SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB40
(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, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ----- TO
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Commission File No. 1-13851
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SONUS CORP.
(Name of small business issuer in its charter)
YUKON TERRITORY, CANADA NOT APPLICABLE
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
111 S.W. FIFTH AVENUE, SUITE 1620 97204
PORTLAND, OREGON (Zip code)
(Address of principal executive offices)
(503) 225-9152
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
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Title of Each Class Name of Each Exchange on Which Registered
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COMMON SHARES, WITHOUT NOMINAL OR PAR VALUE AMERICAN STOCK EXCHANGE
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Securities registered under Section 12(g) of the Exchange Act: NONE
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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 no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is 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. [X]
State the issuer's revenues for its most recent fiscal year:
$33,759,000.
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 18, 1999: $21,577,128.
State the number of shares outstanding of each of the issuer's classes
of common equity: Common Shares, without nominal or par value, 6,109,026 shares,
as of October 18, 1999.
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 9, 1999, are incorporated by reference into Part
III of this Form 10-KSB.
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TABLE OF CONTENTS
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PART I.....................................................................................................................1
ITEM 1. Description of Business............................................................................................1
ITEM 2. Description of Property...........................................................................................10
ITEM 3. Legal Proceedings.................................................................................................10
ITEM 4. Submission of Matters to a Vote of Security Holders...............................................................10
PART II...................................................................................................................11
ITEM 5. Market for Common Equity and Related Stockholder Matters..........................................................11
ITEM 6. Management's Discussion and Analysis or Plan of Operation.........................................................13
ITEM 7. Financial Statements..............................................................................................18
ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............................39
PART III..................................................................................................................40
ITEM 9. Directors, Executive Officers, Promoters, and Control Persons; Compliance with Section 16(a) of the Exchange Act..40
ITEM 10. Executive Compensation...........................................................................................40
ITEM 11. Security Ownership of Certain Beneficial Owners and Management...................................................40
ITEM 12. Certain Relationships and Related Transactions...................................................................40
ITEM 13. Exhibits and Reports on Form 8-K.................................................................................40
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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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
The Company was incorporated under the laws of the Province of Alberta,
Canada, in July 1993, under the name "575035 Alberta Ltd." The Company changed
its name to HealthCare Capital Corp. in October 1994, when it acquired nine
hearing care centers in British Columbia. The Company did not begin operating in
the United States until it purchased two hearing care centers near Santa Maria,
California, in July 1996. By vote of the shareholders, the Company changed its
name from HealthCare Capital Corp. to Sonus Corp. in February 1998, and changed
its jurisdiction of incorporation from Alberta, Canada, to Yukon Territory,
Canada, in December 1998. The Company, through its subsidiaries Sonus-USA, Inc.
("Sonus-USA"), Sonus-Texas, Inc. ("Sonus-Texas"), and Sonus-Canada Ltd.
("Sonus-Canada"), currently owns and operates 99 hearing care centers in the
United States and Western Canada. Centers owned by the Company are located in
the states of Arizona, California, Illinois, Michigan, Missouri, New Mexico,
Oregon, Texas, and Washington and in the Canadian provinces of British Columbia
and Alberta. The Company intends to expand its network of hearing care centers
by acquiring centers in its existing as well as new geographic markets.
Each of the Company's hearing care centers provides its hearing
impaired patients with a full range of audiological products and services.
During the fiscal year ended July 31, 1999, approximately 86% of the Company's
revenues were derived from product sales, including hearing instruments,
batteries, and accessories, 10% were derived from audiological services, and 4%
were from other sources.
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Substantially all of the Company's hearing care centers are staffed with
audiologists. The Company's operating strategy is to provide patients with high
quality and cost-effective hearing care while at the same time increasing its
operating margins by attracting and retaining patients, recruiting qualified and
productive audiologists and hearing instrument dispensers, achieving economies
of scale and administrative efficiencies, and pursuing large group and managed
care contracts. The Company believes that it is well positioned to provide
retail hearing rehabilitative services to consumers while simultaneously serving
the diagnostic needs of referring physicians and meeting the access and cost
concerns of managed care providers and insurance companies.
The Company, through its subsidiary Hear PO Corp., also operates as an
independent provider association and hearing care benefit administrator. 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.
The Company, through Sonus-USA, operates a franchise licensing program
called The Sonus Network. Licensees are entitled to use the Sonus name and
receive other benefits such as practice management advice and training, group
buying discounts, and marketing services. There are currently 64 licensees under
the licensing program with 116 locations in 20 states.
In August 1999, the Company launched its e-commerce program through its
internet site at www.sonus.com. Products that can be purchased through
www.sonus.com include gift certificates, hearing instrument batteries, assistive
listening devices, hearing protection items, educational materials, and
audiology equipment, supplies and accessories. Audiologists and hearing
instrument dispensers can also purchase hearing instruments for resale to their
patients. The Company believes that e-commerce poses substantial opportunities
for revenue growth and intends to continue to devote resources to enhancing its
web site and increasing product availability and differentiation.
INDUSTRY BACKGROUND
Professionals and Centers. Hearing instruments may be dispensed by either a
dispensing audiologist or a hearing instrument specialist ("HIS"). Although both
audiologists and HISs may be licensed to dispense hearing instruments,
audiologists have advanced training in audiology and hold either a masters or
Ph.D. degree.
The June 1998 issue of The Hearing Review, a hearing industry trade
journal, indicates that approximately 24% of HISs in the U.S. are at least 61
years of age, 30% are 51-60 years of age, 33% are 41-50 years of age and only
13% are age 40 or under, compared to 5%, 21%, 45% and 29%, respectively, for
dispensing audiologists. The Company believes that many HISs are facing
retirement with no formal "exit-strategy," a situation that creates an
attractive investment opportunity for the Company.
The typical hearing care practice wields little purchasing power with
manufacturers, and must spread overhead over a relatively small revenue base. In
addition, a typical hearing care practice often has insufficient capital to
purchase new technologies and lacks the systems and size necessary to develop
economies of scale. As a result, the Company believes that dispensing
audiologists and HISs will find it increasingly attractive to sell their
practices to or affiliate with larger organizations, such as the Company.
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Another factor that may favor the consolidation of hearing care
practices is managed care. As managed care becomes more pervasive, hearing care
professionals will have an even greater need for the information resources,
management expertise, economies of scale, and access to managed care group
contracts that larger organizations such as the Company may be better able to
provide. However, managed care is not presently a large part of the hearing care
market and hearing care products and services are likely to continue to be
provided predominantly on a private pay basis for the next several years.
Notwithstanding the factors favoring consolidation of hearing care
practices, there are currently only a few multiple center networks operating in
more than one state or province in the United States or Canada with combined
annual revenues in excess of $5 million.
Hearing Impaired Population. According to the 1996 edition of Communication
Facts, published by the American Speech-Language Hearing Association, the number
of persons in the United States who have hearing loss is estimated to be
approximately 28 million and the percentage of individuals with a hearing loss
relative to the general population is approximately 2% for those under 18 years
of age, 5% for those between 18 and 44 years of age, 14% for those between 45
and 64 years of age, 23% for those between 65 and 74 years of age, and 32% for
those over 75 years of age. In addition, the American Tinnitus Association
estimates that approximately 12 million American adults have tinnitus (a ringing
sensation in the ears) that is severe enough to seek medical help.
The Company believes that the widely recognized demographic trend
toward an aging population will increase the demand for hearing instrument sales
and audiological services and that the demand for hearing instruments that are
less visible and for newer and superior hearing instrument technology, such as
digital and programmable hearing instruments, will also contribute to market
growth. In addition, the Company believes that some individuals forgo hearing
care because of the stigma of aging that can be associated with wearing a
hearing instrument and that the demand for hearing instrument sales and hearing
care services can be increased by marketing and education designed to reduce
that stigma.
Hearing Health Care Industry Segments. The hearing health care industry serving
patients with hearing and balance disorders is comprised of four distinct
service segments:
hearing rehabilitation services, including the evaluation and
rehabilitation of persons with hearing impairments by assessing
communicative impairment and providing amplification;
advanced audio-diagnostic services, including the neuro-audiologic
evaluation and non-medical diagnosis of hearing and balance disorders;
industrial and preventative audiological services, including noise
level measurements, dosimetry, and hearing screenings; and
otolaryngologic services, including surgery and other medical
treatment.
The Company's centers primarily provide hearing rehabilitation
services. The Company has two facilities, one located in Calgary, Alberta, and
the other in Orange County, California, that provide advanced audio-diagnostic
services and one center located in San Diego, California, that provides
evaluation and treatment for patients with tinnitus. The Company also operates
the Sonus Hearing Institute, a state-of-the art hearing healthcare research and
training facility, adjacent to the Company's corporate offices in Portland,
Oregon.
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Hearing rehabilitation services include the assessment and
rehabilitation of persons with hearing impairments through the use of hearing
instruments and counseling. Rehabilitation services, including amplification
systems, are provided by audiologists and HISs. The services offered include the
diagnostic audiological testing, fitting and dispensing of hearing instruments,
follow-up rehabilitative assistance, the sale of hearing instrument batteries,
hearing instrument repairs, and the sale of swim plugs, custom ear plugs, and
assistive listening devices.
Advanced audio-diagnostic services include the assessment and
non-medical treatment of vestibular and balance disorders and the evaluation of
patients with specific symptoms of an auditory or vestibular disorder, including
hearing loss, tinnitus, and balance problems. In order to make a differential
diagnosis of hearing disorders, an ear, nose and throat physician may employ or
refer patients to an audiologist to conduct special diagnostic hearing tests to
differentiate between conductive, sensory, and neural pathology. If the cause of
the hearing loss is a medical disorder in either the nervous system (neural) or
the middle ear (conductive), the physician proceeds with medical treatment.
However, if a non-treatable conductive or sensory loss is found, the physician
will generally refer the patient to an audiologist for rehabilitation.
GROWTH STRATEGY
The Company's growth strategy involves expanding its operations by
selectively acquiring hearing centers located in existing as well as new
geographic markets and by increasing the number of licensees under the Company's
franchise licensing program. The Company believes that the fragmented nature of
the hearing care industry, the absence of industry-wide standards, and the
inexperience and limited capital resources of many hearing care providers,
combine to provide an opportunity to build an expanding network of Company-owned
and licensed hearing care centers devoted to providing high-quality hearing
health care services.
The Company works to expand its network of Company-owned centers in
each new market by initially targeting for acquisition a significant hearing
care practice in order to secure a solid foundation upon which to build a
regional network of audiology practices. The Company then seeks to acquire
additional individual or group practices in order to realize economies of scale
in management, marketing, and administration, in hopes that its initial purchase
in the region will attract other practitioners interested in selling their
businesses. Due to the contacts of management with audiologists in the industry,
the Company is frequently presented with opportunities to acquire hearing care
centers. From August 1, 1996, to September 30, 1999, the Company acquired 108
centers, all located in the United States.
The Company looks at the following factors before acquiring centers in
a particular geographic market: (a) population size and distribution; (b)
audiology practice density, saturation and average group size; (c) local
competitors; (d) level of managed care penetration; and (e) local industry and
economy. In acquiring particular centers within a geographic market, the Company
seeks centers with the following characteristics: (a) an established patient
base drawing from a substantial metropolitan population; (b) significant revenue
and profitability prior to acquisition; and (c) above-average potential to
enhance center profitability after acquisition.
Prior to acquiring a hearing care center, the Company conducts a due
diligence investigation of the center's operations that includes an analytical
review of the center's financial statements, tax returns, and other operating
data, a review of patient files on a random sample basis, a review of credit
reports, contracts, bank deposits, and other documents and information that the
Company deems significant, and the preparation of financial projections. Based
on the information collected and analyzed during the due diligence review, the
Company determines an appropriate purchase price for the acquisition.
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The Company generally uses cash, promissory notes, assumption of debt,
or a combination of the foregoing to fund acquisitions. The amount paid for each
practice varies on a case-by-case basis according to historical revenues,
projected earnings after integration into the Company, and transaction
structure. In connection with each acquisition, the Company acquires
substantially all of the assets of the practice, including its audiological
equipment and supplies, office lease and improvements, and patient files. At the
time a practice is acquired, the audiologists and hearing instrument dispensers
associated with the practice typically become employees of the Company.
There can be no assurance that the Company will be able to continue to
complete acquisitions consistent with its expansion plans, that such future
acquisitions will be on terms favorable to the Company, or that the Company will
be able to successfully integrate the hearing care centers that it acquires into
its business. Successful integration is dependent upon maintaining payor and
customer relationships and converting the management information systems of the
centers the Company acquires to the Company's systems. Significant expansion
could place excessive strain on the Company's managerial and other resources and
could necessitate the hiring of additional managerial and administrative
personnel. Unforeseen problems with future acquisitions or failure to manage
expansion effectively may have a material adverse effect on the business,
financial condition, and results of operations of the Company.
OPERATING STRATEGY
The Company's operating strategy is to provide its patients with high
quality and cost effective hearing care products and services while at the same
time increasing its operating margins by attracting and retaining patients,
recruiting qualified and productive audiologists, achieving economies of scale
and administrative efficiencies, and pursuing large group and managed care
contracts.
Attracting and Retaining Patients. The Company seeks to attract new patients and
retain existing patients at each center by providing patients with friendly,
comprehensive, and cost-effective hearing care at convenient times and
locations. In addition, by educating patients about hearing health issues and by
providing quality service during office visits and consistent patient follow-up
and support, the Company hopes to foster patient loyalty and increase the
likelihood of obtaining referrals and repeat visits for examinations and product
purchases.
Recruiting Qualified and Productive Audiologists. Audiologists employed by the
Company are primarily responsible for center profitability as well as for
attracting and retaining customers. The Company seeks to employ audiologists who
share the Company's goal of delivering high-quality hearing care service and who
are also dedicated to expanding and enhancing their practices. The Company has
developed an intensive four-week in-house training course called the Greenhouse
Program(R) for its audiologists that focuses on clinical audiology skills as
well as private practice business management. The Company believes that the
Greenhouse Program(R) can significantly increase employee performance and
improve customer service. The Company also believes that it can offer
significant benefits to private practice audiologists by providing assistance in
administrative tasks associated with operating an audiology practice, thereby
allowing them to focus on serving patients and increasing productivity.
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Achieving Economies of Scale and Administrative Efficiencies. A key operating
strategy of the Company is to achieve increased economies of scale and
administrative efficiencies at each of its centers. When a center is acquired by
the Company, it immediately has available to it terms and discounts with hearing
instrument manufacturers that are generally more favorable than it could
negotiate independently. In addition, the Company believes that by centralizing
certain management and administrative functions such as marketing, billing,
collections, human resources, risk management, payroll, and general accounting
services, the profitability of a center can be improved by spreading the cost of
such functions over a larger revenue base. The Company has developed an on-line
management information system that links a substantial number of the Company's
centers with the Company's corporate headquarters in order to provide management
with the ability to collect and analyze center data, control overhead expenses,
allow detailed budgeting at the center level, and permit effective resource
management. All of the Company's centers are expected to be on-line by May 2000.
Pursue Large Group and Managed Care Contracts. Although the Company intends to
continue to aggressively pursue private-payor business because it is presently
more pervasive and profitable than managed care business, the Company believes
that by providing comprehensive geographic coverage in a particular market
through its Company-owned centers and through its licensees, it will be well
positioned to offer services to group hearing care plans in that market. Managed
care arrangements typically shift some of the economic risk of providing patient
care from the person who pays for the care to the provider of the care by
capping fees, requiring reduced fees, or paying a set fee per patient
irrespective of the amount of care delivered. With respect to hearing care, such
limits could result in reduced payments for services or restrictions on the
types of services for which reimbursement is available or the frequency of
replacements or upgrades of equipment. At the present time, managed care
penetration of the hearing care market is limited. However, if managed care
begins to play a larger role in hearing care, the Company plans to develop
information systems to improve productivity, manage complex reimbursement
methodologies, measure patient satisfaction and outcomes of care, and integrate
information from multiple sources.
