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, 1999
Commission File Number 1-13851
SONUS CORP.
(Exact name of small business issuer as specified in its charter)
Yukon Territory, 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: 6,106,026 Common Shares, without par
or nominal value, outstanding as of December 1, 1999.
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 centers, 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 centers 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
centers, the ability of the Company to attract audiology centers as franchise
licensees under the Sonus Network, 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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SONUS CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
October 31, July 31,
1999 1999
-------------- -------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,963 $ 498
Accounts receivable, net of allowance for doubtful
accounts of $1,015 and $907, respectively 4,230 3,666
Other receivables 514 346
Inventory 513 499
Prepaid expenses 433 340
------------- -------------
Total current assets 14,653 5,349
Property and equipment, net 7,494 6,208
Other assets 95 60
Goodwill and covenants not to compete, net 19,648 19,768
------------- -------------
$ 41,890 $ 31,385
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable-related party $ 500 $ 500
Accounts payable 4,479 3,727
Accrued payroll 1,028 1,223
Other accrued liabilities 1,793 1,317
Convertible notes payable 931 931
Capital lease obligations, current portion 225 129
Long-term debt, current portion 2,160 2,150
------------- -------------
Total current liabilities 11,116 9,977
Capital lease obligations, less current portion 522 96
Long-term debt, less current portion 2,113 2,497
------------- -------------
Total liabilities 13,751 12,570
------------- -------------
Shareholders' equity:
Series A convertible preferred stock, no par
value per share, 13,333,333 shares authorized,
issued, and outstanding (liquidation preference of $19,690) 15,701 15,701
Series B convertible preferred stock, no par
value per share, 2,500,000 shares authorized,
issued, and outstanding (liquidation preference of $10,000) 9,900 ---
Common stock, no par value per share, unlimited
number of shares authorized, 6,107,706 and 6,109,026 shares,
respectively, issued and outstanding 14,966 14,976
Notes receivable from shareholders (93) (93)
Accumulated deficit (12,180) (11,595)
Accumulated other comprehensive loss (155) (174)
------------- -------------
Total shareholders' equity 28,139 18,815
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$ 41,890 $ 31,385
============= =============
See accompanying notes to consolidated financial statements.
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SONUS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended
October 31,
-------------------------------
1999 1998
------------ ------------
Revenues:
Product $ 8,862 $ 6,646
Service 876 920
Other 404 135
------------ ------------
Net revenues 10,142 7,701
Costs and expenses:
Cost of products sold 3,051 2,601
Clinical expenses 4,886 4,364
General and administrative expenses 2,038 1,784
Depreciation and amortization 698 475
------------ ------------
Total costs and expenses 10,673 9,224
------------ ------------
Loss from operations (531) (1,523)
Other income (expense):
Interest income 41 104
Interest expense (97) (56)
Other, net 2 1
------------ ------------
Net loss $ (585) $ (1,474)
============ ============
Loss per share of common stock:
Basic and diluted $ (0.10) $ (0.24)
Average shares outstanding:
Basic and diluted 6,085 6,083
See accompanying notes to consolidated financial statements.
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SONUS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended
October 31,
-----------------------------
1999 1998
-----------------------------
Cash flows from operating activities:
Net loss $ (585) $ (1,474)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for bad debt expense 98 68
Depreciation and amortization 698 475
Changes in operating assets and liabilities:
Accounts receivable (619) 87
Other receivables (166) 10
Inventory (12) (52)
Prepaid expenses (92) (112)
Accounts payable and accrued liabilities 977 233
----------- ------------
Net cash provided by (used in) operating activities 299 (765)
----------- ------------
Cash flows from investing activities:
Sale of short-term investments --- 1,870
Purchase of property and equipment (1,196) (915)
Additional costs related to acquisitions --- (116)
Deferred acquisition costs and other, net (34) (90)
Net cash paid on business acquisitions (90) (950)
----------- ------------
Net cash used in investing activities (1,320) (201)
----------- ------------
Cash flows from financing activities:
Net repayments of long term debt
and capital lease obligations (420) (223)
Deferred financing costs, net --- 1
Repayments of bank loans and
short-term notes payable --- (173)
Issuance of preferred stock, net of costs 9,900 ---
Issuance of common stock, net of costs --- 248
Repurchase of common stock (10) ---
----------- ------------
Net cash provided by (used in) financing activities 9,470 (147)
----------- ------------
Net increase (decrease) in cash and cash equivalents 8,449 (1,113)
Effect on cash and cash equivalents of changes
in foreign translation rate 16 (31)
Cash and cash equivalents, beginning of period 498 2,720
----------- ------------
Cash and cash equivalents, end of period $ 8,963 $ 1,576
=========== ============
Supplemental disclosure of investing and financing activities:
Interest paid during the period $ 72 $ 56
Supplemental disclosure of non-cash financing activities:
Issuance and assumption of long-term debt in acquisitions --- $ 1,240
Acquisition of clinical equipment and computer hardware with
capital lease obligations $ 566 ---
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 should be read in conjunction with the
Company's Annual Report on Form 10-KSB for the fiscal year ended July 31, 1999.
