 1997
Revenues. Total revenues for the fiscal year ended July 31, 1998, were
$22,368,000, representing a 66% increase over revenues of $13,462,000 for the
prior fiscal year. Of this increase, $3,760,000 was attributable to the 34
businesses acquired during fiscal 1998. Product sales revenues were $18,792,000
for the 1998 fiscal year, up 64% from the $11,472,000 for fiscal 1997.
Audiological service revenues increased from $1,943,000, or 14% of total
revenues in fiscal 1997, to $3,311,000, or 15% of total revenues, for the 1998
fiscal year.
Gross Profit on Product Sales. Product gross profit for the fiscal year ended
July 31, 1998, was $11,080,000 compared to $6,462,000 for the prior fiscal year.
Gross profit percentage on product sales was 59% for fiscal 1998 versus 56% for
fiscal 1997. The increase in gross profit percentage on product sales was
primarily attributable to higher volume discounts, improved product sales
management, and an increase in the percentage of total revenues derived from the
Company's operations in the United States, where gross profit percentages are
higher than those for the Company's operations in Canada.
-1-
<PAGE>
Clinical Expenses. Clinical expenses include all personnel, marketing, occupancy
and other operating expenses at the clinic level. Clinical expenses for the
fiscal year ended July 31, 1998, were $12,297,000, representing an increase of
105% over clinical expenses of $5,985,000 for the prior fiscal year. This
increase was primarily due to clinical expenses associated with the 34
additional businesses that were owned by the Company during the fiscal year
ended July 31, 1998, but not owned during the prior fiscal year and increased
marketing expenses designed to increase brand awareness of the Company within
the hearing health industry.
General and Administrative Expenses. General and administrative expenses
increased 73% from $3,410,000 for the fiscal year ended July 31, 1997, to
$5,896,000 for the fiscal year ended July 31, 1998, due to planned increases in
corporate staff and other corporate expenses related to the operation of a
larger organization as well as one-time expenses incurred in connection with the
implementation of the Company's franchise licensing program, consulting and
professional fees, and inventory revaluations. As a percentage of revenues,
general and administrative expenses rose to 26% for the fiscal year ended July
31, 1998, versus 25% for the prior fiscal year. Management anticipates that
general and administrative expenses will decrease as a percentage of revenues as
the Company establishes a larger revenue base through its strategic acquisition
program and enhanced marketing efforts.
Depreciation and Amortization Expense. Depreciation and amortization expense for
the fiscal year ended July 31, 1998, was $1,361,000, an increase of 72% over the
depreciation and amortization expense of $790,000 for 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 34 additional
businesses operated by the Company during the fiscal year ended July 31, 1998.
Interest Income and Expense. Interest income for the fiscal year ended July 31,
1998, increased to $452,000 from $76,000 for 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 and the
exercise of warrants to purchase Common Shares in February 1998. Interest
expense for the fiscal year ended July 31, 1998, was $149,000 compared to
$47,000 for the fiscal year ended July 31, 1997, due to higher balances of
long-term debt incurred in connection with acquisitions.
LIQUIDITY AND CASH RESERVES
For the fiscal year ended July 31, 1998, net cash used in operating activities
was $2,203,000 compared to $606,000 for fiscal 1997. The Company invested cash
of $3,765,000 in business acquisitions, $1,414,000 in property and equipment,
and $6,408,000 in the purchase of short-term investments for the fiscal year
ended July 31, 1998, compared to $2,858,000, $1,191,000, and $0, respectively,
for the fiscal year ended July 31, 1997. During the fiscal year ended July 31,
1998, the Company received cash, net of costs, of $1,984,000 for the issuance of
Common Shares, primarily in connection with the exercise of warrants issued in
February 1996, and $15,701,000 for the issuance of 13,333,333 Series A
Convertible Preferred Shares together with warrants to purchase 2,000,000 Common
Shares for $12 per share, in a private placement. The Company also repaid
long-term debt of $1,625,000 and bank loans and short-term notes payable
totaling $39,000 during fiscal 1998.
Sonus-Canada, the Company's Canadian operating subsidiary, has a revolving
demand loan with a commercial bank, providing for borrowings up to $198,000 at
July 31, 1998. As of July 31, 1998, $46,000 was outstanding against this line.
Advances under the line of credit bear interest at 1% above the bank's prime
rate and are secured by all the assets of Sonus-Canada.
At July 31, 1998, the Company had working capital of $6,309,000 and cash and
short-term investments totaling $9,128,000. 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 over the next 12
months and to use up to $1,000,000 for acquisitions during that time period. The
Company's capital expenditures during fiscal 1999 are budgeted to be
approximately $1,700,000, with $533,000 committed as of October 1, 1998.
Additional funding will be needed to finance operations and planned capital
expenditure beyond that time period and to fund the Company's strategy to
acquire additional hearing care clinics. These funding requirements may result
in the Company incurring long-term and short-term indebtedness and in the public
or private issuance, from time to time, of additional equity or debt securities.
Any such issuance of equity may be dilutive to current shareholders and debt
financing may impose significant restrictive covenants on
-2-
<PAGE>
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 approximately $69,000 had been incurred as of July 31, 1998. The new
software is scheduled to be completed by the end of December 1998, with
implementation during the following six months. The Company will also be
installing a new release of its accounting and financial reporting software in
November 1998 that the vendor represents is Year 2000 compliant. The cost for
installing the new release is expected to be less than $10,000. In the first six
months of 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 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.
ACCOUNTING PRONOUNCEMENTS
The Company will adopt Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130") for its fiscal year ending
July 31, 1999. SFAS No. 130 establishes requirements for disclosure of
comprehensive income. The objective of SFAS No. 130 is to report all changes in
equity that result from transactions and economic events other than transactions
with owners. Comprehensive income is the total of net income and all other
non-owner changes in equity. The Company does not anticipate any significant
impact on reported results of operations due to the adoption of SFAS No. 130.
The Company will also adopt Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information," ("SFAS No.
131") for its fiscal year ending July 31, 1999. SFAS No. 131 changes the way
segment information is reported for public companies and requires those
companies to report selected segment information in interim financial reports to
shareholders. Although the Company has not fully determined its complete impact,
the Company does not foresee any material change due to adoption of SFAS No. 131
on its financial presentation to shareholders.
-3-
<PAGE>
In June 1998, Statement of Financial Accounting Standards No. 133 , "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No. 133") was issued.
SFAS No. 133 standardizes the accounting for derivative instruments by requiring
that an entity recognize those items as assets or liabilities in the financial
statements and measure them at fair value. SFAS No. 133 is required to be
adopted for fiscal years beginning after June 15, 1999. Since the Company does
not hold any derivative instruments, SFAS No. 133 is not expected to have an
impact on the Company's financial statements.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5") which requires that costs of start-up activities and organizational
costs be expensed as incurred. SOP 98-5 is effective for financial statements
for fiscal years beginning after December 15, 1998. Although the Company has not
fully determined its complete impact, the Company does not foresee any material
change due to adoption of SOP 98-5 on its financial presentation to
shareholders.
-4-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
SONUS CORP.:
We have audited the accompanying consolidated balance sheets of Sonus Corp.