Many third-party insurers impose restrictions in their health insurance
policies on the frequency with which hearing instruments may be upgraded or
replaced on a reimbursable basis. Such restrictions have a negative impact on
hearing instrument sales volume. There can be no guarantee that such insurers
will not implement other policy restrictions in the future in order to further
minimize reimbursement for hearing care. Such restrictions could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
CENTER STAFFING AND FACILITIES
Typically, each Company-owned hearing center is staffed with at least
one audiologist and one patient care coordinator, who handles scheduling and
clerical functions. Where volume warrants, a center may also be staffed with
additional audiologists, hearing instrument dispensers, and patient care
coordinators. An audiologist employed by the Company has a masters or Ph.D.
degree in audiology. The audiologist is licensed by the appropriate state or
province to dispense hearing instruments and is a member of the American
Speech-Language Hearing Association or the Canadian Association of
Speech/Language Pathologists and Audiologists.
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Each of the Company's hearing centers operates in leased space that
ranges in size from 800 to 3,000 square feet depending on patient volume and the
extent of services provided by the center. Centers generally have a reception
seating area, a reception work and filing area, an office for the audiologist or
hearing instrument dispenser, a laboratory for hearing instrument repairs and
modifications, a technology demonstration room and an evaluation room. A
properly equipped office offering only hearing rehabilitation services requires
equipment that costs $50,000 to $75,000. The cost of equipment for a center
offering advanced audio-diagnostic services is much greater and ranges from
$225,000 to $250,000.
PRODUCTS AND SUPPLIERS
The hearing instrument manufacturing industry is highly competitive
with approximately 40 manufacturers serving the worldwide market. Few
manufacturers offer significant product differentiation. The Company currently
purchases a large percentage of its hearing instruments from six primary
manufacturers based upon criteria that include quality, price, and service. The
Company recently began offering a line of private-label hearing instruments that
is being marketed as the Sonus Digital Hearing System. In addition to hearing
instruments, the Company's centers also offer a limited selection of other
assistive listening devices and hearing instrument accessories.
MARKETING
The Company's marketing program is designed to help its hearing care
centers retain existing patients and expand the services they receive, attract
new patients, and develop contracts to serve large groups of patients.
The Company believes that patient satisfaction is the key to retaining
and expanding services to existing patients. The Company also believes that
delivering comfortable, high quality hearing care at times and locations that
are convenient for the patient will motivate patients to return to the Company's
centers for their future hearing care needs. Educating patients about hearing
health, prescribing only necessary hearing enhancing products, ensuring that
each patient leaves a center with a future visit already scheduled, and
maintaining consistent patient follow-up and support are key elements of the
Company's plan to build patient loyalty and patronage.
After a patient has obtained a hearing instrument, ongoing revenues are
generated from battery purchases and routine maintenance of the instruments. The
Company believes that repeat revenues are attributable to the length of time
that a center has been established and the effectiveness of its patient
retention programs.
The Company believes that the same aspects of the Company's approach
that earn the loyalty of current patients will also generate new patients. The
Company's new patient marketing programs are designed to help the Company
generate referrals from physicians and existing patients and increase the
Company's visibility in the community. The Company seeks to foster such
visibility by developing marketing materials and information sources that
communicate the Company's philosophy of high quality patient-oriented hearing
care.
The Company's large group marketing approach is designed to enable the
Company to develop contacts with self-insured employers and with health plans in
the metropolitan areas it serves and emphasizes the convenience, quality of
care, and wide range of services offered by the Company. The economies of scale
available to the Company may also allow health plans and self-insured employers
served by the Company to reduce administrative burdens they might otherwise
face. The Company believes that it is well positioned to respond to challenges
presented by the growth of managed care arrangements as they arise.
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COMPETITION
The hearing care industry in the United States and Canada is highly
fragmented and intensely competitive. Many of the Company's competitors are
small retailers that focus primarily on the sale of hearing instruments.
However, the Company also competes with other networks of hearing care centers
and with large distributors of hearing instruments such as Dahlberg, Inc, a
hearing instrument manufacturer that distributes its products through a national
network of over 1,000 franchised and company-owned stores (Miracle-Ear), and
Beltone Electronics Corp., a hearing instrument manufacturer that distributes
its products primarily through its nationwide network of approximately 600
franchised dealers. These competitors are in many cases better known and owned
by companies having far greater financial and other resources than the Company.
There can be no assurance that one or more of these competitors will not seek to
compete directly in the markets targeted by the Company, nor can there be any
assurance that the largely fragmented hearing care market cannot be successfully
consolidated by other companies or through the establishment of co-operatives,
alliances, confederations or the like.
REGULATION
The sale of hearing instrument devices is regulated at the federal
level in the United States by the United States Food and Drug Administration
("FDA"), which has been granted broad authority to regulate the hearing care
industry. Under federal law, hearing instruments may only be sold to individuals
who have first obtained a medical evaluation from a licensed physician, although
a fully informed adult may waive a medical evaluation in certain instances.
Regulations promulgated by the FDA also presently require that dispensers of
hearing instruments provide customers with certain warning statements and
notices in connection with the sale of hearing instruments and that such sales
be made in compliance with certain labeling requirements.
Most states in the United States and many provinces in Canada have
established formal licensing procedures that require the certification of
audiologists and/or HISs. Although the extent of regulation varies by
jurisdiction, almost all states and provinces engage in some degree of oversight
of the industry. The Company operates its hearing care centers through its
wholly owned subsidiaries, Sonus-USA, Sonus-Texas, and Sonus-Canada. These
subsidiary corporations employ licensed audiologists and HISs who offer and
perform audiology services and dispense hearing instruments on behalf of the
Company.
In certain states in the United States, business corporations such as
Sonus-USA may not be authorized to employ audiologists and offer audiology
services. For example, in California, where the Company operates a number of
centers, although the performance of audiology services by professional
corporations owned solely by licensed audiologists is expressly authorized under
California law, it is unclear whether general business corporations such as
Sonus-USA may employ licensed audiologists to perform audiology services.
However, the California Department of Consumer Affairs has indicated by
memorandum that speech-language pathologists, which are regulated under statutes
and regulations similar to those governing audiologists, may practice in a
general business corporation and that a general business corporation may provide
speech-language pathology services through licensed speech pathologists. In
Illinois, where the Company also operates a number of centers, it is also
unclear whether general business corporations may employ licensed audiologists
to perform audiology services. Under Illinois law, only professional
corporations and individuals are authorized to obtain licenses to practice
audiology.
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The laws and regulations governing the practice of audiology are
enforced by regulatory agencies with broad discretion. If the Company were found
to be in violation of such laws and regulations in one or more states, the
consequences could include the imposition of fines and penalties upon the
Company and its audiologists as well as the issuance of orders prohibiting the
Company from operating its centers under its present structure. In that event,
among the solutions the Company might consider would be the restructuring of all
or a portion of its operations in a manner similar to that used by certain
medical and dental center networks. Under such a structure, professional
corporations owned by licensed audiologists would contract with the Company to
perform professional services and the Company would contract with the
professional corporations to provide management services.
No assurance can be given that the Company's activities will be found
to be in compliance with laws and regulations governing the corporate practice
of audiology or, if its activities are not in compliance, that the operational
structure of the Company can be modified to permit compliance. In addition, no
assurance can be given that other states or provinces in which the Company
presently operates will not enact prohibitions on the corporate practice of
audiology or that the regulatory framework of certain jurisdictions will not
limit the ability of the Company to expand into such jurisdictions if the
Company is unable to modify its operational structure to comply with such
prohibitions or to conform with such regulatory framework. Additional laws and
regulations may be adopted in the future at the federal, state, or province
level that could have a material adverse effect on the business, financial
condition, and results of operations of the Company.
A portion of the revenues of the hearing care centers operated by the
Company comes from Medicare and Medicaid programs. Federal law prohibits the
offer, payment, solicitation or receipt of any form of remuneration in return
for, or in order to induce, (i) the referral of a Medicare or Medicaid patient,
(ii) the furnishing or arranging for the furnishing of items or services
reimbursable under Medicare or Medicaid programs or (iii) the purchase, lease or
order of any item or service reimbursable under Medicare or Medicaid.
Noncompliance with the federal anti-kickback legislation can result in exclusion
from Medicare and Medicaid programs and civil and criminal penalties.
Because of its franchise licensing program, The Sonus Network, the
Company is subject to state and federal regulation of franchising. Much of this
regulation involves providing detailed disclosure to a prospective franchisee
and periodic registration by the franchisor with state administrative agencies.
Additionally, some states have enacted, and others have considered, legislation
that governs the termination or non-renewal of a franchise agreement and other
aspects of the franchise relationship. The United States Congress has also
considered legislation of this nature. The Company believes that it has complied
with all applicable franchise laws and regulations.
PRODUCT AND PROFESSIONAL LIABILITY; PRODUCT RETURNS
In the ordinary course of its business, the Company may be subject to
product and professional liability claims alleging the failure of, or adverse
effects claimed to have been caused by, products sold or services provided by
the Company. The Company maintains insurance against such claims at a level that
the Company believes is adequate. A customer may return a hearing instrument to
the Company and obtain a full refund up to 60 days (75 days for certain models)
after the date of purchase. In general, the Company can return hearing
instruments returned by customers within the return period allowed by the
Company to the manufacturer for a full refund. The Company maintains an accrual
based on estimated returns to account for returns that cannot be passed through
to the manufacturers and must be absorbed by the Company.
-9-
<PAGE>
EMPLOYEES
At October 1, 1999, the Company had 269 full-time and 89 part-time
employees, of which 100 are audiologists or hearing instrument dispensers
practicing full time and 24 are practicing part-time. None of the Company's
employees are represented by a labor union. Management believes it maintains
good relationships with its employees.
SERVICE AND ENFORCEMENT OF LEGAL PROCESS
The Company is incorporated under the laws of Yukon Territory, Canada.
Two of the Company's directors are residents of Canada and all or a portion of
the assets of such persons and of the Company are located outside of the United
States. As a result, it may be difficult for holders of the Company's securities
to effect service within the United States upon those directors who are not
residents of the United States, or to realize in the United States upon
judgments of courts of the United States predicated upon the civil liability
provisions of the United States federal securities laws to the extent such
judgments exceed such person's United States assets. There is doubt as to the
enforceability in Canada against the Company or against any of its directors who
are not residents of the United States, in original actions or in actions for
enforcement of judgments of United States courts, of liabilities predicated
solely upon United States federal securities laws. The Company's agent for
service of process in the United States is MN Service Corp. (Oregon), 111 S.W.
Fifth Avenue, Suite 3500, Portland, Oregon 97204, telephone (503) 224-5858.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices are located in approximately 12,400
square feet of leased office space in downtown Portland, Oregon. The lease
expires on September 30, 2004 and provides for an annual base rent of $235,200
until October 1, 2003, when the annual base rent increases to $273,060. Each of
the Company's hearing centers operates in leased space that ranges in size from
800 to 3,000 square feet. Approximately 65 percent of the locations are leased
for one to eight-year terms pursuant to generally non-cancelable leases (with
renewal options in some cases) with the remaining locations leased on a month-to
month basis. The aggregate committed rental expense as of July 31, 1999, for the
subsequent five-year period is approximately $5.7 million.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-10-
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON SHARES
The Company's common shares ("Common Shares") were traded on The
Alberta Stock Exchange until February 10, 1998, at which time they began trading
on the American Stock Exchange. The following table sets forth the reported high
and low sales prices in Canadian and United States dollars for the Common Shares
for the periods indicated:
<TABLE>
FISCAL YEAR PERIOD HIGH LOW HIGH LOW
CANADIAN $(2) UNITED STATES $(1)
<S> <C> <C> <C> <C>
1998................................. First Quarter 10.75 7.75 7.75 5.60
Second Quarter 13.00 8.50 9.05 6.00
Third Quarter 13.64 10.84 9.50 7.63
Fourth Quarter 14.36 9.15 9.50 6.25
1999................................. First Quarter 14.966 6.945 9.875 4.500
Second Quarter 8.237 4.899 5.375 3.188
Third Quarter 8.588 6.165 5.750 4.125
Fourth Quarter 7.180 5.894 4.938 4.000
</TABLE>
- -----------
(1) For reported prices prior to February 10, 1998, the high and low sales
prices were converted to United States dollars as of the date of sale.
(2) For reported prices after February 10, 1998, the high and low sales
prices were converted to Canadian dollars as of the date of sale.
HOLDERS AND DIVIDENDS
As of October 1, 1999, there were 56 holders of record of Common
Shares.
For as long as Warburg, Pincus Ventures, L.P., beneficially owns at
least 666,666 Series A Convertible Preferred Shares or Series B Convertible
Preferred Shares or the Common Shares into which such preferred shares are
convertible, the Company may not, without such holder's consent, pay any
dividend or distribution on its Common Shares.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
Following is a summary of the principal Canadian federal income tax
considerations under the Income Tax Act (Canada) (the "Tax Act") and the
regulations thereunder generally applicable to a holder of Common Shares who,
for purposes of the Tax Act, holds such shares as capital property and deals at
arm's length with the Company. Generally, Common Shares will be considered to be
capital property to a holder provided the holder does not hold the Common Shares
in the course of carrying on a business of trading or dealing in securities and
has not acquired them in one or more transactions considered to be an adventure
in the nature of trade. Special rules apply to non-resident insurers that carry
on an insurance business in Canada and elsewhere.
This summary is based upon the provisions of the Tax Act in force as of
the date hereof, all specific proposals to amend the Tax Act that have been
publicly announced prior to the date hereof (the "Proposed Amendments") and the
Company's understanding of the current published administrative and assessing
policies and practices of Revenue Canada, Customs, Excise and Taxation ("Revenue
Canada"). For the purposes of this summary, it has been assumed that the Tax Act
will be amended as proposed, although no assurance can be given in this regard.
This summary is not exhaustive of all possible federal income tax consequences
and, except for the Proposed Amendments, does not anticipate any changes in the
law, whether by legislative, governmental or judicial decision or action, nor
does it take into account provincial, territorial or foreign tax considerations,
which may differ significantly from those discussed herein. This summary is not
applicable to holders who are "specified financial institutions" for purposes of
the Tax Act, a holder that is a "financial institution" as defined in the Tax
Act for purposes of the mark-to-market rules, or to a holder of an interest
which would be a "tax shelter investment" as defined in the Tax Act.
-11-
<PAGE>
This summary is of a general nature only and is not intended to be, and
should not be construed to be, legal or tax advice to any particular holder.
Accordingly, holders should consult their independent tax advisers for advice
with respect to the income tax consequences relevant to their particular
circumstances.
The following applies to holders of Common Shares who are not resident
in Canada for purposes of the Tax Act and who do not use or hold and are not
deemed to use or hold their Common Shares in, or in the course of, carrying on a
business in Canada.
Dispositions of Common Shares. A non-resident holder will, upon a disposition or
deemed disposition of Common Shares, not be subject to taxation in Canada on any
gain realized on the disposition unless the shares are "taxable Canadian
property" for the purposes of the Tax Act and no relief is afforded under an
applicable tax convention between Canada and the country of residence of the
holder. Since the Common Shares are listed on a prescribed stock exchange for
the purposes of the Tax Act, Common Shares held by a non-resident holder will
generally not be "taxable Canadian property" unless, at any time during the
five-year period immediately preceding the disposition, the non-resident holder,
persons with whom the non-resident holder did not deal at arm's length, or the
non-resident holder together with such persons, owned or had the right to
acquire 25% or more of the issued shares of any class of the capital of the
Company. Any interest in shares or options in respect of shares will be
considered to be the equivalent of ownership of such shares for purposes of the
definition of taxable Canadian property.
Non-residents whose shares constitute "taxable Canadian property" will
be subject to taxation in respect of a disposition or deemed disposition of
Common Shares on the same basis as Canadian residents unless otherwise exempted
by an applicable tax convention between Canada and the country of residence of
the holder.
Pursuant to the Canada-United States Income Tax Convention, 1980 (the
"Convention"), shareholders of the Company that are residents in the United
States for the purposes of the Convention and whose shares might otherwise be
"taxable Canadian property" may be exempt from Canadian taxation in respect of
any gains on the disposition of the Common Shares, provided the principal value
of the Company is not derived from real property located in Canada at the time
of disposition.