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 have been made. 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, 1998, have been reclassified in order to conform to the
presentation for the three month period ended October 31, 1999.
2. Acquisitions
During the three months ended October 31, 1999, the Company acquired 4
hearing care centers in 2 separate transactions. The aggregate purchase price
for the acquisitions consisted of cash payments of $90,000. As a result of the
acquisitions, the Company recorded $5,000 in property and equipment and $85,000
in goodwill.
3. Comprehensive Loss
(in thousands) Three months ended October 31,
1999 1998
---- ----
Net loss $ (585) $(1,474)
Other comprehensive loss, net of
tax:
Foreign currency translation
adjustments (19) (31)
-------- --------
Comprehensive loss $ (604) $(1,505)
======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1999 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1998
REVENUES. Total revenues for the three months ended October 31, 1999,
were $10,142,000, representing a 32% increase over revenues of $7,701,000 for
the comparable period in fiscal 1998. The increase was due to the 22 additional
hearing care centers that were acquired by the Company during the twelve months
ended October 31, 1999, as well as an increase of 12% in comparable center
revenue in the fiscal first quarter. Product revenues were $8,862,000 for the
three months ended October 31, 1999, up 33% from $6,646,000 for the same period
in fiscal 1998. Audiological service revenues decreased 5% to $876,000 for the
three months ended October 31, 1999, from $920,000 for the comparable period in
fiscal 1998. Audiological service revenues represented 9% and 12% of total
revenues for the three month periods ended October 31, 1999 and 1998,
respectively. The Company continued to focus on more profitable hearing
instrument sales resulting in a decrease in audiological service revenues. Other
revenues increased 199% to $404,000 for the three months ended October 31, 1999,
from $135,000 for the three months ended October 31, 1998. The increase was due
to the increased size of the Company and increased revenues from The Sonus
Network, the Company's franchise licensing program, and from the Company's Hear
PO Corp. subsidiary. Hear PO Corp. obtains contracts to provide hearing care
benefits to managed care group and corporate health care organizations through
its approximately 1,100 affiliated audiologists, sells Hear PO brand private
label hearing instruments, and operates as a buying group for its affiliated
audiologists.
PRODUCT GROSS PROFIT. Product gross profit for the three months ended
October 31, 1999, was $5,811,000 or 66% of product revenues, compared to
$4,045,000 or 61% of product revenues for the comparable period in fiscal 1998.
The increase in product gross profit percentage was due to increased buying
power with hearing instrument manufacturers, less dependence on sales discounts,
increased utilization of the Company's private-label hearing instruments, better
price management, and a tiered pricing strategy based on levels of technology
that was introduced in November 1998.
CLINICAL EXPENSES. As a percentage of revenues, clinical expenses
decreased to 48% for the three months ended October 31, 1999, compared to 57%
for the three months ended October 31, 1998. The decrease was due to the
Company's continuing efforts to cut costs, streamline its operations, eliminate
inefficient and duplicative processes, and increase same center revenue.
Clinical expenses for the three months ended October 31, 1999, were $4,886,000,
representing an increase of 12% over clinical expenses of $4,364,000 for the
comparable period in fiscal 1998. The increase in clinical expenses was due to
clinical expenses associated with the additional centers that were operated by
the Company during the three months ended October 31, 1999. Clinical expenses
include all personnel, marketing, occupancy, and other operating expenses at the
clinic level.
GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of revenues,
general and administrative expenses decreased to 20% for the three-month period
ended October 31, 1999, versus 23% for the same period in the prior fiscal year.
The decrease in general
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and administrative expenses as a percentage of revenues was due to growth in the
Company's revenue base as a result of its strategic acquisition program and
enhanced marketing efforts. General and administrative expenses increased 14%
from $1,784,000 for the three months ended October 31, 1998, to $2,038,000 for
the three months ended October 31, 1999, due to planned increases in corporate
staff and other corporate expenses related to the operation of a larger
organization.
DEPRECIATION AND AMORTIZATION EXPENSE. As a percentage of revenues,
depreciation and amortization expense increased to 7% for the three-month period
ended October 31, 1999, compared to 6% for the three months ended October 31,
1998. Depreciation and amortization expense for the three months ended October
31, 1999, was $698,000, an increase of 47% over the depreciation and
amortization expense of $475,000 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 22 additional centers
acquired by the Company during the twelve-month period ended October 31, 1999.