(previously HealthCare Capital Corp.) and subsidiaries as of July 31, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the two-year period ended July
31, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sonus
Corp. and subsidiaries as of July 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the years in the
two-year period ended July 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
October 23, 1998
-5-
<PAGE>
SONUS CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
July 31, July 31,
1998 1997
------------------ --------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,720 $ 1,099
Short-term investments 6,408 ---
Accounts receivable, net of allowance
for doubtful accounts
of $684 and $97, respectively 3,339 2,514
Other receivables 515 314
Inventory 967 425
Prepaid expenses 270 260
------------------ --------------
Total current assets 14,219 4,612
Property and equipment, net 3,607 2,277
Other assets 151 136
Goodwill and covenants not to compete, net 16,152 9,519
------------------ --------------
$ 34,129 $ 16,544
================== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans and short-term notes payable $ 46 $ 59
Accounts payable 2,879 2,260
Accrued payroll 1,110 486
Other accrued liabilities 2,595 649
Convertible notes payable --- 2,600
Capital lease obligation, current portion 120 101
Long term debt, current portion 1,160 357
------------------ --------------
Total current liabilities 7,910 6,512
Capital lease obligation, non-current portion 223 305
Long term debt, non-current portion 1,733 765
Convertible notes payable 1,170 127
------------------ --------------
Total liabilities 11,036 7,709
Commitments and contingencies (Note 12)
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 ---
Common stock, no par value per share, unlimited
number of shares authorized, 6,079,908 and 5,427,657
shares, respectively, issued and outstanding 14,673 11,131
Notes receivable from shareholders (283) (124)
Accumulated deficit (6,711) (2,117)
Cumulative translation adjustment (229) (22)
Treasury stock, 6,960 and 3,960 shares, respectively, at cost (58) (33)
------------------ --------------
Total shareholders' equity 23,093 8,835
------------------ --------------
$ 34,129 $ 16,544
================== ==============
</TABLE>
See accompanying notes to consolidated financial statements
-6-
<PAGE>
SONUS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended
July 31,
-----------------------------
1998 1997
------------ ------------
Net revenues $ 22,368 $ 13,462
Costs and expenses:
Cost of products sold 7,712 5,010
Clinical expenses 12,297 5,985
General and administrative expenses 5,896 3,410
Depreciation and amortization 1,361 790
------------ ------------
Total costs and expenses 27,266 15,195
------------ ------------
Loss from continuing operations (4,898) (1,733)
Other income (expense):
Interest income 452 76
Interest expense (149) (47)
Other, net 1 3
------------ ------------
Net loss $ (4,594) $ (1,701)
============ ============
Per share of common stock:
Basic $ (0.89) $ (0.42)
Diluted $ (0.89) $ (0.42)
Average shares outstanding:
Basic 5,167 4,010
Diluted 5,167 4,010
See accompanying notes to consolidated financial statements.
-7-
<PAGE>
SONUS CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
Number of Number of Shareholder
Shares Shares Preferred Common Notes
Preferred Stock Common Stock Stock Stock Receivable
--------------- ------------ --------- ------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1996 -- 3,565,549 $ -- $ 1,925 --
Stock issued in connection
with receipt of tax credit -- 22,560 -- 38 --
Proceeds from exercise of stock options -- 155,000 -- 316 (124)
Stock issued in connection
with acquisitions -- 587,876 -- 3,291 --
Stock issued under private
placement (net proceeds) -- 1,093,482 -- 5,529 --
Proceeds from exercise of warrants -- 7,150 -- 32 --
Repurchase of common stock -- (3,960) -- -- --
Translation adjustment -- -- -- -- --
Net loss -- -- -- -- --
------ --------- ------- --------- ---------
BALANCE AT JULY 31, 1997 -- 5,427,657 $ -- $ 11,131 $ (124)
====== ========= ======= ========= =========
Stock issued upon conversion
of convertible note -- 25,925 -- 128 --
Stock issued in connection with acquisition
contingent upon satisfaction of certain
conditions (Note 2) -- 22,936 -- -- --
Repurchase of common stock -- (3,000) -- -- --
Proceeds from exercise of stock options -- 10,000 -- 9 --
Stock issued in connection with
Series A convertible preferred
stock, net of costs 13,333,333 15,701 -- --
Proceeds from exercise
of warrants -- 373,998 -- 1,957 --
Proceeds from exercise
of stock options -- 2,400 -- 18 --
Advance on shareholder notes -- -- -- -- (159)
Stock issued upon
conversion of convertible notes -- 220,000 -- 1,430 --
Payment of cash in lieu of fractional shares -- (8) -- -- --
Translation adjustment -- -- -- -- --
Net loss -- -- -- -- --
---------- --------- ------- ------- ----
BALANCE AT JULY 31, 1998 13,333,333 6,079,908 $15,701 $14,673 (283)
========== ========= ======= ======= ====
</TABLE>
<TABLE>
Cummulative Total
Accumulated Translation Treasury Shareholders'
Deficit Adjustment Stock Equity
----------- ------------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE AT JULY 31, 1996 $ (416) $ 3 $ -- $ 1,512
Stock issued in connection
with receipt of tax credit -- -- -- 38
Proceeds from exercise of stock options -- -- -- 192
Stock issued in connection
with acquisitions -- -- -- 3,291
Stock issued under private
placement (net proceeds) -- -- -- 5,529
Proceeds from exercise of warrants -- -- -- 32
Repurchase of common stock -- -- (33) (33)
Translation adjustment -- (25) -- (25)
Net loss (1,701) -- -- (1,701)
------ ----------- ------- -------
BALANCE AT JULY 31, 1997 (2,117) $ (22) $ (33) $ 8,835
====== =========== ======= =======
Stock issued upon conversion
of convertible note -- -- -- 128
Stock issued in connection with acquisition
contingent upon satisfaction of certain
conditions (Note 2) -- -- -- --
Repurchase of common stock -- -- (25) (25)
Proceeds from exercise of stock options -- -- -- 9
Stock issued in connection with
Series A convertible preferred
stock, net of costs -- -- -- 15,701
Proceeds from exercise
of warrants -- -- -- 1,957
Proceeds from exercise
of stock options -- -- -- 18
Advance on shareholder notes -- -- -- (159)
Stock issued upon
conversion of convertible notes -- -- -- 1,430
Payment of cash in lieu of fractional shares -- -- -- --
Translation adjustment -- (207) -- (207)
Net loss (4,594) -- -- (4,594)
------- ----------- ------- -------
BALANCE AT JULY 31, 1998 $(6,711) $ (229) $ (58) $23,093
======= =========== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
-8-
<PAGE>
SONUS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
Years ended
July 31,
--------------------------
1998 1997
--------------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (4,594) $ (1,701)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for bad debt expense 412 47
Depreciation and amortization 1,361 790
Changes in non-cash working capital:
Accounts receivable (51) (530)
Other receivables (181) (237)
Inventory (405) (61)
Prepaid expenses 24 (136)
Accounts payable and accrued liabilities 1,231 1,222
------------ -----------
Net cash used in operating activities (2,203) (606)
------------ -----------
Cash flows from investing activities:
Purchase of short-term investments (6,408) ---
Purchase of property and equipment (1,414) (1,191)
Additional costs related to acquisitions (198) (149)
Deferred acquisition costs and other, net (1) 177
Net cash paid on business acquisitions (3,765) (2,858)
------------ -----------
Net cash used in investing activities (11,786) (4,021)
------------ -----------
Cash flows from financing activities:
Net repayments of long-term debt
and capital lease obligations (1,625) (58)
Deferred financing costs, net (20) 42
Advances on (repayments of) bank loans and
short-term notes payable (39) ---
Advances to shareholders (159) (124)
Issuance of common stock for cash, net of costs 1,984 5,915
Issuance of preferred stock for cash, net of costs 15,701 ---
Acquisition of treasury stock (25) (33)
------------ -----------
Net cash provided by financing activities 15,817 5,742
------------ -----------
Net increase in cash and cash equivalents 1,828 1,115
Effect on cash and cash equivalents of changes
in foreign translation rate (207) (27)
Cash and cash equivalents, beginning of period 1,099 11