Non-resident holders who might hold their Common Shares as "taxable
Canadian property" should consult their own tax advisers with respect to the
income tax consequences of a disposition of their Common Shares.
Non-resident holders whose shares are repurchased by the Company,
except in respect of certain purchases made by the Company in the open market,
will be deemed to have received the payment of a dividend by the Company in an
amount equal to the excess paid over the paid-up capital of the Common Shares so
purchased. Such deemed dividend will be excluded from the holder's proceeds of
disposition of the Common Shares for the purposes of computing any capital gain
or loss but will be subject to Canadian non-resident withholding tax in the
manner described below under "Dividends."
Dividends. Dividends received by a non-resident holder of Common Shares will be
subject to Canadian withholding tax at the rate of 25% of the amount thereof
unless the rate is reduced under the provisions of an applicable tax convention
between Canada and the country of residence of the holder. The provisions of the
Convention generally reduce the rate to 15%. A further reduction to 5% under the
Convention will be available if the recipient is a company which owns at least
10% of the voting shares of the Company.
-12-
<PAGE>
INVESTMENT CANADA ACT
The Investment Canada Act (the "ICA") prohibits the acquisition of
control of a Canadian business by non-Canadians without review and approval of
the Investment Review Division of Industry Canada, the agency that administers
the ICA, unless such acquisition is exempt from review under the provisions of
the ICA. The Investment Review Division of Industry Canada must be notified of
such exempt acquisitions. The ICA covers acquisitions of control of corporate
enterprises, whether by purchase of assets, shares or "voting interests" of an
entity that controls, directly or indirectly, another entity carrying on a
Canadian business.
Apart from the ICA, there are no other limitations on the right of
nonresident or foreign owners to hold or vote securities imposed by Canadian law
or the Company's Articles. There are no other decrees or regulations in Canada
that restrict the export or import of capital, including foreign exchange
controls, or that affect the remittance of dividends, interest or other payments
to nonresident holders of the Company's Common Shares, except as discussed
elsewhere herein.
SALES OF UNREGISTERED SECURITIES DURING FISCAL 1999
There were no securities of the Company issued without registration
under the Securities Act of 1933 during the fiscal year ended July 31, 1999,
except as previously reported in the Company's quarterly reports on Form 10-QSB
filed during the fiscal year.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
During the fiscal year ended July 31, 1999, the Company achieved
significant growth in revenues, primarily due to the acquisition and operation
of additional hearing care centers. For the fiscal year ended July 31, 1999, the
Company generated total revenues of $33.8 million, an increase of 51% over
fiscal 1998. For the fiscal year ended July 31, 1999, the Company incurred a net
loss of $4.9 million, compared to a net loss of $4.6 million for the 1998 fiscal
year. As of July 31, 1999, the Company's accumulated deficit was $11.6 million
and its total shareholders' equity was $18.8 million.
ACQUISITIONS
During the fiscal year ended July 31, 1999, the Company acquired 31
hearing care centers in 17 transactions. The aggregate purchase price for the
acquisitions consisted of cash payments of $1,704,000, promissory notes issued
by the Company of $1,749,000 generally payable over three years, and $900,000 in
assumed liabilities. As a result of the acquisitions, the Company recorded
approximately $95,000 in accounts receivable, $90,000 in inventory, $457,000 in
property and equipment, $20,000 in other assets, and $3,700,000 in goodwill,
which included costs related to acquisitions. The Company also recorded $299,000
for covenants not to compete, of which $79,000 was paid in cash at the time of
closing, with the balance payable over three years.
The 31 hearing care businesses acquired by the Company during the
fiscal year ended July 31, 1999, have combined historical revenues for their
immediately preceding fiscal years of approximately $8.6 million. The Company
expects these centers to contribute to the Company's future revenues consistent
with their historical revenues, as well as to have a positive effect on cash
flows and liquidity.
-13-
<PAGE>
As of July 31, 1999, the Company had recorded $19,774,000 in goodwill
and $2,226,000 in covenants not to compete. The amortization of the unamortized
balance totaling $19,768,000 at July 31, 1999, which represented approximately
63% of the Company's total assets, will result in an annual non-cash charge to
earnings of approximately $948,000 in each of the next 20 years. If all of the
employees with covenants not to compete referred to above were to leave the
Company, an additional non-cash charge to earnings of approximately $677,000 in
each of the current and next two fiscal years would also be incurred.
RESULTS OF OPERATIONS
Year Ended July 31, 1999, Compared to Year Ended July 31, 1998
Revenues. Total revenues for the fiscal year ended July 31, 1999, were
$33,759,000, representing a 51% increase over revenues of $22,368,000 for the
prior fiscal year. The increase was primarily due to the 31 businesses acquired
during fiscal 1999. Revenue was also favorably impacted by an increase of 5% in
comparable center revenue in fiscal 1999. Comparable centers are those centers
that have been open at least 24 months. Product sales revenues were $29,044,000
for the 1999 fiscal year, up 55% from the $18,792,000 for fiscal 1998.
Audiological service revenues increased from $3,311,000, or 15% of total
revenues, in fiscal 1998, to $3,392,000, or 10% of total revenues, for the 1999
fiscal year.
Gross Profit on Product Sales. Product gross profit for the fiscal year
ended July 31, 1999, was $18,278,000 compared to $11,080,000 for the prior
fiscal year. Gross profit percentage on product sales increased to 63% for
fiscal 1999 from 59% for fiscal 1998. The increase in gross profit percentage on
product sales was primarily attributable to increased buying power with hearing
instrument manufacturers, less dependence on sales discounts, better price
management and a new tiered pricing strategy based on levels of technology.
Clinical Expenses. As a percentage of revenues, clinical expenses
decreased to 53% for the fiscal year ended July 31, 1999, compared to 55% for
the fiscal year ended July 31, 1998. The percentage decrease was due to the
Company's ability to cut costs, streamline its operations, and eliminate
inefficient and duplicative processes. Clinical expenses for the fiscal year
ended July 31, 1999, were $17,795,000, representing an increase of 45% over
clinical expenses of $12,297,000 for the prior fiscal year. This increase was
primarily due to clinical expenses associated with the 31 additional businesses
that were acquired by the Company during the fiscal year ended July 31, 1999.
Clinical expenses include all personnel, marketing, occupancy and other
operating expenses at the center level.
General and Administrative Expenses. As a percentage of revenues,
general and administrative expenses decreased to 22% for the fiscal year ended
July 31, 1999, versus 26% for the same period in the prior fiscal year. The
decrease in general 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, as well as an administrative
restructuring and cost-cutting program implemented by the Company in fiscal
1999. General and administrative expenses in dollar terms increased 29% from
$5,896,000 for the fiscal year ended July 31, 1998, to $7,583,000 for the fiscal
year ended July 31, 1999, due to planned increases in corporate staff and other
corporate expenses related to the operation of a larger organization.
-14-
<PAGE>
Depreciation and Amortization Expense. Depreciation and amortization
expense for the fiscal year ended July 31, 1999, was $2,450,000, an increase of
80% over the depreciation and amortization expense of $1,361,000 for the prior
fiscal year. The increase resulted from the depreciation of property and
equipment and amortization of goodwill and covenants not to compete associated
with the 31 additional businesses acquired by the Company during the fiscal year
ended July 31, 1999, as well as from depreciation and amortization associated
with businesses acquired in the second half of fiscal 1998.
Interest Income and Expense. Interest income for the fiscal year ended
July 31, 1999, decreased to $261,000 from $452,000 for the prior fiscal year.
The decrease was due to lower balances of cash and short-term investments held
by the Company. Interest expense for the fiscal year ended July 31, 1999, was
$300,000 compared to $149,000 for the fiscal year ended July 31, 1998, due to
higher balances of long-term debt incurred in connection with acquisitions.
Net Loss. For the fiscal year ended July 31, 1999, the Company had a
net loss of $4,884,000 compared to a net loss of $4,594,000 for the fiscal year
ended July 31, 1998. The Company's loss from operations before depreciation and
amortization for fiscal 1999 was $2,385,000 compared to an operating loss before
depreciation and amortization of $3,537,000 for fiscal 1998.
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.
Clinical Expenses. 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 and branding programs, 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.
-15-
<PAGE>
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 property and
equipment 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 a sale of preferred shares 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.
Net Loss. For the fiscal year ended July 31, 1998, the Company had a
net loss of $4,594,000 compared to a net loss of $1,701,000 for the fiscal year
ended July 31, 1997. The Company's loss from operations before depreciation and
amortization for fiscal 1998 was $3,537,000 compared to a loss of $943,000 for
fiscal 1997.
LIQUIDITY AND CASH RESERVES
For the fiscal year ended July 31, 1999, net cash used in operating
activities was $2,281,000 compared to $2,203,000 for fiscal 1998 and $606,000
for fiscal 1997. Net cash provided by investing activities was $878,000 in
fiscal 1999 compared to net cash used in investing activities of $11,786,000 in
fiscal 1998 and $4,021,000 in fiscal 1997. The Company sold short-term
investments to fund acquisitions and provide working capital during fiscal 1999
in contrast to its purchase of short-term investments in fiscal 1998 and fiscal
1997 following the sale of preferred shares in the second quarter and the sale
of common shares and warrants in fiscal 1997. Net cash provided by financing
activities was $5,742,000 in fiscal 1997 and $15,817,000 in fiscal 1998 compared
to net cash used in financing activities of $821,000 in fiscal 1999. The change
was primarily the result of funds provided by the sale of common shares and
warrants in fiscal 1997 and the sale of preferred shares in fiscal 1998.
On October 1, 1999, the Company issued 2,500,000 Series B Convertible
Preferred Shares in a private placement for $10,000,000 in cash. As a result,
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 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.
-16-
<PAGE>
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 is expected to begin in November 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 Company estimates that the replacement of this
equipment will be completed before December 31, 1999, and that the cost of
replacement will be 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 and is 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 problem that may affect its operations, business, and financial
condition.
ACCOUNTING PRONOUNCEMENTS
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
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. As 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 statements.
-17-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
SONUS CORP.:
We have audited the accompanying consolidated balance sheets of Sonus Corp. and
subsidiaries as of July 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended July 31, 1999. 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, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the years in the
three-year period ended July 31, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
Portland, Oregon
October 25, 1999
-18-
<PAGE>
SONUS CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
July 31,
----------------------------
1999 1998
-------- --------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 498 $ 2,720
Short-term investments, available for sale --- 6,408
Accounts receivable, net of allowance for doubtful
accounts of $907 and $684, respectively 3,666 3,339
Other receivables 346 515
Inventory 499 967
Prepaid expenses 340 270
-------- --------
Total current assets 5,349 14,219
Property and equipment, net 6,208 3,607
Other assets 60 151
Goodwill and covenants not to compete, net 19,768 16,152
-------- ---------
$ 31,385 $ 34,129
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loan $ --- $ 46
Note payable-related party 500 ---
Accounts payable 3,727 2,879
Accrued payroll 1,223 1,110
Other accrued liabilities 1,317 2,595
Convertible notes payable 931 ---
Capital lease obligation, current portion 129 120
Long-term debt, current portion 2,150 1,160
-------- --------
Total current liabilities 9,977 7,910
Convertible notes payable --- 1,170
Capital lease obligation, less current portion 96 223
Long-term debt, less current portion 2,497 1,733
-------- --------
Total liabilities 12,570 11,036
-------- --------
Shareholders' equity:
Series A convertible preferred stock, no par
value per share, 13,333,333 shares authorized,
issued, and outstanding (liquidation preference of $18,000) 15,701 15,701
Common stock, no par value per share, unlimited
number of shares authorized, 6,109,026 and 6,079,908
shares, respectively, issued and outstanding 14,976 14,615
Notes receivable from shareholders (93) (283)
Accumulated deficit (11,595) (6,711)
Accumulated other comprehensive loss (174) (229)
-------- --------
Total shareholders' equity 18,815 23,093
-------- --------
$ 31,385 $ 34,129
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
SONUS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
Years ended July 31,
-----------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Product $ 29,044 $ 18,792 $ 11,472
Service 3,392 3,311 1,943
Other 1,323 265 47
---------- ---------- ----------
Net revenues 33,759 22,368 13,462
Costs and expenses:
Cost of products sold 10,766 7,712 5,010
Clinical expenses 17,795 12,297 5,985
General and administrative expenses 7,583 5,896 3,410
Depreciation and amortization 2,450 1,361 790
---------- ---------- ----------
Total costs and expenses 38,594 27,266 15,195
---------- ---------- ----------
Loss from operations (4,835) (4,898) (1,733)
Other income (expense):
Interest income 261 452 76
Interest expense (300) (149) (47)
Other, net (10) 1 3
---------- ---------- ----------
Net loss $ (4,884) $ (4,594) $ (1,701)
========== ========== ==========
Net loss per common share:
Basic and diluted $ (0.80) $ (0.89) $ (0.42)
Weighted average common shares outstanding:
Basic and diluted 6,090,379 5,160,399 4,009,876
</TABLE>
See accompanying notes to consolidated financial statements.
-20-
<PAGE>
SONUS CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
Preferred stock Common stock
------------------------ ------------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE AT JULY 31, 1996 --- --- 3,565,549 $ 1,925
Net loss --- --- --- ---
Foreign currency translation adjustment --- --- --- ---
Comprehensive loss --- --- --- ---
Stock issued in connection
with receipt of tax credit --- --- 22,560 38
Proceeds from exercise of stock options --- --- 155,000 316
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) (33)
---------- ---------- ---------- ----------
BALANCE AT JULY 31, 1997 --- --- 5,427,657 $ 11,098
Net loss --- --- --- ---
Foreign currency translation adjustment --- --- --- ---
Comprehensive loss --- --- --- ---
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) (25)
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 note --- --- --- ---
Stock issued upon conversion
of convertible notes --- --- 220,000 1,430
Payment of cash in lieu of fractional shares --- --- (8) ---
---------- ---------- ---------- ----------
BALANCE AT JULY 31, 1998 13,333,333 $ 15,701 6,079,908 $ 14,615
Net loss --- --- --- ---
Foreign currency translation adjustment --- --- --- ---
Comprehensive loss --- --- --- ---
Proceeds from exercise of warrants --- --- 39,799 248
Repurchase of common stock --- --- (10,680) (90)
Repayment on shareholder notes --- --- --- ---
Payment of cash in lieu of fractional shares --- --- (1) ---
Stock options granted to non-employees --- --- --- 203
---------- ---------- ---------- ----------
BALANCE AT JULY 31, 1999 13,333,333 $ 15,701 6,109,026 $ 14,976
========== ========== ========== ==========
</TABLE>
<TABLE>
Accumulated
Shareholder other Total
notes Accumulated comprehensive Comprehensive shareholders'
receivable deficit income (loss) income (loss) equity
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE AT JULY 31, 1996 --- $ (416) $ 3 $ 1,512
Net loss --- (1,701) --- $ (1,701) (1,701)
Foreign currency translation adjustment --- --- (25) (25) (25)
----------
Comprehensive loss --- --- --- $ (1,726) ---
==========
Stock issued in connection
with receipt of tax credit --- --- --- 38
Proceeds from exercise of stock options (124) --- --- 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)
---------- ---------- ---------- ----------
BALANCE AT JULY 31, 1997 $ (124) $ (2,117) $ (22) $ 8,835
Net loss --- (4,594) --- $ (4,594) (4,594)
Foreign currency translation adjustment --- --- (207) (207) (207)
----------
Comprehensive loss --- --- --- $ (4,801) ---
==========
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)
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 note (159) --- --- (159)
Stock issued upon conversion
of convertible notes --- --- --- 1,430
Payment of cash in lieu of fractional shares --- --- --- ---
---------- ---------- ---------- ----------
BALANCE AT JULY 31, 1998 $ (283) $ (6,711) $ (229) $ 23,093
Net loss --- (4,884) --- $ (4,884) (4,884)
Foreign currency translation adjustment --- --- 55 55 55
----------
Comprehensive loss --- --- --- $ (4,829) ---
==========
Proceeds from exercise of warrants --- --- --- 248
Repurchase of common stock --- --- --- (90)
Repayment on shareholder notes 190 --- --- 190
Payment of cash in lieu of fractional shares --- --- --- ---
Stock options granted to non-employees --- --- --- 203
---------- ---------- ---------- ----------
BALANCE AT JULY 31, 1999 $ (93) $ (11,595) $ (174) $ 18,815
========== ========== ========== ==========
</TABLE>
-21-
<PAGE>
SONUS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
Years ended July 31,
-----------------------------------------
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (4,884) $ (4,594) $ (1,701)
Adjustments to reconcile net loss to net cash
used in operating activities:
Bad debt expense 389 412 47
Depreciation and amortization 2,450 1,361 790
Compensation cost for options granted to non-employees 203 --- ---
Changes in operating assets and liabilities, net of effects
of acquisitions:
Accounts receivable (554) (51) (530)
Other receivables 172 (181) (237)
Inventory 560 (405) (61)
Prepaid expenses (59) 24 (136)
Accounts payable and accrued liabilities (558) 1,231 1,222
-------- -------- --------
Net cash used in operating activities (2,281) (2,203) (606)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity (purchase) of short-term investments 6,408 (6,408) ---
Purchase of property and equipment (3,368) (1,414) (1,191)
Additional costs related to acquisitions (188) (198) (149)
Deferred acquisition costs and other, net 88 (1) 177
Net cash used in business acquisitions (2,062) (3,765) (2,858)
-------- -------- --------
Net cash provided by (used in) investing activities 878 (11,786) (4,021)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of long-term debt
and capital lease obligations (1,626) (1,625) (58)
Deferred financing costs, net 3 (20) 42
Net advances (repayments) of bank loans and
short-term notes payable 454 (39) ---
Advances from (payments to) shareholders 190 (159) (124)
Issuance of common stock for cash, net of costs 248 1,984 5,915
Issuance of preferred stock for cash, net of costs --- 15,701 ---
Acquisition of treasury stock (90) (25) (33)
-------- -------- --------
Net cash provided by (used in) financing activities (821) 15,817 5,742
-------- -------- --------
Net change in cash and cash equivalents (2,224) 1,828 1,115
Effect on cash and cash equivalents of changes
in foreign translation rate 2 (207) (27)
Cash and cash equivalents, beginning of year 2,720 1,099 11
-------- -------- --------
Cash and cash equivalents, end of year $ 498 $ 2,720 $ 1,099
======== ======== ========
Supplemental disclosure of non-cash investing and financing activities:
Interest paid during the year $ 218 $ 149 $ 47
Non-cash financing activities:
Issuance and assumption of debt in acquisitions $ 2,611 $ 1,781 $ 676
Issuance of convertible notes in acquisitions --- --- 2,600
Issuance of common stock in acquisitions --- --- 3,291
Issuance of debt for covenants not to compete with purchase
price adjustments for acquisitions completed in fiscal year 1998 650 --- ---
Issuance of common stock upon conversion of convertible note --- 1,557 ---
</TABLE>
See accompanying notes to consolidated financial statements.