INTEREST INCOME AND EXPENSE. Interest income for the three months ended
October 31, 1999, decreased to $41,000 from $104,000 for the same period in the
prior fiscal year. The decrease was due to lower balances of cash and short-term
investments held by the Company as funds have been used for acquisitions.
Interest expense for the three months ended October 31, 1999, was $97,000
compared to $56,000 for the three months ended October 31, 1998, reflecting
higher balances of long-term debt incurred in connection with acquisitions.
NET LOSS. The Company's net loss for the three months ended October 31,
1999, decreased 60% from $1,474,000 for the three months ended October 31, 1998,
to $585,000 for the three months ended October 31, 1999. The Company had income
from operations before interest, depreciation, and amortization for the three
months ended October 31, 1999, of $167,000 compared to a loss from operations
before interest, depreciation, and amortization of $1,048,000 for the three
months ended October 31, 1998.
LIQUIDITY AND CASH RESERVES
For the three months ended October 31, 1999, net cash provided by
operating activities was $299,000 compared to net cash used in operating
activities of $765,000 for the three months ended October 31, 1998. Net cash
used in investing activities was $1,320,000 in the first three months of fiscal
1999 compared to $201,000 in the first three months of fiscal 1998. Net cash
provided by financing activities was $9,470,000 in the first three months of
fiscal 1998 compared to net cash used in financing activities of $147,000 in the
first three months of fiscal 1999. The change was primarily due to the issuance
of 2,500,000 Series B Convertible Preferred Shares (the "Series B Shares") in a
private placement for $10,000,000 in cash on October 1, 1999.
As a result of the issuance of the Series B Shares, 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. Thereafter, the Company anticipates that additional
funding will be needed to fund the Company's strategy of acquiring additional
hearing care centers. These funding requirements may result in the Company
incurring long-term and short-term indebtedness and in the public or private
issuance, from time to time, of additional equity or debt securities. Any such
issuance of equity may be dilutive to current shareholders and debt financing
may impose significant restrictive covenants on the Company. There can be
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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
continuing its development of a new patient management system. Initially, the
Company's hearing care centers and its subsidiary Hear PO Corp. will use the
software. However, in the future the Company may license the software to its
Sonus Network franchise licensees and others. The development contractor for the
software has represented that it will meet Year 2000 standards. Implementation
of the new software began December 13, 1999. The Company installed a new release
of its accounting and financial reporting software in March 1999, which the
vendor represents is Year 2000 compliant. The Company has surveyed all of its
servers, personal computers, and network hardware to determine compliance with
Year 2000 standards and is in the process of replacing all equipment that was
found to be deficient. The replacement of this equipment will be completed
before December 31, 1999, at an estimated cost of less than $50,000.
The Company has reviewed its non-IT systems (primarily voice
communications) for Year 2000 compliance and has replaced those systems that
were found to be non-compliant. The Company's cost to replace the non-IT systems
that were non-compliant with Year 2000 standards was less than $50,000.
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 is continuing 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 as it considers such a plan to be unnecessary. However, 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 problem that may
affect its operations, business, and financial condition.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
As described in Part I, Item 2 above, on October 1, 1999, the Company
issued the Series B Shares in a private placement. The Company relied on the
exemption from registration provided by Section 4(2) under the Securities Act of
1933 with respect to the sale of the Series B Shares. Additional information
regarding the issuance of the Series B Shares is contained in the Company's
Current Report on Form 8-K dated October 1, 1999, and filed October 12, 1999.
Such information is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits filed as part of this report or incorporated by
reference herein are listed in the accompanying exhibit index.
(b) Reports on Form 8-K. During the quarter ended October 31, 1999, the
Company filed a Current Report on Form 8-K dated October 1, 1999, reporting the
issuance of the Series B Shares.
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/ Scott E. Klein
Scott E. Klein
President and Chief Operating Officer
(Principal Financial Officer)
DATED: December 13, 1999
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EXHIBIT INDEX
-------------
Exhibit
Number Description of Exhibit
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27 Financial Data Schedule.
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<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 8,963
<SECURITIES> 0
<RECEIVABLES> 5,245
<ALLOWANCES> (1,015)
<INVENTORY> 513
<CURRENT-ASSETS> 14,653
<PP&E> 7,494
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,890
<CURRENT-LIABILITIES> 11,116
<BONDS> 2,635
0
25,601
<COMMON> 14,966
<OTHER-SE> (12,428)
<TOTAL-LIABILITY-AND-EQUITY> 41,890
<SALES> 8,862
<TOTAL-REVENUES> 10,142
<CGS> 3,051
<TOTAL-COSTS> 3,051
<OTHER-EXPENSES> 7,622
<LOSS-PROVISION> 98
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> (585)
<INCOME-TAX> 0
<INCOME-CONTINUING> (585)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (585)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