============ ===========
Cash and cash equivalents, end of period $ 2,720 $ 1,099
============ ===========
Supplemental disclosure of non-cash investing and financing activities:
Interest paid during the period $ 149 $ 47
Non-cash financing activities:
Issuance and assumption of long-term debt in acquisitions $ 1,781 $ 676
Issuance of convertible notes in acquisitions $ --- $ 2,600
Issuance of common stock in acquisitions $ --- $ 3,291
Issuance of common stock upon conversion of convertible note $ 1,557 $ ---
</TABLE>
See accompanying notes to consolidated financial statements
-9-
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Company
----------------------
Sonus Corp. (formerly HealthCare Capital Corp.), an Alberta, Canada
corporation (the "Company"), through its primary operating subsidiaries,
Sonus-Canada Ltd., a British Columbia, Canada corporation, and Sonus-USA, Inc.,
a Washington corporation, currently owns and operates a network of 89 hearing
care clinics in the United States and Western Canada. The clinics are located in
the states of Arizona, California, Illinois, Michigan, Missouri, New Mexico,
North Dakota, Oregon, and Washington, and in the Canadian provinces of British
Columbia and Alberta. Each of the Company's hearing care clinics provides its
hearing impaired patients with a full range of audiological products and
services. The Company intends to expand its network of hearing care clinics by
acquiring clinics in its existing, as well as new, geographic markets. The
Company, through its recently acquired subsidiary Hear PO Corp., a New Mexico
corporation, also operates as an independent provider association and hearing
care benefit administrator, which obtains contracts to provide hearing care
benefits to managed care group and corporate health care organizations through
its approximately 1,000 affiliated audiologists and then processes claims under
those contracts on behalf of the audiologists in exchange for a fee.
Principles of Consolidation
---------------------------
The consolidated financial statements include the Company's wholly owned
subsidiaries. All significant inter-company accounts have been eliminated. The
functional currency of the Company's Canadian operations is the Canadian dollar
while the functional currency of the Company's U.S. operations is the U.S.
dollar. In accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation", assets and liabilities recorded in Canadian
dollars are remeasured at current rates in existence at the balance sheet date.
Revenues and expenses are remeasured using the weighted average exchange rate
for the period Exchange gains and losses from remeasurement of assets and
liabilities recorded in Canadian dollars are treated as unrealized gains and
losses and reported as a separate component of shareholders' equity
Revenue Recognition
-------------------
Revenues from the sale of hearing instrument products are recognized at
the time of delivery. Revenues from the provision of hearing care diagnostic
services are recognized at the time that such services are performed. Net
revenues consist of the following (in thousands):
July 31,
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Product revenue $18,792 $11,472
Service revenue 3,311 1,943
Other revenue 265 47
------- -------
$22,368 $13,462
======= =======
</TABLE>
Income Taxes
------------
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are
-10-
<PAGE>
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Cash and Cash Equivalents
-------------------------
Cash equivalents consist of short-term, highly liquid investments with
original maturities of 90 days or less.
Short-term Investments
----------------------
Short-term investments consist of available-for-sale securities, as
defined by Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). Under SFAS
No. 115, unrealized holding gains and losses are reflected as a net amount in a
separate component of shareholders' equity until realized. At July 31, 1998,
there were no unrealized holding gains or losses as the market value of the
Company's available-for-sale securities approximated cost. Gross realized gains
and losses on sales of available-for-sale securities for fiscal 1998 and 1997
were nominal. Realized gains and losses are computed by determining cost on a
specific identification basis.
At July 31, 1998, the Company's short-term investments consisted of the
following debt securities which had maturities of less than six months and were
carried at cost which approximated market (in thousands):
Corporate Bonds $ 2,760
Discount Commercialal Paper 3,648
--------
$ 6,408
========
The Company did not have any short-term investments at July 31, 1997.
Gross proceeds from sales and maturities of available-for-sale
investments during fiscal 1998 and 1997 were $18,511,000 and $0, respectively.
Inventory
---------
Inventories are stated at the lower of cost (first in, first out) or net
realizable value.
Property and Equipment
----------------------
Property and equipment are recorded at cost and depreciated using the
straight-line method over the following useful lives:
Professional equipment Seven years
Office equipment Five years
Automotive equipment Five years
Leasehold improvements Five years
Computer equipment Five years
In the year of acquisition, depreciation is calculated at one-half the
above noted rates. Property and equipment purchased under capitalized leases are
amortized over the shorter of the lease term or their estimated useful life and
such depreciation is included with depreciation expense. On November 1, 1997,
the Company changed the method by which it calculates depreciation on property
and equipment to the straight-line method. Previously, professional equipment
was depreciated using the 20% declining balance method and office and computer
equipment and automobiles were depreciated using the 30% declining balance
method. The Company also adopted a useful life of seven years for professional
equipment and five years for office equipment and automobiles. The cumulative
effect of the changes adopted by the Company for the fiscal year ended July 31,
1998, was not material.
-11-
<PAGE>
Advertising Expenses
--------------------
The Company defers its advertising costs until the advertisement is
actually run, at which time the full expense is recognized. Deferred advertising
costs were $0 and $89,000 at July 31, 1998 and 1997, respectively. Advertising
expense was $2,786,000 and $786,000 for the years ended July 31, 1998 and 1997,
respectively.
Goodwill and Covenants Not to Compete
-------------------------------------
The unallocated purchase costs in excess of the net assets acquired
(goodwill) is being amortized on the straight-line basis over twenty years.
Non-compete agreements are amortized on the straight-line basis over the period
benefited. Goodwill and covenants not to compete are as follows (in thousands):
<TABLE>
July 31,
1998 1997
---- ----
<S> <C> <C>
Goodwill $15,611 $ 8,966
Covenants not to compete 1,578 955
Less: Accumulated amortization (1,037) (402)
------ -----
$16,152 $ 9,519
======= =======
</TABLE>
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted projected future cash flows of the
acquired businesses from which the goodwill arose. Amortization charged to
operations was $635,000 and $364,000 for the years ended July 31, 1998 and 1997,
respectively.
Deferred Acquisition and Financing Costs
----------------------------------------
Costs related to the acquisition of clinics are deferred and, upon
successful completion of acquisitions, are allocated to the assets acquired and
are subject to the accounting policies outlined above. Costs related to
potential acquisitions that are unsuccessful are expensed in the periods in
which it is determined that such acquisitions are unlikely to be consummated.
Costs related to issuing shares are deferred and upon the issuance of the
related shares, are applied to reduce the net proceeds of the issue.
Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128"). SFAS No. 128 supersedes APB Opinion No. 15, "Earnings Per Share" and
specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. It replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS. Basic EPS,
unlike primary EPS, excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock 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.