-22-
<PAGE>
SONUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Company
----------------------
Sonus Corp., a Yukon Territory, Canada corporation (the "Company"),
through its primary operating subsidiaries, Sonus-Canada Ltd., a British
Columbia, Canada corporation, Sonus-USA, Inc., a Washington corporation, and
Sonus-Texas, Inc., an Oregon corporation, owns and operates 99 hearing care
centers in the United States and Western Canada. The centers are located in the
states of Arizona, California, Illinois, Michigan, Missouri, New Mexico, Oregon,
Texas, and Washington, and in the Canadian provinces of British Columbia and
Alberta. Each of the Company's hearing care centers provides its hearing
impaired patients with a full range of audiological products and services. The
Company intends to expand its network of hearing care centers by acquiring
centers in its existing, as well as new, geographic markets. The Company also
operates a franchise licensing program called The Sonus Network. Licensees are
entitled to use the Sonus name and receive other benefits such as practice
management advice and training, group buying discounts, and marketing services.
The Company, through its subsidiary Hear PO Corp., a New Mexico corporation,
also operates as an independent provider association and hearing care benefit
administrator. 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.
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
("SFAS") 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.
-23-
<PAGE>
Income Taxes
------------
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
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 SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". 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, 1999, the Company had no short-term investments and
therefore no unrealized holding gains or losses. 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 1999, 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 Commercial Paper 3,648
------
$6,408
======
Gross proceeds from sales and maturities of available-for-sale
investments during fiscal 1999 and 1998 were $6,408,000 and $18,511,000,
respectively.
Inventory
---------
Inventory primarily consists of hearing instruments, hearing instrument
batteries, and assistive listening devices and is stated at the lower of cost
(first in, first out) or net realizable value.
-24-
<PAGE>
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
Leasehold improvements Five years
Computer equipment and software Five years
Property and equipment purchased under capitalized leases are amortized
over the shorter of the lease term or their estimated useful lives 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. The cumulative effect of the
changes adopted by the Company for the fiscal year ended July 31, 1998, was not
significant.
Advertising Expense
-------------------
The Company defers its advertising costs until the advertisement is
actually run, at which time the full expense is recognized. Deferred advertising
costs were $84,000 and $0 at July 31, 1999 and 1998, respectively. Advertising
expense was $3,632,000, $2,786,000 and $786,000 for the years ended July 31,
1999, 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 as of July 31:
(in thousands) 1999 1998
---- ----
Goodwill $19,774 $15,611
Covenants not to compete 2,226 1,578
Less: Accumulated amortization (2,232) (1,037)
------ ------
$19,768 $16,152
======= =======
Amortization charged to operations was $1,195,000, $635,000 and
$364,000 for the years ended July 31, 1999, 1998 and 1997, respectively.
-25-
<PAGE>
Deferred Acquisition and Financing Costs
----------------------------------------
Costs related to the acquisition of centers 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.
Impairment of Long-Lived Assets
-------------------------------
The Company assesses the recoverability of long-lived assets, including
goodwill, by determining whether the carrying amount of the long-lived asset
over its remaining live can be recovered through undiscounted projected future
cash flows. The Company has not recognized any impairment losses during the
years ended July 31, 1999, 1998, and 1997.
Net Loss Per Share
------------------
On August 1, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share", which provides that "basic net income (loss) per share" and "diluted net
income (loss) per share" for all periods presented be computed using the
weighted average number of common shares outstanding during the respective
period, with diluted net income per share including the effect of potentially
dilutive common shares. Common stock equivalents related to convertible debt,
convertible preferred stock, stock options, and warrants are anti-dilutive and,
therefore, not included in the 1999, 1998, and 1997 diluted net loss per share.
Furthermore, there were no reconciling items to obtain net loss applicable to
common shareholders from the Company's net loss for the years ended July 31,
1999, 1998, and 1997.
Comprehensive Income (Loss)
---------------------------
On August 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income (loss) consists of net income (loss)
and foreign currency translation adjustment and is presented in the consolidated
statement of shareholders' equity. SFAS No. 130 requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
Stock Based Compensation
------------------------
The Company accounts for its stock plans in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation", which establishes a fair value
method of accounting for stock plans. As allowed by SFAS No. 123, the Company
has elected to continue to apply Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees", which prescribes an intrinsic
value based method of accounting for stock plans covering employees and to
provide the pro-forma disclosures of the effects of SFAS No. 123 on net income
(loss) and net income (loss) per share.
-26-
<PAGE>
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.
Fair Value of Financial Instruments
-----------------------------------
The carrying value of financial instruments such as cash and cash
equivalents, short-term investments, accounts receivable, other receivables,
trade payables, notes payable, and convertible notes payable approximate their
fair value because of the short-term nature of these instruments. The carrying
amount of the Company's long-term debt approximates fair value because the
interest rates approximate the rates that management believes are currently
available to the Company. The carrying amount of capital lease obligations
approximates fair value.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
-----------------
Certain amounts in the 1997 and 1998 financial statements have been
reclassified to conform with the 1999 presentation.
NOTE 2. ACQUISITIONS
During the fiscal year ended July 31, 1999, the Company acquired 31
hearing care centers in 17 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 $1,704,000,
promissory notes issued by the Company of $1,749,000 generally payable over
three years, and $900,000 in assumed liabilities. As a result of the
acquisitions, the Company recorded approximately $95,000 in accounts receivable,
$90,000 in inventory, $457,000 in property and equipment, $20,000 in other
assets, and $3,700,000 in goodwill, which included costs related to
acquisitions. In addition to the purchase price for the acquisitions, the
Company also recorded $299,000 for covenants not to compete, of which $79,000
was paid in cash at the time of closing, with the balance payable over three
years.
-27-
<PAGE>
During the fiscal year ended July 31, 1998, the Company acquired 33
centers 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.
The following unaudited pro forma financial information reflects the
historical operations of the hearing care centers acquired by the Company during
the fiscal year ended July 31, 1999 (the "Acquisitions"), from August 1, 1998,
to the date of acquisition. Such financial information has been prepared for
comparative purposes only and 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, 1997, for
the fiscal year ended July 31, 1998, and August 1, 1998, for the fiscal year
ended July 31, 1999. 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.
FISCAL YEAR
(in thousands,
except per share amounts) 1999 1998
---- ----
Net revenues $37,756 $30,818
Net loss $ 4,688 $ 4,206
Net loss per share (basic and diluted) $ 0.77 $ 0.82
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of July 31:
(in thousands) 1999 1998
------ ------
Professional equipment $2,154 $1,521
Office equipment 926 707
Leasehold improvements 1,030 760
Computer equipment and software 4,689 2,012
----- -----
8,799 5,000
Less accumulated depreciation (2,591) (1,393)
------ ------
$6,208 $3,607
====== ======
-28-
<PAGE>
NOTE 4. CONVERTIBLE NOTES PAYABLE
At July 31, 1998, the Company had outstanding non-interest bearing
notes in the amount of $1,170,000 convertible at any time into 180,000 Common
Shares at a rate of $6.50 per share. During the fiscal year ended July 31, 1999,
$239,000 of the notes were paid, leaving a balance outstanding at July 31, 1999,
of $931,000 (convertible into 143,000 Common Shares) that became due and payable
on August 1, 1999.
NOTE 5. CAPITAL LEASES
The following is a schedule by year of future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of July 31, 1999 (in thousands):
2000...................................................... $142
2001...................................................... 99
----
Total minimum lease payments.............................. 241
Less: amount representing interest....................... (16)
----
Present value of minimum lease payments................... 225
Less current portion...................................... (129)
----
$ 96
====
Total assets under capitalized leases at July 31, 1999 and 1998, were $112,000
and $271,000, net of accumulated depreciation of $375,000 and $244,000,
respectively.
NOTE 6. LONG-TERM DEBT
Long-term debt consists of the following as of July 31 (in thousands):
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Installment notes incurred in connection with acquisitions payable in
monthly installments due from 2000 to 2003 with a weighted
average interest rate of 7.2%, partially secured by purchased assets.......... $ 460 $ 322
Installment notes incurred in connection with acquisitions payable in
quarterly installments due from 2000 to 2001 with a weighted
average interest rate of 6.5%, partially secured by purchased assets.......... 517 150
Installment notes incurred in connection with acquisitions payable in annual
installments due from 1999 to 2004 with a weighted
average interest rate of 6.2%, partially secured by purchased assets.......... 2,167 1,910
Non-interest bearing installment obligations for covenants not to compete
due from 1999 to 2001 (net of discount of $83), partially secured by assets
purchased in related acquisitions............................................. 637 460
Equipment loans from suppliers with interest rates from 7.8% to 18% per annum
due 1999 to 2003, secured by equipment........................................ 366 51
Working capital loan from a supplier with floating interest rate of prime
plus3/4% due 2001, secured by certain accounts receivable..................... 500 ---
------- ---------
4,647 2,893
Less current portion........................................................ (2,150) (1,160)
------ ---------
$ 2,497 $ 1,733
========= =========
</TABLE>
Annual maturities of long-term debt are as follows (in thousands): 2000 -
$2,150; 2001 - $1,743; 2002 - $489; 2003 - $232; 2004 - $17; thereafter - $16.
-29-
<PAGE>
NOTE 7. SHAREHOLDERS' EQUITY
Series A Convertible Preferred Shares
In December 1997, the Company issued 13,333,333 Series A Convertible
Preferred Shares (the "Series A Shares") in a private placement. The following
summarizes certain terms of the Series A Shares:
Voting Rights. Each Series A 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 Series A 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 Series A 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"). As of July 31, 1999, cumulative undeclared
dividends amounted to approximately $1,425,000. All accrued and unpaid dividends
will be forfeited upon the conversion of the Series A 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");
(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 Series A
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 Series A 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.
-30-
<PAGE>
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 Series A Shares
upon liquidation, the holders of Series A 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 Series A 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 Series A 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 Series A Shares. After payment of the full
amount of the liquidating distribution to which they are entitled, the holders
of Series A Shares will have no right to any of the remaining assets of the
Company.
Optional Redemption. The Series A Shares may not be redeemed before
December 24, 2002. Thereafter, the Series A 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 Series A 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 Series
A Shares. The Series A Shares are not subject to mandatory redemption or any
sinking fund provisions.
Conversion Rights. The Series A 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 Series A
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 Series A Shares, any
accrued and unpaid dividends with respect to such shares will be forfeited. The
Company has the right to force conversion of the Series A Shares, in whole or in
part, upon satisfaction of certain 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 years ended July 31, 1998 and 1999.
Share Purchase Warrants
-----------------------
At July 31, 1999, the Company had outstanding share purchase warrants
issued in connection with the Series A Shares to purchase 2,000,000 Common
Shares at an exercise price of $12.00 per share until December 24, 2002. The
terms of the share purchase warrants were amended on October 1, 1999, in
connection with the issuance of the Company's Series B Convertible Preferred
Shares to reduce the exercise price to $6.75 per share and extend the expiration
date to October 1, 2004. The Company may force the exercise of the warrants upon
satisfaction of all the Triggering Conditions, except that the Common Shares are
only required to be traded on a U.S. Principal Market at a daily closing price
greater than $8.00 instead of $12.00 per Common Share on each of the ten
consecutive trading days preceding the applicable date.
-31-
<PAGE>
In August 1998, the Company issued 39,799 Common Shares at $6.25 per share
in connection with the exercise of share purchase warrants issued in September
and December 1996. 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 2,300,000 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, 1999 or 1998.
-32-
<PAGE>
The activity during the fiscal years ended July 31 was as follows:
<TABLE>
1999 1998 1997
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of 1,560,000 $7.54 488,400 $6.41 340,000 $4.15
year
Granted 655,000 $5.56 1,138,000 $8.12 368,400 $6.85
Exercised -- -- (12,400) $2.10 (155,000) $2.05
Canceled (187,000) $8.70 (54,000) $9.79 (65,000) $7.50
--------- --------- --------
Outstanding - end of year 2,028,000 $6.74 1,560,000 $7.54 488,400 $6.41
========= ========= =======
Exercisable at end of year 808,441 $6.54 363,200 $5.98 177,500 $5.95
Weighted-average fair value
of options granted during the
year $4.26 $8.38 $4.47
</TABLE>
The following table summarizes information about stock options
outstanding at July 31, 1999:
<TABLE>
Options Outstanding Options Exercisable
------------------------------------------------------- -------------------------------------
Weighted-
Average Weighted- Number Weighted -
Number Outstanding Remaining Average Exercisable Average
Range of as of Contractual Exercise as of Exercise
Exercise Prices July 31, 1999 Life Price July 31, 1999 Price
- -------------------- ------------------- ---------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
$1.00-- $2.00 60,000 1.39 $1.26 60,000 $ 1.26
$2.01-- $3.50 25,000 1.55 $3.32 25,000 $ 3.32
$3.51-- $5.00 125,000 9.87 $4.22 5,357 $.4.22
$5.01-- $6.50 696,000 7.73 $5.97 281,334 $ 6.10
$6.51-- $8.00 795,000 7.59 $6.94 331,000 $ 7.06
$8.01-- $9.50 96,000 5.66 $8.61 48,000 $ 8.96
$9.51-- $12.00 231,000 8.52 $10.82 57,750 $10.82
- -------------------- ------------------- ---------------- --------------- ------------------ ----------------
$1.00-- $12.00 2,028,000 7.54 $6.74 808,441 $ 6.54
========= =======
</TABLE>
No compensation cost has been recognized for its stock option grants
to employees under APB No. 25. Total compensation cost recognized in the
statements of operations for options granted to non-employees under SFAS No.
123 during the years ended July 31, 1999, 1998, and 1997, was $203,000, $0,
and $0, respectively. Pro forma information regarding net income (loss) and
net income (loss) per share is required under SFAS No. 123 and has been
determined as if the Company had accounted for all 1999, 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 1999, 1998, and 1997: risk-free
interest rates of 5.92%, 5.5% and 5.94%, respectively; an expected option life
of 7.52 years, 7.69 years and 4.92 years, respectively; expected volatility of
90%, 114% and 96%, respectively; and dividend yield of zero.
-33-
<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 No. 123, net
loss and net loss per share would have been as follows:
<TABLE>
1999 1998 1997
---- ---- ----
(in thousands, except per share data)
Net loss applicable to common shareholders:
<S> <C> <C> <C>
As reported $(4,884) $(4,594) $(1,701)
Pro forma (1) $(6,176) $(5,988) $(3,276)
Net loss per share (basic and diluted):
As reported $(0.80) $(0.89) $ (0.42)
Pro forma (1) $(1.01) $(1.16) $ (0.82)
</TABLE>
(1) SFAS No. 123 applies to awards granted in fiscal years that begin after
December 15, 1994. Consequently, the effects of applying SFAS No. 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, 1998, and 1999.
NOTE 8. INCOME TAXES
Sonus Corp. and its Canadian subsidiary file separate corporate
income tax returns on a stand-alone basis in Canada. Sonus-USA, Inc. and its
subsidiaries file corporate income tax returns in the United States.
The components of temporary differences that give rise to significant
portions of deferred income taxes are as follows at July 31 (in thousands):
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Net operating losses carried forward 4,281 $2,443 $839
Allowance for doubtful accounts 364 277 44
Other 31 14 ---
----- ------ ----
4,676 2,734 883
Deferred tax liabilities:
Depreciation (83) --- ---
Goodwill and start-up costs (305) (240) (54)
----- ------ ----
4,288 2,494 829
Less valuation allowance (4,288) (2,494) (829)
----- ------ ----
--- --- ---
===== ====== ====
</TABLE>
-34-
<PAGE>
A reconciliation of the Company's expected tax expense using the
statutory income tax rate to the actual effective rate is as follows:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax benefit at statutory rate (34)% (34)% (34)%
Adjustment for higher Canadian tax rate --- (1) ---
Expenses not deductible for tax
purposes 5 3 5
State taxes, net of federal (5) (5) (4)
Change in valuation allowance
impacting statement of operations 34 37 33
-- -- --
Tax rate per financial statements ---% ---% ---%
=== === ===
</TABLE>
At July 31, 1999, the Company had approximate net operating loss
carryforwards for tax purposes which, if not utilized, expire in the years
ended as follows (in thousands):
CANADA UNITED STATES TOTAL
2001 $16 $ --- $16
2002 24 --- 24
2003 532 --- 532
2004 233 --- 233
2005 278 --- 278
2006 80 --- 80
2009 --- 24 24
2010 --- 29 29
2011 --- 656 656
2012 --- 781 781
2013 --- 3,932 3,932
2019 --- 3,986 3,986
------ ------ -------
$1,163 $9,408 $10,571
====== ====== =======
A provision of the Internal Revenue Code requires the utilization of
net operating losses be limited when there is a change of more than 50 percent
in ownership of the Company. Such a change occurred in December 1997. This
ownership change may limit the utilization of any net operating losses
incurred prior to the change in ownership date.
NOTE 9. RELATED PARTY TRANSACTIONS
William DeJong is a partner in the Calgary, Alberta law firm of
Ballem MacInnes and is a director of the Company. Total fees, disbursements
and government sales tax paid to Ballem MacInnes by the Company for legal
services as of July 31, 1999, 1998, and 1997 were $12,000, $196,000, and
$168,000, respectively (converted from Canadian dollars at July 31, 1999,
1998, and 1997).
-35-
<PAGE>
Gregory J. Frazer, Ph.D., an officer and director of the Company, and
Mr. Frazer's wife, were shareholders in certain Hearing Care Associates
corporations that the Company acquired during the fiscal years ended July 31,
1998 and 1997. During the fiscal year ended July 31, 1999, the Company issued
a three-year promissory note to Mr. Frazer in the principal amount of
$102,000, payable in equal quarterly installments, in connection with purchase
price adjustments for hearing care centers previously acquired from Mr.
Frazer. The Company also entered into expanded non-compete agreements with Mr.
Frazer and his wife that pay them a total of $10,758 per month until September
2001. 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, which bore interest at 10% and 7.75%,
respectively, were repaid on July 6, 1999, along with interest of $16,077. 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 $29,187 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 was repaid on March 30, 1999, along with interest at 7.75%
per annum in the amount of $4,287. On March 19, 1998, the Company loaned Mr.
Dawson $32,272, in order to pay taxes incurred as a result of option exercises
in April 1996. The loan matures on December 31, 2000, and bears interest at
7.75% per annum.
On December 8, 1998, the Corporation loaned Scott E. Klein, President
and Chief Operating Officer of the Company, $100,000 in connection with the
purchase of his primary residence in Portland, Oregon. The loan, which was due
on the earlier of the sale of Mr. Klein's residence in Minnesota or October 31,
1999, was repaid on June 7, 1999, along with interest at 8% in the amount of
$4,000.
On July 21, 1999, Cindy Dawson-Austin, mother of Mr. Dawson, loaned the
Company $500,000 for working capital. The loan, which bears interest at 12% per
annum, was due on October 18, 1999, but has not been repaid at the request of
Ms. Dawson-Austin.
NOTE 10. 401(K) PLAN
The Company sponsors a 401(k) plan for all employees who have
satisfied minimum service and age requirements. Employees may contribute up to
20% of their compensation to the plan. The Company does not match employee
contributions.
-36-
<PAGE>
NOTE 11. COMMITMENTS AND CONTINGENCIES
Operating Leases
----------------
The following is a schedule by year of future minimum lease payments
for non-cancelable operating leases at July 31, 1999 (in thousands):
2000 $1,698
2001 1,506
2002 1,155
2003 794
2004 557
Thereafter 409
------
Total minimum lease payments $6,119
======
Rental expense under operating leases was $2,236,000, $1,426,000 and
$810,000 for the years ended July 31, 1999, 1998, and 1997, respectively.
Contingent Payments
-------------------
The terms of certain of the Company's acquisition agreements provide
for additional consideration to be paid if the acquired entity's revenues or
results of operations exceed certain target levels. Such additional
consideration is paid in cash and is recorded when earned as additional
purchase price. The maximum amount of contingent consideration that the
Company may be required to pay for fiscal 2000 is $520,000 and $1,100,000
thereafter.
Insurance
---------
In the normal course of business, the Company may become a defendant
or plaintiff in various lawsuits. Although a successful claim for which the
Company is not fully insured could have a material effect on the Company's
financial condition, management is of the opinion that it maintains insurance
at levels sufficient to insure itself against the normal risk of operations.
NOTE 12. SEGMENT INFORMATION
The Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" during fiscal 1999. In accordance with SFAS
No. 131, the Company has identified a single operating segment: the sale and
servicing of hearing instruments and the provision of audiology services. Sales
are primarily to individual consumers. No customer constituted more than 5% of
total revenues. Revenues by country were as follows for the years ended July 31:
<TABLE>
(in thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
United States $30,511 $19,498 $10,048
Canada 3,248 2,870 3,414
------- ------- -------
Total $33,759 $22,368 $13,462
======= ======= =======
</TABLE>
-37-
<PAGE>
NOTE 13. SUBSEQUENT EVENTS
On October 1, 1999, the Company issued 2,500,000 Series B Convertible
Preferred Shares (the "Series B Shares") in a private placement for $10,000,000
in cash. In connection with the sale of the Series B Shares, the Company agreed
to reduce the exercise price of its outstanding share purchase warrants
entitling the holder thereof to purchase 2,000,000 Common Shares (the
"Warrants") from $12.00 to $6.75 per share, to extend the exercise period to
October 1, 2004, and to remove the limitation on the number of shares that may
be issued upon a cashless exercise of the Warrants. The Corporation also agreed
to submit certain amendments to the terms of the Series A Shares for
consideration and approval by the Company's shareholders at the 1999 annual
meeting of shareholders. The proposed amendments to the terms of the Series A
Shares provide that dividends payable thereon may be paid in Common Shares at
the option of the Company until December 24, 2002, and thereafter only in cash,
and lower the earnings and share price thresholds to avoid specified increases
in the dividend rate and as a condition to mandatory conversion of the Series A
Shares.
The Series B Shares are initially convertible at the option of the
holder on a one-for-one basis into 2,500,000 Common Shares at a conversion price
of $4.00 per share. The conversion rate is subject to increase to the extent
that the Company's receivables as of July 31, 1999, that are collected by July
31, 2000, total less than $4,736,000, as well as to adjustments for stock
dividends, stock splits, recapitalizations, and other similar events. In
addition, until the Company attains specified quarterly earnings targets, the
conversion rate will increase beginning October 31, 2000, such that
approximately 200,000 additional Common Shares would be issuable upon conversion
at that date with respect to the four fiscal quarters then ended. Additional
adjustments will be made each quarter thereafter as long as the earnings targets
have not been met. The amount of such quarterly adjustments will be based on a
factor of 2 percent of the original purchase price plus the sum of all prior
adjustments until November 1, 2004, increasing in steps thereafter to 4.5
percent beginning November 1, 2006. Once the Company has met the specified
earnings targets for four consecutive fiscal quarters, no further adjustments in
the conversion rate will be made. The Series B Shares are subject to mandatory
conversion at the option of the Company if certain share price and earnings
targets are met.
Cash dividends will accrue on the Series B Shares at an annual rate of
8 percent of the conversion price then in effect until November 1, 2004,
increasing in steps thereafter to 18 percent beginning November 1, 2006,
provided that the Corporation has met specified quarterly earnings targets. If
the Corporation has not met the earnings targets by July 31, 2002, dividends
will not accrue or be payable on the Series B Shares. Upon conversion of the
Series B Shares, any accumulated dividends will be forfeited.
In September of 1999, the Company acquired 4 hearing care centers in 2
transactions for a total purchase price of $70,000 in cash. Each transaction
was accounted for as a purchase.
NOTE 14. CANADIAN VERSUS U.S. GAAP
As of July 31, 1999, 1998, and 1997 there were no material
differences between Canadian generally accepted accounting principles ("GAAP")
and U.S. GAAP.
-38-
<PAGE>
NOTE 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED - SEE ACCOMPANYING
INDEPENDENT AUDITORS' REPORT)
The following is a tabulation of the unaudited quarterly results of
operations for the years ended July 31, 1999 and 1998 (in thousands, except per
share data):
<TABLE>
Quarter ended
October 31, January 31, April 30, July 31,
1998 1999 1999 1999
<S> <C> <C> <C> <C>
Net revenues $ 7,701 $ 8,486 $ 9,093 $ 8,479
Income (loss) from operations (1,523) (701) 75 (2,686)
Net income (loss) (1,474) (699) 65 (2,776)
EBITDA (1) (1,048) (187) 637 (1,787)
Net income (loss) per share (basic and diluted) $ (0.24) $ (0.11) $ 0.01 $ (0.46)
Quarter ended
October 31, January 31, April 30, July 31,
1997 1998 1998 1998
Net revenues $ 5,307 $ 4,109 $ 5,719 $ 7,233
Loss from operations (79) (1,135) (778) (2,906)
Net loss (96) (1,085) (581) (2,832)
EBITDA (1) 198 (812) (429) (2,494)
Net loss per share (basic and diluted) $ (0.02) $ (0.24) $ (0.10) $ (0.49)
</TABLE>
- ---------------
(1) "EBITDA" is defined as income (loss) from operations plus depreciation and
amortization and 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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-39-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information with respect to the directors and executive officers of the
Company and compliance with Section 16(a) of the Securities Exchange Act of 1934
is incorporated herein by reference to the Company's definitive Management
Information Circular and Proxy Statement dated November 5, 1999 ("Proxy
Statement"), under the headings "Section 16(a) Beneficial Ownership Reporting
Compliance" and "2. Election of Directors."
ITEM 10. EXECUTIVE COMPENSATION
The required information is incorporated herein by reference to the
Proxy Statement under the heading "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The required information is incorporated herein by reference to the
Proxy Statement under the heading "Share Ownership By Principal Shareholders and
Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The required information is incorporated herein by reference to the
Proxy Statement under the heading "Interests of Insiders in Material
Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits are listed in the Exhibit Index beginning on page 42 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, 1999.
-40-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 1, 1999 SONUS CORP.
By /s/ Brandon M. Dawson
Brandon M. Dawson
Chairman and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated as of November 1, 1999.
SIGNATURE TITLE
PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR:
<TABLE>
<S> <C>
/s/ Brandon M. Dawson Chairman and Chief Executive Officer and Director
Brandon M. Dawson
PRINCIPAL FINANCIAL OFFICER:
/s/ Scott E. Klein President and Chief Operating Officer
Scott E. Klein
</TABLE>
PRINCIPAL ACCOUNTING OFFICER:
/s/ Douglas A. Pease Controller
Douglas A. Pease
A MAJORITY OF OTHER DIRECTORS:
*HAYWOOD D. COCHRANE, JR. Director
* WILLIAM DEJONG Director
* GREGORY J. FRAZER, Ph.D. Director
*HUGH T. HORNIBROOK Director
*DAVID J. WENSTRUP Director
/s/ Scott E. Klein
*By Scott E. Klein, as attorney-in-fact
-41-
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1 Articles of Incorporation of the Company.
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2 to
the Company's quarterly report on Form 10-QSB for the quarter
ended January 31, 1999.
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 filed November 25, 1997.
10.2 Securities Purchase Agreement between the Company and Warburg
dated October 1, 1999. Incorporated by reference to Exhibit 4 to
the Company's current report on Form 8-K filed October 12, 1999.
10.3 Amended and Restated Warrant Agreement between the Company and
Warburg dated October 1, 1999, and related Amended and Restated
Warrant Certificate dated October 1, 1999.
10.4 Form of Convertible Subordinated Note.
10.5 1993 Stock Option Plan. Incorporated by reference to Exhibit 10.26
to the SB-2.*
10.6 Second Amended and Restated Stock Award Plan (as amended October
26, 1998). Incorporated by reference to Exhibit 10.3 to the
Company's quarterly report on Form 10-QSB for the quarter ended
October 31, 1998.*
10.7 Employment Agreement dated October 1, 1996, between Sonus-USA, and
Gregory J. Frazer. Incorporated by reference to Exhibit 10.28 to
the SB-2.*
10.8 Employment Agreement dated December 24, 1997, between the Company
and Brandon M. Dawson. Incorporated by reference to Exhibit 10.30
to Post-Effective Amendment No. 1, filed March 5, 1998 (the
"Amendment") to the SB-2.*
10.9 Employment Agreement dated October 30, 1998, between the Company
and Scott Klein. Incorporated by reference to Exhibit 10.1 to the
Company's quarterly report on Form 10-QSB for the quarter ended
October 31, 1998.*
10.10 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.*
10.11 Promissory Note of Brandon M. Dawson dated March 19, 1998, as
amended, and related Pledge Agreement between the Company and Mr.
Dawson, dated May 1, 1998.*
10.12 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.
10.13 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.
10.14 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.
10.15 Noncompetition Agreement dated January 25, 1999, between
Sonus-USA, Inc. and Gregory J. Frazer.
10.16 Amendment Agreement effective as of August 1, 1998, by and between
Sonus-USA, Inc. and Gregory J. Frazer.