Concentrations of Credit Risk
-----------------------------
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash, short-term
investments, and trade receivables. The Company places its cash with high credit
quality institutions. At times, such amounts may be in excess of the Federal
Deposit Insurance Corporation insurance limits. The Company's trade accounts
receivable are derived from numerous private payers, insurance carriers, health
maintenance organizations and government agencies. Concentration of credit risk
relating to trade accounts receivable is limited due to the diversity and number
of patients and payers.
-12-
<PAGE>
Fair Value of Financial Instruments
-----------------------------------
The carrying value of financial instruments such as cash and cash
equivalents, short-term investments, trade receivables, notes receivable, trade
payables, notes payable, and long-term debt approximate their fair value.
Use of Estimates
----------------
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Reverse Stock Split
-------------------
Effective February 9, 1998, the Company effected a one-for-five reverse
stock split of its common shares ("Common Shares"). All share and per share
information appearing in the accompanying financial statements for the fiscal
year ended July 31, 1997, has been restated to give effect to the reverse stock
split.
Reclassifications
-----------------
Certain amounts in the 1997 financial statements have been reclassified
in order to conform to the 1998 presentation.
NOTE 2. ACQUISITIONS
During the fiscal year ended July 31, 1998, the Company acquired 33
clinics and one hearing care benefit administrator in 18 transactions. Each
transaction was accounted for as a purchase. The acquired assets and liabilities
were recorded at their estimated fair values at the date of acquisition, and the
unallocated excess purchase price (goodwill) is being amortized on a straight
line basis over 20 years. The operating results of each acquisition have been
included in the consolidated statements of operations from the respective
acquisition date. The aggregate purchase price for the acquisitions consisted of
cash payments of $3,650,000, promissory notes issued by the Company of
$1,781,000 generally payable over three years, and $3,072,000 in assumed
liabilities. In addition, $1,405,000 will be paid and 22,936 Common Shares that
have been issued but are being held by the Company will be released over a
three-year period if certain annual net revenue targets are met. As a result of
the acquisitions, the Company recorded approximately $1,186,000 in accounts
receivable, $137,000 in inventory, $629,000 in property and equipment, $96,000
in other assets, and $6,455,000 in goodwill, which included costs related to
acquisitions. In addition to the purchase price for the acquisitions, the
Company also recorded $623,000 for covenants not to compete, of which $157,000
was paid in cash at the time of closing, with the balance payable over three
years.
During the fiscal year ended July 31, 1997, the Company acquired 39
clinics in 12 transactions. Each transaction was accounted for as a purchase.
The acquired assets and liabilities were recorded at their estimated fair values
at the date of acquisition, and the unallocated excess purchase price (goodwill)
is being amortized on a straight line basis over 20 years. The unallocated
excess purchase price (goodwill) is being amortized on a straight line basis
over 20 years. The operating results of each acquisition have been included in
the consolidated statements of operations from the respective acquisition date.
The aggregate purchase price for the acquisitions consisted of cash payments of
$2,091,000, promissory notes issued by the Company of $3,277,000 generally
payable over three years, 587,876 Common Shares and $486,000 in assumed
liabilities. As a result of the acquisitions, the Company recorded approximately
$1,629,000 in accounts receivable, $220,000 in inventory, $916,000 in property
and equipment, $493,000 in other assets, $2,096,000 in current liabilities and
$7,983,000 in goodwill. In addition to the purchase price for the acquisitions,
the Company also recorded $940,000 for covenants not to compete, of which
$792,000 was paid in cash at the time of closing, with the balance payable over
three years.
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property and equipment consist of the following (in thousands):
-13-
<PAGE>
<TABLE>
July 31,
1998 1997
---- ----
<S> <C> <C>
Professional equipment $1,521 $ 930
Office equipment 705 481
Automotive equipment 2 16
Leasehold improvements 760 405
Computer equipment 2,012 1,144
----- -----
5,000 2,976
Less accumulated depreciation (1,393) (699)
----- -----
$3,607 $2,277
===== =====
</TABLE>
NOTE 4. FINANCING ARRANGEMENTS
Bank Loan
---------
Sonus-Canada Ltd. maintains a revolving bank demand loan bearing
interest at the bank's prime rate plus 1% per annum (8.5% and 5.75% at July 31,
1998 and 1997, respectively ), secured by a general security agreement covering
all assets of Sonus-Canada Ltd. The loan provided for a maximum credit limit of
$198,000 and $182,000 at July 31, 1998 and 1997, respectively, of which $46,000
and $0 were outstanding at July 31, 1998 and 1997, respectively.
Short-term Notes Payable
------------------------
At July 31, 1997, Sonus-USA, Inc., and Sonus-Canada had outstanding
short-term, non-interest bearing notes from certain hearing instrument
manufacturers totaling $59,000.
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
July 31,
1998 1997
---- ----
<S> <C> <C>
Installment notes incurred in connection with acquisitions payable in
monthly installments due from 1998 to 2002 with a weighted
average interest rate of 6.5%............................................ $ 322 $ 348
Installment notes incurred in connection with acquisitions payable
in quarterly installments due from 1999 to 2000 with a weighted
average interest rate of 6%.............................................. 150 133
Installment notes incurred in connection with acquisitions payable
in annual installments due from 1999 to 2003 with a weighted
average interest rate of 6.3%............................................ 1,910 390
Non-interest bearing installment obligations for covenants not to compete
due from 1999 to 2001.................................................... 460 94
Equipment loan from a supplier bearing interest at 10% payable in monthly
installments due 2000.................................................... 51 75
Equipment loan from suppliers with interest rates from 0%to 9% per annum
due from 1999 to 2018.................................................... --- 82
------- -------
-14-
<PAGE>
2,893 1,122
Less current portion.................................................... (1,160) (357)
------- -------
$ 1,733 $ 765
======= =======
</TABLE>
Annual maturities of long-term debt are as follows (in thousands): 1999 -
$1,160; 2000 - $908; 2001 - $598; 2002 - $115; 2003 - $112.
NOTE 6. CAPITAL LEASES
The following is a schedule by year of future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of July 31, 1998 (in thousands):
<TABLE>
<S> <C>
1999............................................................................ $ 144
2000............................................................................ 142
2001............................................................................ 98
-----
Total minimum lease payments.................................................... 384
Less: amount representing interest............................................. (41)
-----
Present value of minimum lease payments......................................... 343
Less current portion............................................................ (120)
-----
$ 223
=====
</TABLE>
Total assets under capitalized leases at July 31, 1998 and 1997, were $271,000
and $305,000, net of accumulated depreciation of $244,000 and $131,000,
respectively
NOTE 7. CONVERTIBLE NOTES PAYABLE
At July 31, 1997, the Company had outstanding non-interest bearing notes
in the amount of $2,600,000 convertible into 400,000 Common Shares at a rate of
$6.50 per share. During the fiscal year ended July 31, 1998, $1,430,000 of the
notes were converted into 220,000 Common Shares. At July 31, 1998, $1,170,000 of
the notes (convertible into 180,000 Common Shares) remained outstanding and
mature August 1, 1999. At July 31, 1997, the Company had outstanding a
non-interest bearing note in the amount of approximately $127,000 due on demand
and convertible into Common Shares at the rate of $5.00 per share. The note was
converted into 25,975 Common Shares during the fiscal year ended July 31, 1998.