21 The Company's subsidiaries are SONUS-USA, Inc., a Washington
corporation, Sonus- Canada Ltd., a British Columbia (Canada)
corporation, Sonus-Texas, Inc., an Oregon corporation, and Hear PO
Corp., a New Mexico corporation.
23 Consent of KPMG LLP.
24 Power of attorney of certain officers and directors.
27 Financial Data Schedule.
99 Description of capital stock of the Company.
- -----------
* Management contract or compensatory plan or arrangement.
-42-
YUKON
Justice
BUSINESS CORPORATIONS ACT
(Section 190)
Form 3-01
ARTICLES OF CONTINUANCE
1. Name of Corporation:
SONUS CORP.
2. The classes and any maximum number of shares that the corporation is
authorized to issue:
SEE ATTACHED SCHEDULE "A"
3. Restrictions if any on share transfers:
NONE
4. Number (or minimum or maximum number) of Directors:
Minimum 3 - Maximum 11
5. Restrictions if any on businesses the corporation may carry on:
NONE
6. If change of name effected, previous name:
NOT APPLICABLE
7. Details of incorporation:
SEE ATTACHED SCHEDULE "B"
8. Other provisions if any:
SEE ATTACHED SCHEDULE "C"
<TABLE>
- ---------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C> <C>
9. Date Signature Title
December 15, 1998 "Signed by: William DeJong" Director/Asst. Secretary
- ---------------------------------------- ------------------------------------- -------------------------------------
</TABLE>
YG(3040Q)F1 REV. 11/87
<PAGE>
SCHEDULE "A"
The Corporation is authorized to issue an unlimited number of Common Shares
without nominal or par value and an unlimited number of Preferred Shares without
nominal or par value, which Common Shares and Preferred Shares shall have
attached thereto the rights, privileges, restrictions and conditions hereinafter
set forth:
PROVISIONS ATTACHING TO THE COMMON SHARES
Voting Rights
i) at all meetings of the shareholders of the Corporation, the holders of
the Common Shares shall be entitled to one (1) vote for each such share
so held;
Dividends and Other Distributions
ii) the holders of the Common Shares shall be entitled to receive such
dividends as the directors of the Corporation may, in their discretion,
declare thereon; and
iii) in the event of the liquidation, dissolution or winding-up of the
Corporation or other distribution of its assets among the shareholders,
the holders of the Common Shares shall be entitled to receive the
remaining property of the Corporation.
PURSUANT TO THE SPECIAL MEETING OF SHAREHOLDERS OF THE CORPORATION HELD ON
FEBRUARY 9, 1998, ITEM NO. 2 OF THE ARTICLES OF THE CORPORATION WERE AMENDED IN
ACCORDANCE WITH THE PROVISIONS OF SECTION 167(1)(F) OF THE BUSINESS CORPORATIONS
ACT (ALBERTA) ON FEBRUARY 9, 1998 BY THE ADDITION OF THE FOLLOWING PROVISIONS:
<PAGE>
Simultaneously with the effective date of this amendment (the
"Effective Date"), each of the Corporation's Common Shares, without
nominal or par value, issued and outstanding immediately prior to the
Effective Date (the "Old Common Shares") shall automatically and
without any action on the part of the holder thereof be reclassified as
and changed into one-fifth (1/5) of a Common Share, without nominal or
par value (the "New Common Shares"), subject to the treatment of
fractional share interests as described below. Each holder of a
certificate or certificates which immediately prior to the Effective
Date represented outstanding Old Common Shares (the "Old Certificates,"
whether one or more) shall be entitled to receive upon surrender of
such Old Certificates to the Corporation's Transfer Agent for
cancellation, a certificate or certificates (the "New Certificates,"
whether one or more) representing the number of whole New Common Shares
into which and for which the Old Common Shares formerly represented by
such Old Certificates so surrendered, are reclassified under the terms
hereof. From and after the Effective Date, Old Certificates shall
represent only the right to receive New Certificates (and, where
applicable, cash in lieu of fractional shares, as provided below)
pursuant to the provisions hereof. No certificates or scrip
representing fractional share interests in New Common Shares will be
issued, and no such fractional share interest will entitle the holder
thereof
<PAGE>
-3-
to vote, or to any rights of a shareholder of the Corporation. A holder
of Old Certificates shall receive, in lieu of any fraction of a New
Common Share to which the holder would otherwise be entitled, a cash
payment therefor on the basis of the closing price of the Old Common
Shares on The Alberta Stock Exchange on the Effective Date (or in the
event the Common Shares are not so traded on the Effective Date, such
closing price on the next preceding day on which such shares were
traded on The Alberta Stock Exchange). If more than one Old Certificate
shall be surrendered at one time for the account of the same
shareholder, the number of whole New Common Shares for which New
Certificates shall be issued shall be computed on the basis of the
aggregate number of Old Common Shares represented by the Old
Certificates so surrendered. In the event that the Corporation's
Transfer Agent determines that a holder of Old Certificates has not
tendered all his certificates for exchange, the Transfer Agent shall
carry forward any fractional share until all certificates of that
holder have been presented for exchange such that payment for
fractional shares to any one person shall not exceed the value of four
Old Common Shares. If any New Certificate is to be issued in a name
other than that in which the Old Certificates surrendered for exchange
are issued, the Old Certificates so surrendered shall be properly
endorsed and otherwise in proper form for transfer, and the person or
persons requesting such exchange shall affix any requisite stock
transfer tax stamps to the Old Certificates surrendered, or provide
funds for their purchase, or establish to the satisfaction of the
Corporation's Transfer Agent that such taxes are not payable. From and
after the Effective Date the amount of capital represented by the New
Common Shares into which and for which the Old Common Shares are
reclassified under the terms hereof shall be the same as the amount of
capital represented by the Old Common Shares so reclassified, until
thereafter reduced or increased in accordance with applicable law.
PROVISIONS ATTACHING TO THE PREFERRED SHARES
Directors' Authority to Issue in One or More Series
- ---------------------------------------------------
i) the Preferred Shares may from time to time be issued in one or more
series and subject to the following provisions, and subject to the
sending of articles of amendment in prescribed form, and the issuance
of a certificate of amendment in respect thereof, the directors may fix
from time to time before such issue the number of shares which is to
comprise each series and the designation, rights, privileges,
restrictions and conditions attaching to each series of Preferred
Shares including, without limiting the generality of the foregoing, the
rate or amount of dividends or the method of calculating dividends, the
dates of payment thereof, the redemption, purchase and/or conversion
prices and terms and conditions of redemption, purchase and/or
conversion, and any sinking fund or other provisions;
<PAGE>
-4-
ii) the Preferred Shares of each series shall, with respect to the payment
of dividends and the distribution of assets or return of capital in the
event of liquidation, dissolution or winding-up of the Corporation,
whether voluntary or involuntary, or any other return of capital or
distribution of assets of the Corporation among its shareholders for
the purpose of winding up its affairs, rank on a parity with the
Preferred Shares of every other series and be entitled to preference
over the Common Shares and over any other shares of the Corporation
ranking junior to the Preferred Shares. The Preferred Shares of any
series may also be given such other preferences, not inconsistent with
these articles, over the Common Shares and any other shares of the
Corporation ranking junior to such Preferred Shares as may be fixed in
accordance with clause (i) above;
iii) if any cumulative dividends or amounts payable on the return of capital
in respect of a series of Preferred Shares are not paid in full, all
series of Preferred Shares participate rateably in respect of
accumulated dividends and return of accumulated dividends and return of
capital; and
iv) unless the directors otherwise determine in the articles of amendment
designating a series, the holder of each share of a series of Preferred
Shares shall not, except as otherwise specifically provided in the
Business Corporations Act (Yukon), be entitled to receive notice of or
vote at any meeting of the shareholders.
FIRST SERIES OF PREFERRED SHARES
--------------------------------
Pursuant to the Resolutions of the Directors of the Corporation, duly passed,
and in accordance with subsection 27(5) of the Business Corporation Act
(Alberta), the Articles of the Corporation were amended December 16, 1997 such
that the first series of Preferred Shares of the Corporation are designated as
"Series A Convertible Preferred Shares" with such rights, privileges,
restrictions and conditions attaching to the shares of such series as are set
forth as follows:
SERIES A CONVERTIBLE PREFERRED SHARES
"1. Number and Designation. The number of shares to
constitute this series shall be 13,333,333 and the designation of such
shares shall be the "Series A Convertible Preferred Shares"
(hereinafter called "this Series"). The number of shares constituting
this Series may be decreased from time to time by action of the Board,
but not below the number of shares of this Series then outstanding. All
shares of this Series shall be identical with each other in all
respects. The shares of this Series shall rank senior to the common
shares (the "Common Shares") of the Corporation as to cash dividends
and upon liquidation, as described below. Any amounts herein
referencing share prices or numbers of shares shall be subject to
appropriate adjustments in the event of any stock splits,
consolidations or the like.
<PAGE>
-5-
"2. Dividend Rights.
(a) Subject to the provisions of this Section 2, the holders
of shares of this Series shall be entitled to receive when, as and if
declared by the Board, out of assets legally available therefor,
cumulative dividends ("Dividends") at the applicable rate per annum
specified in Section 2(b) hereof from the date of issuance and payable
in accordance with Section 2(c) hereof. Dividends shall be cumulative
from the date of initial issuance of the shares of this Series (the
"Initial Issuance Date"), whether or not there shall be assets legally
available for the payment of such Dividends. In the event that the
Board shall declare a Dividend, subject to applicable regulatory
approvals, such Dividend may, at the discretion of the Board, be
payable in Common Shares. The number of Common Shares to be issued to
the holders of shares of this Series upon the payment of a Dividend in
Common Shares shall be the amount of the Dividends payable to such
holder pursuant to this Section 2 divided by either (i) (if the Common
Shares are not traded on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq National Market) U.S. $1.35 or (ii) (if
the Common Shares are traded on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq National Market) the average
Market Price of the Common Shares as such term is defined below for the
ten (10) trading days immediately preceding the Record Date as such
term is defined in Section 2(c) hereof.
For all purposes hereof, the term "Market Price of
the Common Shares" as of any specified date shall mean: (i) if the
Common Shares are listed or admitted for trading on one or more United
States national securities exchanges, the daily closing price for the
Common Shares on the principal exchange in the United States on which
the Common Shares are listed; (ii) if the Common Shares are not listed
or admitted for trading on any United States national securities
exchange, the daily closing price for the Common Shares on the Nasdaq
National or Nasdaq Small-Cap Market ("Nasdaq"); (iii) if the Common
Shares are not listed or admitted for trading on a United States
national securities exchange or on Nasdaq, the daily closing price of
the Common Shares on the principal stock exchange in Canada on which
the Common Shares are listed (expressed in United States dollars based
upon the noon buying rate in New York City for cable transfers in
Canadian dollars as certified for customs purposes by the Federal
Reserve Bank of New York); (iv) if the Common Shares are not listed or
admitted to trading on any United States national or Canadian national
securities exchange or on Nasdaq, the average of the reported bid and
asked prices on the trading day preceding such date in the
over-the-counter market as furnished by the National Quotation Bureau,
Inc., or, if such firm is not then engaged in the business of reporting
such prices, as furnished by any member of the National Association of
Securities Dealers, Inc. selected by the Company; or (v) if the Common
Shares are not publicly traded, the Market Price for such day shall be
the fair market value thereof determined jointly by the Company and the
holder of a majority of the shares of this Series then outstanding;
provided, however, that if such parties are unable to reach agreement
within a reasonable period of time, the Market Price shall be
determined in good faith by the independent investment banking firm
selected jointly by the Company and the holder of a majority of the
shares of this Series then outstanding or, if that selection cannot be
made within an additional 15 days, by an independent investment banking
firm selected by the American Arbitration Association in accordance
with its rules.
<PAGE>
-6-
"(b) The Dividend per share of this Series shall be computed
based upon a rate per annum of 5% on a base amount of U.S. $1.35 per
share of this Series (the "Base Amount"). The Dividend rate per annum
shall be subject to increase in the event that all of the following
conditions (the "Triggering Conditions") have not been satisfied by the
dates specified below: (i) the Common Shares are listed on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National
Market; (ii) the Common Shares are traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market at
a Market Price greater than U.S. $2.40 per Common Share on each of the
10 consecutive trading days preceding such date; and (iii) the
Corporation's net income (excluding profit or loss on disposal of a
significant part of the Company's assets or separate segment thereof,
gains on restructuring payables, gains or losses on the extinguishment
of debt, expropriations of property, gains or losses that are the
direct result of a major casualty, or one-time losses resulting from
prohibition under a newly-enacted law or regulation) before income
taxes, Dividends on the shares of this Series and amortization of
goodwill and covenants not to compete for the three consecutive fiscal
quarters preceding such date, as reported in or derived from the
Corporation's quarterly or annual reports filed with the Securities and
Exchange Commission, shall have averaged at least U.S. $0.07 per fully
diluted Common Share per fiscal quarter, provided, however, in making
such calculation, the Common Shares issuable upon exercise of the
warrants issued to Warburg Pincus Ventures, L.P. ("Warburg"), pursuant
to that certain Warrant Agreement between the Corporation and Warburg
relating to warrants to purchase 10,000,000 Common Shares (the "Warrant
Agreement"), shall be excluded but Common Shares issuable upon the
conversion of the shares of this Series shall not. All references to
per share amounts or prices with respect to the Triggering Conditions
shall be appropriately adjusted for any subdivision, consolidation, or
reclassification of the Common Shares. Until the Triggering Conditions
have been satisfied, the Dividend rate per annum shall be (A)15% of the
Base Amount per share of this Series from and after January 1, 2003 and
payable in accordance with Section 2(c) hereof commencing January 1,
2004; (B) 18% of the Base Amount per share of this Series from and
after January 1, 2004 and payable in accordance with Section 2(c)
hereof commencing January 1, 2005; and (C) thereafter, 21% of the Base
Amount per share of this Series from and after January 1, 2005 and
payable in accordance with Section 2(c) hereof commencing January 1,
2006. Upon the satisfaction of all the Triggering Conditions, the
Dividend per share of this Series shall be computed based upon a rate
per annum of 5% of the Base Amount. Accruals of Dividends shall not
bear interest. All Dividends declared upon the shares of this Series
shall be declared pro rata per share.
"(c) The record date for the determination of the holders of
shares of this Series who shall be entitled to receive Dividends (the
"Record Date") shall be the first business day of each calendar year,
and only the holders of shares of this Series of record on the Record
Date shall be entitled to receive such Dividends. All Dividends payable
to such holders of record shall be paid on the tenth business day
following the Record Date on each issued and outstanding share of this
Series.
"(d) Dividends payable on shares of this Series for any
period other than a full dividend period shall be computed on the basis
of a 360-day year consisting of twelve 30-day months. Any Dividend
payment made on shares of this Series shall first be credited against
the earliest accumulated but unpaid Dividends due with respect to the
shares of this Series.
<PAGE>
-7-
"(e) No dividends shall be declared or paid or set aside for
payment on any share capital of the Corporation ranking, as to
dividends, on a parity with or subordinate to the shares of this Series
for any period unless full accumulated Dividends have been or
contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set aside for such payment on the
shares of this Series for all Dividend periods terminating on or prior
to the date of payment of such dividends. When Dividends are not paid
in full on the shares of this Series and any other preferred shares of
the Corporation ranking with respect to payment of dividends on a
parity with the shares of this Series, all dividends declared or paid
upon shares of this Series and such other preferred shares shall be
declared and paid pro rata so that the amount of dividends declared and
paid on the shares of this Series and such other preferred shares shall
in all cases bear to each other the same ratio that accumulated
dividends per share (which in the case of noncumulative preferred
shares shall not include any accumulation in respect of unpaid
dividends for prior dividend periods) on shares of this Series and such
other preferred shares bear to each other. Except as provided in the
preceding sentence, unless full accumulated Dividends have been paid or
declared and a sum sufficient for the payment thereof set aside for
payment, no dividends (other than dividends or distributions paid in
Common Shares, or options, warrants or rights to subscribe for or
purchase Common Shares, or, in each case, any other series of shares of
the Corporation ranking subordinate to the shares of this Series as to
dividends and upon liquidation) shall be declared and paid or a sum
sufficient for the payment thereof set aside for payment or any other
distribution declared or made upon the Common Shares or any other class
of shares of the Corporation ranking subordinate to or on a parity with
the shares of this Series as to dividends or upon liquidation. No
Common Shares or shares of any other class of shares of the Corporation
ranking subordinate to or on a parity with the shares of this Series as
to dividends or upon liquidation shall be redeemed, purchased or
otherwise acquired for any consideration (and no funds shall be paid to
or made available for a sinking fund for the redemption of any such
share capital) by the Corporation (except by conversion into or
exchange for shares of the Corporation ranking subordinate to the
shares of this Series as to dividends and upon liquidation or except
with respect to Common Shares that the Corporation has become obligated
to redeem prior to the issuance of any shares of this Series upon the
occurrence of specified circumstances) unless, in each case, the full
accumulated Dividends shall have been paid or declared and a sum
sufficient for the payment thereof set aside for payment. Holders of
shares of this Series shall not be entitled to any dividend, whether
payable in cash, property or stock, in excess of the full Dividends on
such shares.
"(f) Upon conversion of any shares of this Series by any
holder thereof pursuant to Section 7 hereof, any Dividends accrued and
payable to such holder shall be forfeited and the Corporation shall
have no further obligation to such holder of shares of this Series for
such accumulated Dividends.
"3. Liquidation Rights. (a) In the event of any voluntary or
involuntary dissolution, liquidation, or winding up of the affairs of
the Corporation, after payment or provision for payment of the debts
and other liabilities of the Corporation and any preferential amounts
payable with respect to securities of the Corporation ranking prior to
the shares of this Series ("Senior Preferred Shares"), the holders of
shares of this Series shall be entitled to receive out of the assets
<PAGE>
-8-
of the Corporation available for distribution to shareholders, before
any distribution of assets is made to holders of the Common Shares or
any other share capital of the Corporation ranking subordinate to the
shares of this Series, a liquidating distribution in an amount equal to
the greater of (i) U.S. $1.35 per share of this Series plus an amount
equal to any accrued and unpaid Dividends (including accumulated
Dividends, whether or not declared) to and including the date of
distribution or (ii) the amount distributable to the holders of shares
of this Series as if such holders had converted their shares of this
Series into Common Shares pursuant to Section 7 hereof immediately
prior to such dissolution, liquidation or winding up of the affairs of
the Corporation (plus accumulated Dividends, whether or not declared).
Amounts payable pursuant to clause (i) or (ii) of this Section 3(a)
shall be distributed ratably among the holders of shares of this Series
in proportion to the number of shares of this Series held. After
payment to the holders of shares of this Series of the full amount to
which such holders are entitled as set forth above, the holders of
shares of this Series shall have no right or claim to any of the
remaining assets of the Corporation.
"(b) If upon any such dissolution, liquidation or winding up
of the affairs of the Corporation, the assets of the Corporation
distributable among the holders of shares of this Series and the
holders of all other classes or series of shares of the Corporation
ranking on a parity with the shares of this Series shall be
insufficient to permit the payment to them of the full preferential
amounts to which they are entitled, then the entire assets of the
Corporation so to be distributed shall be distributed ratably among the
holders of shares of this Series and such other classes or series of
shares of the Corporation in proportion to the sum of the accumulated
dividends and the liquidation preferences per share.
"(c) The sale, conveyance, mortgage, pledge or lease of all or
substantially all the assets of the Corporation shall be deemed to be a
liquidation, dissolution or winding up of the Corporation for purposes
of this Section 3.
"4. Optional Redemption. (a) The shares of this Series may not
be redeemed before the fifth anniversary of the Initial Issuance Date.
Thereafter, the shares of this Series shall be redeemable (subject to
subsection 4(d) below) at the option of the Corporation, in whole or in
part, at the redemption price, which shall be an amount equal to the
greater of (i) U.S. $1.35 per share of this Series plus the amount of
any accrued and unpaid Dividends per share of this Series (including
accumulated Dividends, whether or not declared) or (ii) the Fair Market
Value of a share of this Series (as defined below). For purposes
hereof, the Fair Market Value shall be determined by a nationally
recognized independent investment banking firm mutually agreed to by
the Corporation and the holder of a majority of the shares of this
Series then outstanding, whose determination shall be conclusive.
"(b) (i) In case the Corporation shall desire to exercise its
right to redeem any shares of this Series, it shall give notice of such
redemption to holders of the shares of this Series to be redeemed as
hereinafter provided in this Section 4(b).
"(ii) Notice of redemption shall be given to the
holders of shares of this Series to be redeemed by mailing
such notice by first-class mail to their last addresses as
they
<PAGE>
-9-
shall appear upon the register for the shares of this Series
not less than 120 calendar days prior to the date fixed for
redemption.
"(iii) Each such notice of redemption (A) shall
specify the date fixed for redemption and the redemption price
at which shares of this Series are to be redeemed, (B) shall
state that payment of the redemption price for the shares of
this Series to be redeemed will be made at the principal
executive offices of the Corporation, upon presentation and
surrender of certificates representing such shares of this
Series, and (C) if less than all the shares of this Series are
to be redeemed, shall specify the number of shares of this
Series held by each holder to be redeemed. In case any
certificate representing shares of this Series is to be
redeemed in part only, the notice of redemption which relates
to such certificate shall state the number of shares of this
Series represented by such certificate to be redeemed and
shall state that on and after the redemption date, upon
surrender of such certificate, a new certificate or
certificates for a number of shares of this Series equal to
the unredeemed portion thereof will be issued.
"(iv) If less than all the shares of this Series are
to be redeemed, the Corporation shall effect such redemption
pro rata among the holders thereof (based on the number of
shares of this Series held on the date of notice of
redemption).
"(c) (i) If the giving of notice of redemption shall have been
completed as provided above, the shares of this Series specified in
such notice shall become redeemable, and shall be redeemed by the
Corporation upon presentation and surrender of the certificate
representing such shares, on the date and at the place stated in such
notice at the redemption price, and on and after such date fixed for
redemption, notwithstanding that any certificate for shares of this
Series so called for redemption shall not have been surrendered for
cancellation, unless there shall have been a default in payment of the
redemption price, all shares of this Series called for redemption shall
no longer be deemed to be outstanding, and all rights with respect to
such shares of this Series shall forthwith cease and terminate except
only the right of the holders thereof to receive from the Corporation
the redemption price, without interest, of the shares to be redeemed,
and such shares shall not thereafter be transferred on the books of the
Corporation or be deemed to be outstanding for any purpose whatsoever.
"(ii) Upon presentation of any certificate
representing shares of this Series only a portion of which are
to be redeemed, the Corporation shall immediately issue, at
its expense, a new certificate or certificates representing
the shares of this Series not redeemed.
"(d) Except as provided in paragraph (a) above, the
Corporation shall have no right to redeem the shares of this Series.
Any shares of this Series so redeemed shall be permanently retired,
shall no longer be deemed outstanding and shall not under any
circumstances be reissued, and the Corporation may from time to time
take such appropriate corporate action as may be necessary to reduce
the authorized shares of this Series accordingly. Nothing herein
contained shall prevent or restrict the purchase by the Corporation,
from time to time either at public or
<PAGE>
-10-
private sale, of the whole or any part of the shares of this Series at
such price or prices as the Corporation may determine, subject to the
provisions of applicable law.
"5. No Mandatory Redemption. The shares of this Series shall
not be subject to mandatory redemption by the Corporation.
"6. Voting Rights. (a) Each issued and outstanding share of
this Series shall be entitled to the number of votes equal to the
number of Common Shares of the Corporation into which each such share
of this Series is convertible (as adjusted from time to time pursuant
to Section 7(a) hereof), at each meeting of shareholders of the
Corporation with respect to any and all matters presented to the
shareholders of the Corporation for their action or consideration.
Except as provided by law, by the provisions of paragraph (b) below or
by the provisions establishing any other series of preferred stock of
the Corporation, holders of the shares of this Series and of any other
outstanding preferred stock shall vote together with the holders of
Common Shares as a single class.
(b) In addition to any other rights provided by law, the
Corporation shall not amend, alter or repeal the preferences, special
rights or other powers of the shares of this Series or any other
provision of the Corporation's constating documents that would
adversely affect the rights of the holders of the shares of this
Series, including, without limitation, any increase in the number of
shares of this Series, without the written consent or affirmative vote
of the holders of at least 66-2/3% of the then outstanding aggregate
number of such adversely affected shares of this Series, given in
writing or by vote at a meeting, consenting or voting (as the case may
be) separately as a class. For this purpose, the authorization or
issuance of any series of preferred stock of the Corporation with
preference or priority over, or being on a parity with the shares of
this Series as to the right to receive either dividends or amounts
distributable upon liquidation, dissolution or winding up of the
Corporation shall be deemed to adversely affect the shares of this
Series.
"7. Conversion. (a) Each share of this Series may be converted
at any time, at the option of the holder thereof, in the manner
hereinafter provided, into fully-paid and nonassessable Common Shares,
provided, however, that on any redemption of any shares of this Series
or any liquidation of the Corporation, the right of conversion shall
terminate at the close of business on the full business day next
preceding the date fixed for such redemption or for the payment of any
amounts distributable on liquidation to the holders of the shares of
this Series. The initial conversion rate for shares of this Series
shall be one Common Share for each one share of this Series surrendered
for conversion, representing an initial conversion price (for purposes
of Section 7(g)) of U.S. $1.35 per share of the Corporation's Common
Shares (hereinafter, the "Conversion Price"). The applicable conversion
rate and Conversion Price from time to time in effect are subject to
adjustment as hereinafter provided.
"(b) Whenever the Conversion Price shall be adjusted as
provided in Section 7(g) hereof, the Corporation shall forthwith file
at each office designated for the conversion of the shares of this
Series, a statement, signed by any of the Chairman of the Board, the
President, any Vice President or the Treasurer of the Corporation,
showing in reasonable detail the facts requiring such adjustment. The
Corporation shall also cause a notice setting forth any such
adjustments to be sent by mail, first class, postage prepaid, to each
record holder of shares of this Series at his
<PAGE>
-11-
or its address appearing on the stock register. If such notice relates
to an adjustment resulting from an event referred to in paragraph
7(g)(vii), such notice shall be included as part of the notice required
to be mailed and published under the provisions of paragraph 7(g)(vii)
hereof.
"(c) The right of conversion shall be exercised by the holder
by the surrender of the certificates representing shares of this Series
to be converted to the Corporation at any time during normal business
hours at the office or agency then maintained by it for the conversion
of shares of this Series (the "Conversion Office"), accompanied by
written notice to the Corporation of such holder's election to convert
and, if so required by the Corporation or any conversion agent, by an
instrument of transfer, in form satisfactory to the Corporation and to
any conversion agent, duly executed by the registered holder or by such
holder's duly authorized attorney, and transfer tax stamps or funds
therefor, if required pursuant to Section 7(k).
"(d) As promptly as practicable after the surrender for
conversion of one or more certificates representing any shares of this
Series in the manner provided in Section 7(c) and the payment in cash
of any amount required by the provisions of Section 7(k), the
Corporation will deliver or cause to be delivered at the Conversion
Office to or upon the written order of the holder of such shares, a
certificate or certificates representing the number of full Common
Shares issuable upon such conversion, issued in such name or names as
such holder may direct, subject to any applicable contractual
restrictions and any restrictions imposed by applicable securities
laws. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of
certificates representing shares of this Series in proper order for
conversion, and all rights of the holder of such shares as a holder of
such shares shall cease at such time, and the person or persons in
whose name or names the certificates for such Common Shares are to be
issued shall be treated for all purposes as having become the record
holder or holders thereof at such time; provided, however, that any
such surrender on any date when the stock transfer books of the
Corporation shall be closed shall constitute the person or persons in
whose name or names the certificates for such Common Shares are to be
issued as the record holder or holders thereof for all purposes
immediately prior to the close of business on the next succeeding day
on which such stock transfer books are opened.
"(e) "Upon conversion in the manner provided in this Section 7
of only a portion of the number of shares of this Series represented by
a certificate so surrendered for conversion, the Corporation shall
issue and deliver or cause to be delivered at the Conversion Office to
or upon the written order of the holder of the certificate so
surrendered for conversion, at the expense of the Corporation, a new
certificate or certificates representing the number of shares of this
Series representing the unconverted portion of the certificate so
surrendered, issued in such name or names as such holder may direct,
subject to any applicable contractual restrictions and any restrictions
imposed by applicable securities laws.
"(f) All shares of this Series which shall have been
surrendered for conversion as herein provided shall no longer be deemed
to be outstanding and all rights with respect to such shares, including
the rights, if any, to receive notices and to vote, shall forthwith
cease and terminate except only the right of the holder thereof to
receive Common Shares in exchange therefor. Any shares of this Series
so converted shall be retired and canceled and shall not be
<PAGE>
-12-
reissued, and the Corporation may from time to time take such
appropriate action as may be necessary to reduce the authorized shares
of this Series accordingly.
(g) Anti-Dilution Provisions.
(i) In order to prevent dilution of the right granted
hereunder, the Conversion Price shall be subject to adjustment from time to time
in accordance with this paragraph 7(g)(i). At any given time the Conversion
Price shall be that dollar (or part of a dollar) amount the payment of which
shall be sufficient at the given time to acquire one Common Share of the
Corporation upon conversion of shares of this Series. Upon each adjustment of
the Conversion Price pursuant to this Section 7(g), the registered holder of
shares of this Series shall thereafter be entitled to acquire upon exercise, at
the Conversion Price resulting from such adjustment, the number of Common Shares
of the Corporation obtainable by multiplying the Conversion Price in effect
immediately prior to such adjustment by the number of shares of Common Shares of
the Corporation acquirable immediately prior to such adjustment and dividing the
product thereof by the Conversion Price resulting from such adjustment. For
purposes of this Section 7(g), the term "Number of Common Shares Deemed
Outstanding" at any given time shall mean the sum of (x) the number of shares of
the Corporation's Common Shares outstanding at such time, (y) the number of
Common Shares of the Corporation issuable assuming conversion at such time of
all outstanding shares of the Corporation's other series of convertible
preferred stock, if any, and (z) the number of Common Shares of the Corporation
deemed to be outstanding at such time under subparagraphs 7(g)(ii)(1) to (8),
inclusive.
(ii) Except as provided in paragraph 7(g)(iii) or 7(g)(vi)
below, if and whenever on or after the Initial Issuance Date, the Corporation
shall issue or sell, or shall in accordance with subparagraphs 7(g)(ii)(1) to
(8), inclusive, be deemed to have issued or sold (such issuance or sale, whether
actual or deemed, the "Triggering Transaction") any Common Shares for a
consideration per share less than
(I) (if the Common Shares are not traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market)
the Conversion Price in effect immediately prior to the time of such
issuance or sale, then forthwith upon such issuance or sale the
Conversion Price shall, subject to subparagraphs (1) to (8) of this
Section 7(g)(ii), be reduced to the Conversion Price (calculated to the
nearest tenth of a cent) determined by dividing: (i) an amount equal to
the sum of (x) the product derived by multiplying the Number of Common
Shares Deemed Outstanding immediately prior to such Triggering
Transaction by the Conversion Price then in effect, plus (y) the
consideration, if any, received by the Company upon consummation of
such Triggering Transaction, by (ii) an amount equal to the sum of (x)
the Number of Common Shares Deemed Outstanding immediately prior to
such Triggering Transaction plus (y) the number of Common Shares issued
(or deemed to be issued in accordance with subparagraphs 7(g)(ii)(1) to
(8)) in connection with the Triggering Transaction; or
(II) (if the Common Shares are traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market)
the average Market Price for the ten trading days immediately preceding
such issuance or sale, then forthwith upon such Triggering Transaction,
the Conversion Price shall, subject to subparagraphs (1) to (8) of this
Section 7(g)(ii),
<PAGE>
-13-
be reduced to the Conversion Price (calculated to the nearest tenth of
a cent) determined by multiplying the Conversion Price in effect
immediately prior to the time of such Triggering Transaction by a
fraction, the numerator of which shall be the sum of (x) the Number of
Common Shares Deemed Outstanding immediately prior to such Triggering
Transaction and (y) the number of Common Shares which the aggregate
consideration received by the Company upon such Triggering Transaction
would purchase at the average Market Price for the ten trading days
immediately preceding such Triggering Transaction, and the denominator
of which shall be the Number of Common Shares Deemed Outstanding
immediately after such Triggering Transaction.