NOTE 8. SHAREHOLDERS' EQUITY
Series A Convertible Preferred Shares
-------------------------------------
In December 1997, the Company issued 13,333,333 Series A Convertible
Preferred Shares (the "Convertible Shares") in a private placement. The
following summarizes certain terms of the Convertible Shares:
Voting Rights. Each Convertible Share is entitled to one-fifth of a vote
(or such other number of votes equal to the number of Common Shares into which
such Convertible Share shall be convertible from time to time) in the election
of directors and any other matters presented to the shareholders of the Company
for action or consideration.
Dividends. Each Convertible Share is entitled to receive, when, as and
if declared by the board of directors of the Company out of the Company's assets
legally available for payment, cumulative dividends from the date of original
issuance, payable annually at a rate of 5% per annum on a base amount of $1.35
per share (the "Base Amount"). All accrued and unpaid dividends will be
forfeited upon the conversion of the Convertible Shares. The dividend rate is
subject to increase on specified dates in the event that certain conditions (the
"Triggering Conditions") have not been met. The Triggering Conditions are as
follows:
(a) The Common Shares are listed on the New York Stock Exchange, the
American Stock Exchange, or the Nasdaq National Market (each a "U.S. Principal
Market");
-15-
<PAGE>
(b) The Common Shares are traded on a U.S. Principal Market at a daily
closing price greater than $12.00 per Common Share on each of the ten
consecutive trading days preceding the applicable date; and
(c) The Company's net income before income taxes, dividends on the
Convertible Shares, and amortization of goodwill and covenants not to compete
for the three consecutive fiscal quarters preceding the applicable date shall
have averaged at least $.35 per fully diluted Common Share per fiscal quarter
(for purposes of making this calculation, the Common Shares issuable upon the
exercise of warrants issued in connection with the Convertible Shares will not
be counted). If the Triggering Conditions have not been met by:
(x) January 1, 2003, the dividend rate will thereafter be 15% per annum
of the Base Amount;
(y) January 1, 2004, the dividend rate will thereafter be 18% per annum
of the Base Amount; or
(z) January 1, 2005, the dividend rate will thereafter be 21% per annum
of the Base Amount.
As soon as the Triggering Conditions have been satisfied, the dividend
rate will revert to 5% per annum of the Base Amount.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the Company subject to the rights of
holders of any securities of the Company ranking senior to the Convertible
Shares upon liquidation, the holders of Convertible Shares will be entitled to
receive, out of the assets of the Company available for distribution to
shareholders, before any distribution of assets is made to holders of Common
Shares or any other securities ranking junior to the Convertible Shares upon
liquidation, a liquidating distribution in an amount equal to the greater of (i)
$1.35 per share plus any accrued and unpaid dividends or (ii) the amount that
would have been distributable to such holders if they had converted their
Convertible Shares into Common Shares immediately prior to such dissolution,
liquidation, or winding up, plus any accrued and unpaid dividends. The sale,
conveyance, mortgage, pledge or lease of all or substantially all the assets of
the Company will be deemed to be a liquidation of the Company for purposes of
the liquidation rights of the holders of Convertible Shares. After payment of
the full amount of the liquidating distribution to which they are entitled, the
holders of Convertible Shares will have no right to any of the remaining assets
of the Company.
Optional Redemption. The Convertible Shares may not be redeemed before
January 1, 2003. Thereafter, the Convertible Shares may be redeemed at the
option of the Company, in whole or in part. The redemption price will be an
amount equal to the greater of (i) $1.35 per share plus any accrued and unpaid
dividends or (ii) the fair market value of a Convertible Share as determined by
a nationally recognized independent investment banking firm selected by mutual
agreement of the Company and the holder of a majority of the outstanding
Convertible Shares. The Convertible Shares are not subject to mandatory
redemption or any sinking fund provisions.
Conversion Rights. The Convertible Shares may be converted at any time,
in whole or in part, at the option of the holder thereof, into Common Shares.
The conversion rate is presently equal to one Common Share for every five
Convertible Shares surrendered for conversion. The conversion rate is subject to
further adjustment for stock dividends, stock splits, recapitalizations, and
other anti-dilution adjustments. Upon the conversion of any Convertible Shares,
any accrued and unpaid dividends with respect to such shares will be forfeited.
The Company has the right to force conversion of the Convertible Shares, in
whole or in part, upon satisfaction of all the Triggering Conditions.
Release of Escrowed Shares
--------------------------
Effective with the listing of the 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 been excluded from the calculation of the
average shares outstanding during the fiscal year ended July 31, 1997, are
included in such calculation for the fiscal year ended July 31, 1998.
-16-
<PAGE>
Share Purchase Warrants
-----------------------
At July 31, 1998, the Company had the following share purchase warrants
outstanding:
(1) Share purchase warrants (the "September Warrants") to purchase 1,093,482
Common Shares at an exercise price of $10.00 per share. The September Warrants
expired on August 31, 1998, without being exercised.
(2) Share purchase warrants (the "Agent Warrants") to purchase 99,180 Common
Shares at an exercise price of $6.25 per share issued in connection with
placement of the September Warrants. The Company issued 39,799 Common Shares in
August 1998 in connection with the exercise of a portion of the Agent Warrants.
The remaining Agent Warrants expired on August 31, 1998.
(3) Share purchase warrants issued in connection with the Convertible Shares to
purchase 2,000,000 Common Shares at an exercise price of $12.00 per share
until December 24, 2002. The Company may force the exercise of the warrants
upon satisfaction of all the Triggering Conditions.
In February 1998, the Company issued 373,998 Common Shares at $5.23 per
share pursuant to the exercise of share purchase warrants issued by the Company
in February 1996.
Stock Option Plans
------------------
The Company has two stock option plans, the Stock Option Plan ("1993
Plan") and the Second Amended and Restated Stock Award Plan ("1996 Plan"). The
Company may grant to officers, directors, employees and consultants incentive
and non-qualified options to purchase up to 1,800,000 Common Shares under the
1996 Plan. There are options to purchase 245,000 Common Shares outstanding under
the 1993 Plan; no further options will be granted under the 1993 Plan. The
exercise price of options granted under the 1996 Plan may not be less than 75%
of the fair market value of the Company's Common Shares at the date of grant
(100% for tax-qualified incentive stock options). Options become exercisable at
the date of grant or in equal annual installments over a period of one to four
years from the date of grant. The options generally expire either five or ten
years after the date of grant.
The 1996 Plan also provides for the grant of stock appreciation rights,
restricted units, performance awards and other stock-based awards. The Company
had no such awards or rights outstanding at July 31, 1998 or 1997.
-17-
<PAGE>
The activity during the fiscal years ended July 31, 1998 and 1997 was as
follows:
<TABLE>
1998 1997
---- ----
Weighted- Weighted-
Average Average
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding - beginning of 488,400 $6.41 340,000 $4.15
year
Granted 1,138,000 $8.12 368,400 $6.85
Exercised (12,400) $2.10 (155,000) $2.05
Canceled (54,000) $9.79 (65,000) $7.50
--------- -------
Outstanding - end of year 1,560,000 $7.54 488,400 $6.41
Exercisable at end of year ========= =======
363,200 $5.98 177,500 $5.95
Weighted-average fair value of
options granted during the year $8.38 $4.47
</TABLE>
The following table summarizes information about stock options
outstanding at July 31, 1998:
<TABLE>
Options Outstanding Options Exercisable
----------------------------------------------- -------------------------------
Weighted-
Number Average Weighted- Number Weighted -
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices as of Contractual Exercise as of Exercise
July 31, 1998 Life Price July 31, 1998 Price
- ----------------- --------------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
$1.00-- $2.00 60,000 2.39 $1.26 60,000 $ 1.26
$2.01-- $3.50 25,000 2.55 $3.31 25,000 $ 3.31
$3.51-- $5.00 -- -- $ -- -- $ --
$5.01-- $6.50 166,000 3.34 $6.25 79,700 $ 6.28
$6.51-- $8.00 883,000 8.43 $6.95 158,500 $ 7.24
$8.01-- $9.50 120,000 7.32 $8.58 -- $ --
$9.51-- $12.00 306,000 9.52 $11.11 40,000 $ 9.10
- ----------------- --------------- ------------- -------------- --------------- -------------
$1.00-- $12.00 1,560,000 7.69 $7.54 363,200 $ 5.98
</TABLE>
The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation cost has been recognized for its
stock option grants. Pro forma information regarding net income (loss) and net
income (loss) per share is required under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and
has been determined as if the Company had accounted for all 1998 and 1997
stock option grants based on the fair value method. The pro forma information
presented below is not representative of the effect stock options will have on
pro forma net income (loss) or net income (loss) per share for future years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes multiple option-pricing model. The following weighted
average assumptions were used for grants in 1998 and 1997: risk-free interest
rates of 5.5% and 5.94%, respectively, an expected option life of 7.69 years
and 4.92 years, respectively, expected volatility of 114% and 96%,
respectively, and dividend yield of zero.
-18-
<PAGE>
The Black-Scholes method is one of many models used to calculate the
fair value of options that are freely tradable, fully transferable and that
have no vesting restrictions. These models also require highly subjective
assumptions, including future stock price volatility and expected time until
exercise, which greatly affect the calculated values.
Had compensation cost for these plans been determined based on the fair
value of awards at the grant date, as prescribed by SFAS 123, net loss or net
loss per share would have been as follows:
<TABLE>
1998 1997
---- ----
(in thousands, except
per share data)
Net loss applicable to common shareholders:
<S> <C> <C>
As reported $(4,594) $(1,701)
Pro forma (1) $(5,988) $(3,276)
Net loss per share (basic and diluted):
As reported $(0.89) $ (0.42)
Pro forma (1) $(1.16) $ (0.82)
</TABLE>
(1) SFAS 123 applies to awards granted in fiscal years that begin after
December 15, 1994. Consequently, the effects of applying SFAS 123 shown here
are not likely to be representative of the effects in future years due to the
exclusion of awards granted in prior years but vesting (and therefore
expensed) in 1997 and 1998.
NOTE 9. INCOME TAXES
Sonus Corp. and its Canadian subsidiary file separate corporate income
tax returns on a stand-alone basis in Canada. Sonus-USA, Inc. files separate
corporate income tax returns in the United States.
There was no provision for income taxes for the years ended July 31,
1998 and 1997 as the Company incurred net operating losses.
The components of temporary differences that give rise to significant
portions of deferred income taxes are as follows (in thousands):
<TABLE>
July 31,
1998 1997
---- ----
Deferred tax assets:
<S> <C> <C>
Net operating losses carried forward $2,443 $ 839
Allowance for doubtful accounts 277 44
Other 14 --
----- ---
2,734 883
Deferred tax liabilities:
Goodwill and start-up costs (240) (54)
------ ----
2,494 829
Less valuation allowance (2,494) (829)
------ ----
$ --- $ ---
====== ======
A reconciliation of the Company's expected tax expense using the
statutory income tax rate to the actual effective rate is as follows:
1998 1997
---- ----
Tax benefit at statutory rate (34)% (34)%
Adjustment for higher Canadian tax rate (1) ---
Expenses not deductible for tax purpose 3 5
State taxes, net of federal (5) ---
Change in valuation allowance 37 29
---- ----
Tax rate per financial statements ---% ---%
==== ====
</TABLE>
At July 31, 1998, the Company had approximate net operating loss
carryforwards for tax purposes which, if not utilized, expire in the years
ended as follows (in thousands):
<TABLE>
UNITED
CANADA STATES TOTAL
<S> <C> <C> <C>
2001 $ 573 $ --- $ 573
2002 26 --- 26
2003 563 --- 563
2004 247 --- 247
2005 294 294
2011 --- 639 639
2012 --- 586 586
2013 3,599 3,599
------------- ---------- -------
$ 1,703 $4,824 $6,527
============= ======== =========
</TABLE>
NOTE 10. RELATED PARTY TRANSACTIONS
William DeJong is a partner in the Calgary, Alberta law firm of Ballem
MacInnes and is a director of the Company. Total fees, disbursements and
government sales tax paid to Ballem MacInnes by the Company for legal services
as of July 31, 1998 and 1997 were $196,000 and $168,000, respectively
(converted from Canadian dollars at July 31, 1998 and 1997).
In connection with the acquisition of the Midwest Division of Hearing
Health Services, Inc., Sonus-USA, Inc. assumed a promissory note with a
balance of $360,000 payable to Kathy A. Foltner, an officer of the Company.
The promissory note, which is payable in equal annual installments of $120,000
and bears interest at 6% per annum, has one payment remaining due July 1,
1999.
Gregory J. Frazer, Ph.D., an officer and director of the Company, was a
shareholder in certain Hearing Care Associates corporations that the Company
acquired during the fiscal years ended July 31, 1998 and 1997. For the fiscal
year ended July 31, 1998, the consideration paid to Mr. Frazer and his wife in
connection with the acquisitions and related non-competition agreements
consisted of $242,179 in cash and $80,520 payable in installments over three
years. The consideration paid to Mr. Frazer and his wife during the fiscal
year ended July 31, 1997, totaled $933,000 in cash and 294,071 Common Shares
at a price of $5.00 per share.
On May 8, 1997, Brandon M. Dawson, an officer and director of the
Company, exercised options for 50,000 Common Shares at $1.35 per share. In
connection with the exercise, the Company made loans of $67,500 and $91,000 to
Mr. Dawson on May 8, 1997, and April 24, 1998, respectively, to allow Mr.
Dawson to pay the aggregate exercise price of the options and taxes incurred
as a result of the exercise. The loans mature on November 1, 1999 and bear
interest at 10% and 7.75%, respectively. On October 5, 1997, the Company
loaned Mr. Dawson $85,000 in connection with the purchase of his residence.
The loan was repaid on April 10, 1998, along with interest at 10% per annum in
the amount of $4,308. On December 26, 1997, the Company loaned Mr. Dawson
$32,342 in order to allow Mr. Dawson to repay a loan obtained in connection
with the exercise of options to purchase 20,000 Common Shares. The loan
matures on November 1, 1999, and bears interest at 7.75% per annum. On March
19, 1998, the Company loaned Mr. Dawson $35,760, in order to pay taxes
incurred as a result of option exercises in April 1996. The loan matures on
November 1, 1999, and bears interest at 7.75% per annum. The loans to Mr.
Dawson are secured by 60,000 Common Shares.
-19-
<PAGE>
On May 19, 1997, Gene K. Balzer, Ph.D., a former director of the
Company, exercised options for 40,000 Common Shares at $1.40 per share. In
connection with such exercise, the Company loaned Mr. Balzer $56,000 to pay
the aggregate exercise price of the options. The loan is secured by the stock
underlying the exercised options and accrues interest at 10% per annum.
NOTE 11. 401(K) PLAN
The Company sponsors a 401(k) plan for all employees who have satisfied
minimum service and age requirements. Employees may contribute up to 20% of
their compensation to the plan. The Company does not match employee
contributions.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The following is a schedule by year of future minimum lease payments
for non-cancelable operating leases at July 31, 1998 (in thousands):
1999 $1,393
2000 1,108
2001 913
2002 745
2003 519
Thereafter 605
------
Total minimum lease payments $5,283
======
Rental expense under operating leases was $1,426,000 and $810,000 for
the years ended July 31, 1998 and 1997, respectively.
Insurance
---------
In the normal course of business, the Company may become a defendant or
plaintiff in various lawsuits. Although a successful claim for which the
Company is not fully insured could have a material effect on the Company's
financial condition, management is of the opinion that it maintains insurance
at levels sufficient to insure itself against the normal risk of operations.
NOTE 13. SUBSEQUENT EVENTS
In August and September of 1998, the Company acquired 12 hearing care
clinics in 4 transactions for a total purchase price of $1,812,000. Each
transaction was accounted for as a purchase. The aggregate purchase price for
the acquisitions consisted of cash payments of $942,000 and promissory notes
issued by the Company of $870,000 payable over three years. In addition,
$100,000 will be paid in March 2000 if certain net revenue targets are met. As a
result of the acquisitions, the Company recorded $75,000 in accounts receivable,
$70,000 in inventory, property and equipment, $89,000 in other assets, $96,000
in current liabilities and $1,674,000 in goodwill. In addition to the purchase
price for the acquisitions, the Company also recorded $220,000 for covenants not
to compete payable over three years.
NOTE 14. CANADIAN VERSUS U.S. GAAP
As of July 31, 1998 and 1997, there were no material differences between
Canadian generally accepted accounting principles ("GAAP") and U.S. GAAP.
-20-
<PAGE>
NOTE 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED - SEE ACCOMPANYING
ACCOUNTANTS' REPORT)
The following is a tabulation of the unaudited quarterly results of
operations for the years ended July 31, 1998 and 1997 (in thousands, except per
share data):
<TABLE>
Quarter ended
October 31, January 31, April 30, July 31,
1997 1998 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 5,307 $ 4,109 $ 5,719 $ 7,233
Loss from continuing operations (79) (1,135) (778) (2,906)
Net loss (96) (1,085) (581) (2,832)
Earnings (loss) before interest,
depreciation and amortization (1) 198 (812) (429) (2,494)
Net loss per share (basic and diluted) $ (0.02) $ (0.24) $ (0.10) $ (0.49)
Quarter ended
October 31, January 31, April 30, July 31,
1996 1997 1997 1997
---- ---- ---- ----
Net revenues $ 1,268 $ 2,934 $ 4,355 $ 4,905
Loss from continuing operations (299) (657) (316) (461)
Net loss (298) (649) (290) (464)
Loss before interest,
depreciation and amortization (1) (247) (440) (123) (133)
Net loss per share (basic and diluted) $ (0.11) $ (0.16) $ (0.06) $ (0.10)
</TABLE>
- ---------------
(1) Earnings (loss) before interest, depreciation and amortization is provided
because it is a measure commonly used by acquisition companies. It is
presented to enhance an understanding of the Company's operating results and
is not intended to represent cash flow or results of operations in
accordance with generally accepted accounting principles for the periods
indicated.
NOTE 16. PRO FORMA FINANCIAL INFORMATION (UNAUDITED - SEE ACCOMPANYING
ACCOUNTANTS' REPORT)
The unaudited pro forma financial information set forth below reflects
the historical operations of the clinics acquired by the Company during the
fiscal year ended July 31, 1998 (the "Acquisitions"), from August 1, 1997, to
the date of acquisition. Such financial information .is not necessarily
indicative of the Company's combined financial position or the results of
operations that actually would have occurred if the Acquisitions had been
consummated on August 1, 1996, for the fiscal year ended July 31, 1997, and
August 1, 1997, for the fiscal year ended July 31, 1998. In addition, such
information is not intended to be a projection of results of operations that may
be obtained by the Company in the future. The unaudited pro forma combined
financial information should be read in conjunction with the consolidated
financial statements and related notes thereto included elsewhere herein.
-21-
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1998
<TABLE>
ACQUIRED PRO FORMA SONUS CORP.
SONUS CORP. CLINICS(A) ADJUSTMENTS(B) COMBINED (C)
----------- ---------- -------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net revenues $ 22,368 $ 10,467 $ $ 32,835
Costs and Expenses:
Cost of products sold 7,712 5,051 12,763
Operational expenses 18,193 4,826 23,019
Depreciation and
amortization 1,361 112 211 1,684
-------- -------- --------- --------
Total costs and expenses 27,266 9,989 211 37,466
-------- -------- --------- --------
Income (loss) from operations (4,898) 478 (211) (4,631)
Other income, net 304 15 - 319
Income (loss) before income taxes (4,594) 493 (211) (4,312)
Income tax expense - 23 - 23
-------- -------- --------- --------
Net income (loss) $ (4,594) $ 470 $ (211) $ (4,335)
======== ========= ========== ========
Pro forma:
Net loss per common share $ (0.84)
========
Weighted average number
of shares outstanding 5,167
=====
</TABLE>
-22-
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1997
<TABLE>
ACQUIRED PRO FORMA SONUS CORP.
SONUS CORP. CLINICS(A) ADJUSTMENTS(B) COMBINED (C)
----------- ---------- -------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net revenues $ 13,462 $13,430 $ $ 26,892
Costs and Expenses:
Cost of products sold 5,010 5,821 10,831
Operational expenses 9,395 6,567 15,962
Depreciation and
amortization 790 188 328 1,306
-------- ------- -------- --------
Total costs and expenses 15,195 12,576 328 28,099
-------- ------- -------- --------
Income (loss) from operations (1,733) 854 (328) (1,207)
Other income, net 32 21 - 53
Income (loss) before income taxes (1,701) 875 (328) (1,154)
Income tax expense - 19 - 19
-------- ------- -------- --------
Net income (loss) $ (1,701) $ 856 $ (328) $ (1,173)
======== ======= ======== ========
Pro forma:
Net loss per common share $ (0.29)
========
Weighted average number
of shares outstanding 4,010
========
</TABLE>
(a) Reflects the historical operations of the Acquisitions from August 1,
1997, to the date of acquisition.
(b) To record amortization of goodwill for the Acquisitions in the amount of
$211,000 and $328,000 for the fiscal years ended July 31, 1998, and
1997, respectively, as if the Acquisitions had occurred on August 1,
1997 and August 1, 1996, respectively.
(c) The "Sonus Corp. Combined" column set forth in the unaudited pro forma
statement of operations (i) for the year ended July 31, 1998, gives
effect to the Acquisitions as if they had occurred on August 1, 1997,
and (ii) for the year ended July 31, 1997, gives effect to the
Acquisitions as if they had occurred on August 1, 1996.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits are listed in the Exhibit Index beginning on page 25 of this
report. Each management contract or compensatory plan or arrangement required to
be filed as an exhibit to this report is marked with an asterisk in the Exhibit
Index.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during
the last quarter of the fiscal year ended July 31, 1998.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Amendment No. 1 to its report on Form 10-KSB
for the fiscal year ended July 31, 1998, to be signed on its behalf by the
undersigned, therunto duly authorized on November 6, 1998.
Date: November 6, 1998 SONUS CORP.
By /s/ Brandon M. Dawson
Brandon M. Dawson
President and Chief Executive Officer
-24-
<PAGE>
EXHIBIT INDEX
Exhibit Description of Exhibit
- ------- ----------------------
3.1 Articles of Incorporation of the Company. Incorporated by
reference to Exhibit 3.1 to Post-Effective Amendment No
1, filed March 5, 1998 (the "Amendment") to the Company's
Registration Statement on Form SB-2 filed March 12, 1997
(File No. 333-23137) (the "SB-2").
3.2 Bylaws of the Company. Incorporated by reference to
Exhibit 3.2 to the Amendment.
10.1 Securities Purchase Agreement between the Company and
Warburg, Pincus Ventures, L.P. ("Warburg") dated November
21, 1997. Incorporated by reference to Exhibit 99.2 to
the Company's current report on Form 8-K dated November
25, 1997.
10.2 Warrant Agreement between the Company and Warburg dated
December 24, 1997. Incorporated by reference to Exhibit
10.13 to the Amendment.
10.3 Stock Purchase and Sale Agreement dated as of February
28, 1997, between Gregory J. Frazer and Laurie Van
Duivenbode and SONUS-USA, Inc., a Washington corporation
("Sonus-USA"). Incorporated by reference to Exhibit 10.19
to the SB-2.
10.4 Merger Agreement dated as of October 1, 1996, among the
Company, Hearing Care Associates-Glendale, Inc., Hearing
Care Associates-Glendora, Inc., and Hearing Care
Associates-Northridge, Inc., and Gregory J. Frazer,
Carissa Bennett, and Jami Tanihana"). Incorporated by
reference to Exhibit 10.20 to the SB-2.
10.5 Asset Purchase Agreement effective as of October 31,
1996, among the Company, Sonus-USA and Hearing Health
Services, Inc., and Audio-Vestibular Testing Center, Inc.
(the "Midwest Division Agreement"). Incorporated by
reference to Exhibit 10.21 to the SB-2.
10.6 Stock Purchase and Sale Agreement dated as of January 9,
1997, by and between Gregory J. Frazer and Stephen
Martinez and Sonus-USA. Incorporated by reference to
Exhibit 10.24 to the SB-2.
10.7 Form of Convertible Subordinated Note relating to the
Midwest Division Agreement. Incorporated by reference to
Exhibit 10.25 to the SB-2.
10.8 1993 Stock Option Plan. Incorporated by reference to
Exhibit 10.26 to the SB-2.*
10.9 Second Amended and Restated Stock Award Plan (as amended
December 18, 1997). Incorporated by reference to Exhibit
10.27 to the Amendment.*
10.10 Employment Agreement dated October 1, 1996, between
Sonus-USA, and Gregory J. Frazer. Incorporated by
reference to Exhibit 10.28 to the SB-2.*
10.11 Employment Agreement dated as of November 1, 1996, among
the Company, Sonus-USA, and Kathy Foltner. Incorporated
by reference to Exhibit 10.29 to the SB-2.*
10.12 Employment Agreement dated December 24, 1997, between the
Company and Brandon M. Dawson. Incorporated by reference
to Exhibit 10.30 to the Amendment.*
10.13 Employment Agreement dated December 24, 1997, between the
Company and Edwin J. Kawasaki. Incorporated by reference
to Exhibit 10.31 to the Amendment.*
10.14 Employment Agreement dated December 24, 1997, between the
Company and Randall E. Drullinger. Incorporated by
reference to Exhibit 10.32 to the Amendment.*
-25-
<PAGE>
10.15 Consulting Agreement effective as of January 1, 1997,
between the Company and Hugh T. Hornibrook. Incorporated
by reference to Exhibit 10.33 to the SB-2.*
10.16 Stock Purchase and Sale Agreement dated as of March 6,
1997, between Gregory J. Frazer, Alfred S. Gaston and
Sonus-USA. Incorporated by reference to Exhibit 10.34 to
the SB-2.
10.17 Stock Purchase and Sale Agreement dated as of March 14,
1997, by and between Gregory J. Frazer, David N. Jankins,
and Jami Tanihana and Sonus-USA. Incorporated by
reference to Exhibit 10.35 to Amendment No. 1 to the SB-2
filed May 19, 1997.
10.18 Stock Purchase and Sale Agreement dated as of April 6,
1997, by and between Susan Diaz, Gregory J. Frazer, and
Jami Tanihana and Sonus-USA. Incorporated by reference to
Exhibit 10.36 to Amendment No. 1 to the SB-2 filed May
19, 1997.
10.19 Promissory Notes of Brandon M. Dawson dated May 8, 1997,
December 26, 1997, March 19, 1998, and April 24, 1998,
and related Pledge Agreement between the Company and Mr.
Dawson, dated May 1, 1998. Incorporated by reference to
Exhibits 10.1, 10.2, 10.3, 10.4, and 10.5 to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended April 30, 1998.*
10.20** Amended and Restated Promissory Note of Gene K. Balzer,
Ph.D., dated as of May 19, 1998, and related Pledge
Agreement between the Company and Mr. Balzer, dated as of
May 19, 1997.*
10.21 Stock Purchase Agreement dated August 27, 1997, by and
between Carissa D. Bennett, Gregory J. Frazer, and Evelyn
L. Gong and Sonus-USA, Inc. Incorporated by reference to
Exhibit 10.35 to the Company's Annual Report on Form
10-KSB for the fiscal year ended July 31, 1997.
10.22 Stock Purchase Agreement dated January 5, 1998, by and
between Gregory J. Frazer, Rhonda Jesperson and
Sonus-USA. Incorporated by reference to Exhibit 10.41 to
the Amendment.
10.23 Stock Purchase Agreement dated February 12, 1998, by and
between Gregory Frazer, Donald M. Welch and Sonus-USA.
Incorporated by reference to Exhibit 10.42 to the
Amendment.
21 The Company's subsidiaries are SONUS-USA, Inc., a
Washington corporation, Sonus-Canada Ltd., a British
Columbia (Canada) corporation, and Hear PO Corp., a New
Mexico corporation.
23.1 Consent of KPMG Peat Marwick LLP.
24** Power of attorney of certain officers and directors.
27** Financial Data Schedule.
- ----------------------------
* Management contract or compensatory plan or arrangement.
** Previously filed.
-26-
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sonus Corp.:
We consent to incorporation by reference in the Registration Statement on Form
S-8 No. 333-57673 and the Registration Statement on Form S-3 No. 333-23137 of
Sonus Corp. of our report dated October 23, 1998, relating to the consolidated
balance sheets of Sonus Corp. and subsidiaries as of July 31, 1998 and 1997, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the two-year period ended July 31, 1998, which
report appears in the July 31, 1998 annual report on Form 10-KSB/A of Sonus
Corp.
/s/ KPMG PEAT MARWICK LLP
Portland, Oregon
November 5, 1998