For purposes of determining the adjusted Conversion Price
under this paragraph 7(g)(ii), the following subsections (1) to (8), inclusive,
shall be applicable:
(1) In case the Corporation at any time shall in any
manner grant (whether directly or by assumption in an
amalgamation or otherwise) any rights to subscribe for or to
purchase, or any options for the purchase of, Common Shares or
any stock or other securities convertible into or exchangeable
for Common Shares (such rights or options being herein called
"Options" and such convertible or exchangeable stock or
securities being herein called "Convertible Securities"),
whether or not such Options or the right to convert or
exchange any such Convertible Securities are immediately
exercisable, and the price per share for which the Common
Shares are issuable upon exercise, conversion or exchange
(determined by dividing (x) the total amount, if any, received
or receivable by the Corporation as consideration for the
granting of such Options, plus the aggregate amount of
additional consideration payable to the Corporation upon the
exercise of all such Options, plus, in the case of such
Options which relate to Convertible Securities, the aggregate
amount of additional consideration, if any, payable upon the
issue or sale of such Convertible Securities and upon the
conversion or exchange thereof, by (y) the total maximum
number of Common Shares issuable upon the exercise of such
Options or the conversion or exchange of such Convertible
Securities) shall be less than the average Market Price in
effect for the ten trading days immediately prior to the time
of the granting of such Option (if the Common Shares are
traded on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market) or the Conversion
Price in effect immediately prior to the time of such issuance
or sale (if the Common Shares are not traded on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq
National Market), then the total maximum amount of Common
Shares issuable upon the exercise of such Options or, in the
case of Options for Convertible Securities, upon the
conversion or exchange of such Convertible Securities, shall
(as of the date of granting of such Options) be deemed to be
outstanding and to have been issued and sold by the
Corporation for such price per share. No adjustment of the
Conversion Price shall be made upon the actual issuance of
such Common Shares or such Convertible Securities upon the
exercise of such Options, except as otherwise provided in
subparagraph (3) below.
(2) In case the Corporation at any time shall in any
manner issue (whether directly or by assumption in an
amalgamation or otherwise) or sell any Convertible Securities,
whether or not the rights to exchange or convert thereunder
are immediately
<PAGE>
-14-
exercisable, and the price per share for which Common Shares
are issuable upon such conversion or exchange (determined by
dividing (x) the total amount received or receivable by the
Corporation as consideration for the issue or sale of such
Convertible Securities, plus the aggregate amount of
additional consideration, if any, payable to the Corporation
upon the conversion or exchange thereof, by (y) the total
maximum number of Common Shares issuable upon the conversion
or exchange of all such Convertible Securities) shall be less
than the average Market Price in effect for the ten-day
trading period immediately prior to the time of such issue or
sale (if the Common Shares are traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National
Market) or the Conversion Price in effect immediately prior to
the time of such issuance or sale (if the Common Shares are
not traded on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market), then the total
maximum number of Common Shares issuable upon conversion or
exchange of all such Convertible Securities shall (as of the
date of the issue or sale of such Convertible Securities) be
deemed to be outstanding and to have been issued and sold by
the Corporation for such price per share. No adjustment of the
Conversion Price shall be made upon the actual issuance of
such Common Shares upon exercise of the rights to exchange or
convert under such Convertible Securities, except as otherwise
provided in subparagraph (3) below.
(3) If the purchase price provided for in any Options
referred to in subparagraph (1), the additional consideration,
if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraphs (1) or
(2), or the rate at which any Convertible Securities referred
to in subparagraph (1) or (2) are convertible into or
exchangeable for Common Shares shall change at any time (other
than under or by reason of provisions designed to protect
against dilution of the type set forth in paragraphs 7(g)(ii)
or 7(g)(iv)), the Conversion Price in effect at the time of
such change shall forthwith be readjusted to the Conversion
Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided
for such changed purchase price, additional consideration or
rate, as the case may be, at the time initially granted,
issued or sold. If the purchase price provided for in any
Option referred to in subparagraph (1) or the rate at which
any Convertible Securities referred to in subparagraphs (1) or
(2) are convertible into or exchangeable for Common Shares,
shall be reduced at any time under or by reason of provisions
with respect thereto designed to protect against dilution,
then in case of the delivery of Common Shares upon the
exercise of any such Option or upon conversion or exchange of
any such Convertible Security, the Conversion Price then in
effect hereunder shall forthwith be adjusted to such
respective amount as would have been obtained had such Option
or Convertible Security never been issued as to such Common
Shares and had adjustments been made upon the issuance of the
Common Shares delivered as aforesaid, but only if as a result
of such adjustment the Conversion Price then in effect
hereunder is hereby reduced.
(4) On the expiration of any Option or the
termination of any right to convert or exchange any
Convertible Securities, the Conversion Price then in effect
hereunder shall forthwith be increased to the Conversion Price
which would have been in effect at the time of such expiration
or termination had such Option or Convertible Securities, to
<PAGE>
-15-
the extent outstanding immediately prior to such expiration or
termination, never been issued.
(5) In case any Options shall be issued in connection
with the issue or sale of other securities of the Corporation,
together comprising one integral transaction in which no
specific consideration is allocated to such Options by the
parties thereto, such Options shall be deemed to have been
issued without consideration.
(6) In case any Common Shares, Options or Convertible
Securities shall be issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor
shall be deemed to be the amount received by the Corporation
therefor (before deduction for expenses or underwriters'
discounts or commissions related to such issue or sale). In
case any Common Shares, Options or Convertible Securities
shall be issued or sold for a consideration other than cash,
the amount of the consideration other than cash received by
the Corporation shall be the fair value of such consideration
as determined in good faith by the Board of Directors of the
Corporation.
(7) In case the Corporation shall declare a dividend
or make any other distribution upon the share capital of the
Corporation payable in Common Shares, Options, or Convertible
Securities, then in such case any Common Shares, Options or
Convertible Securities, as the case may be, issuable in
payment of such dividend or distribution shall be deemed to
have been issued or sold without consideration.
(8) For purposes of this paragraph 7(g)(ii), in case
the Corporation shall take a record of the holders of its
Common Shares for the purpose of entitling them (x) to receive
a dividend or other distribution payable in Common Shares,
Options or in Convertible Securities, or (y) to subscribe for
or purchase Common Shares, Options or Convertible Securities,
then such record date shall be deemed to be the date of the
issue or sale of the Common Shares deemed to have been issued
or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such
right or subscription or purchase, as the case may be.
(iii) In the event the Corporation shall declare a dividend
upon the Common Shares (other than a dividend payable in Common Shares covered
by subparagraph 7(g)(ii)(7)) payable otherwise than out of earnings or earned
surplus, determined in accordance with generally accepted accounting principles,
including the making of appropriate deductions for minority interests, if any,
in subsidiaries (herein referred to as "Liquidating Dividends"), then, as soon
as possible after the conversion of any shares of this Series, the Corporation
shall, subject to applicable law, pay to the person converting such shares of
this Series an amount equal to the aggregate value at the time of such exercise
of all Liquidating Dividends (including but not limited to the Common Shares
which would have been issued at the time of such earlier exercise and all other
securities which would have been issued with respect to such Common Shares by
reason of stock splits, stock dividends, amalgamations or reorganizations, or
for any other reason). For the purposes of this paragraph 7(g)(iii), a dividend
other than in cash shall be considered payable out of earnings or earned surplus
only to the extent that such earnings or earned surplus are charged an amount
equal to the fair value of such dividend as determined in good faith by the
Board.
<PAGE>
-16-
(iv) In case the Corporation shall at any time subdivide
(other than by means of a dividend payable in Common Shares covered by paragraph
7(g)(ii)(7)) its outstanding Common Shares into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision shall be
proportionately reduced, and, conversely, in case the outstanding Common Shares
of the Corporation shall be combined into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased.
(v) If any capital reorganization or reclassification of the
share capital of the Corporation, or amalgamation of the Corporation with
another corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of Common
Shares shall be entitled to receive stock, securities, cash or other property
with respect to or in exchange for Common Shares, then, as a condition of such
reorganization, reclassification, amalgamation or sale, lawful and adequate
provision shall be made whereby the holders of shares of this Series shall have
the right to acquire and receive upon conversion of the shares of this Series,
which right shall be prior to the rights of the holders of stock ranking on
liquidation junior to this Series (but after and subject to the rights of
holders of Senior Preferred Shares, if any), such shares of stock, securities,
cash or other property issuable or payable (as part of the reorganization,
reclassification, amalgamation or sale) with respect to or in exchange for such
number of outstanding Common Shares of the Corporation as would have been
received upon conversion of the shares of this Series at the Conversion Price
then in effect. The Corporation will not effect any such amalgamation or sale,
unless prior to the consummation thereof the amalgamated corporation or the
corporation purchasing such assets shall assume by written instrument mailed or
delivered to the holders of the shares of this Series at the last address of
each such holder appearing on the books of the Corporation, the obligation to
deliver to each such holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
receive. If a purchase, tender or exchange offer is made to and accepted by the
holders of more than 50% of the outstanding Common Shares of the Corporation,
the Corporation shall not effect any amalgamation or sale with the person having
made such offer or with any Affiliate (as defined below) of such person, unless
prior to the consummation of such amalgamation or sale the holders of the shares
of this Series shall have been given a reasonable opportunity to then elect to
receive upon the conversion of the shares of this Series either the stock,
securities or assets then issuable with respect to the Common Shares of the
Corporation or the stock, securities or assets, or the equivalent, issued to
previous holders of the Common Shares in accordance with such offer. For
purposes hereof, the term "Affiliate" with respect to any given person shall
mean any person controlling, controlled by or under common control with the
given person.
(vi) The provisions of this Section 7(g) shall not apply to
any Common Shares issued, issuable or deemed outstanding under subparagraphs
7(g)(ii)(1) to (8) inclusive: (i) to any person pursuant to any stock option,
stock purchase or similar plan or arrangement for the benefit of employees of
the Corporation or its subsidiaries in effect on the Initial Issuance Date or
thereafter adopted by the Board of Directors of the Corporation, (ii) pursuant
to options, warrants and conversion rights in existence on the Initial Issuance
Date, (iii) upon exercise of the warrants of the Corporation issued to Warburg
pursuant to the Warrant Agreement or (iv) on conversion of the shares of this
Series or the sale of any additional shares of this Series.
(vii) In the event that:
<PAGE>
-17-
(1) the Corporation shall declare any cash dividend upon its
Common Shares, or
(2) the Corporation shall declare any dividend upon its Common
Shares payable in stock or make any special dividend or other
distribution to the holders of its Common Shares, or
(3) the Corporation shall offer for subscription pro rata to
the holders of its Common Shares any additional shares of stock of any
class or other rights, or
(4) there shall be any capital reorganization or
reclassification of the share capital of the Corporation, including any
subdivision or combination of its outstanding Common Shares, or
amalgamation of the Corporation with, or sale of all or substantially
all of its assets to, another corporation, or
(5) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in connection with such event, the Corporation shall give to the holders
of the shares of this Series:
(A) at least twenty (20) days' prior written notice of
the date on which the books of the Corporation shall
close or a record shall be taken for such dividend,
distribution or subscription rights or for
determining rights to vote in respect of any such
reorganization, reclassification, amalgamation, sale,
dissolution, liquidation or winding up; and
(B) in the case of any such reorganization,
reclassification, amalgamation, sale, dissolution,
liquidation or winding up, at least twenty (20) days'
prior written notice of the date when the same shall
take place.
Such notice in accordance with the foregoing clause (A) shall also specify, in
the case of any such dividend, distribution or subscription rights, the date on
which the holders of Common Shares shall be entitled thereto, and such notice in
accordance with the foregoing clause (B) shall also specify the date on which
the holders of Common Shares shall be entitled to exchange their Common Shares
for securities or other property deliverable upon such reorganization,
reclassification, amalgamation, sale, dissolution, liquidation or winding up, as
the case may be. Each such written notice shall be given by first class mail,
postage prepaid, addressed to the holders of the shares of this Series at the
address of each such holder as shown on the books of the Corporation.
(viii) If at any time or from time to time on or after the
Initial Issuance Date, the Corporation shall grant, issue or sell any Options,
Convertible Securities or rights to purchase property (the "Purchase Rights")
pro rata to the record holders of the Common Shares of the Corporation and such
grants, issuances or sales do not result in an adjustment of the Conversion
Price under paragraph 7(g)(ii) hereof, then each holder of shares of this Series
shall be entitled to acquire (within thirty (30) days after the later to occur
of the initial exercise date of such Purchase Rights or receipt by such holder
of the notice
<PAGE>
-18-
concerning Purchase Rights to which such holder shall be entitled under
paragraph 7(g)(vii)) and upon the terms applicable to such Purchase Rights
either:
(A) the aggregate Purchase Rights which such holder could
have acquired if it had held the number of Common
Shares acquirable upon conversion of shares of this
Series immediately before the grant, issuance or sale
of such Purchase Rights; provided that if any
Purchase Rights were distributed to holders of Common
Shares without the payment of additional
consideration by such holders, corresponding Purchase
Rights shall be distributed to the exercising holders
of the shares of this Series as soon as possible
after such exercise and it shall not be necessary for
the exercising holder of the shares of this Series
specifically to request delivery of such rights; or
(B) in the event that any such Purchase Rights shall have
expired or shall expire prior to the end of said
thirty (30) day period, the number of Common Shares
or the amount of property which such holder could
have acquired upon such exercise at the time or times
at which the Corporation granted, issued or sold such
expired Purchase Rights.
(ix) If any event occurs as to which, in the opinion of the
Board, the provisions of this Section 7(g) are not strictly applicable or if
strictly applicable would not fairly protect the rights of the holders of the
shares of this Series in accordance with the essential intent and principles of
such provisions, then the Board shall make an adjustment in the application of
such provisions, in accordance with such essential intent and principles, so as
to protect such rights as aforesaid, but in no event shall any adjustment have
the effect of increasing the Conversion Price as otherwise determined pursuant
to any of the provisions of this Section 7(g) except in the case of a
combination of shares of a type contemplated in paragraph 7(g)(iv) and then in
no event to an amount larger than the Conversion Price as adjusted pursuant to
paragraph 7(g)(iv).
"(h) No fractional Common Shares shall be issued upon the
conversion of any share or shares of this Series. If any fractional
interest in a Common Share would, except for the provisions of this
Section 7(h), be deliverable upon the conversion of any share or shares
of this Series, the Corporation shall in lieu of delivering the
fractional Common Share therefor satisfy such fractional interest by
payment to the holder of such surrendered share or shares of this
Series of an amount in cash equal (computed to the nearest cent) to the
current market value of such fractional interest, computed on the basis
of the Market Price of the Common Shares on the date of such
conversion, provided, however, that no amount shall be paid by the
Corporation to such holder of less than U.S. $5.00.
"(i) The Corporation shall be entitled to effect the mandatory
conversion, in whole or in part, of the shares of this Series in
accordance with this Section 7 if all of the Triggering Conditions (set
forth in Section 2(b) hereof) shall have been satisfied as of the date
of the notice described below. Upon such mandatory conversion, each
share of this Series subject to such conversion shall be converted into
Common Shares at the then effective Conversion Price for such shares.
In case the Corporation shall desire to exercise the right to convert
all or, as the case may
<PAGE>
-19-
be, any shares of this Series in accordance with the right to do so, it
shall provide notice to the holders of the shares of this Series to be
converted as hereinafter provided in this Section 7(i).
"(i) A notice of conversion shall be given to the
holders of shares of this Series to be converted by mailing by
first-class mail to their last addresses as they shall appear upon the
register for shares of this Series not less than 120 calendar days
prior to the date fixed for conversion.
"(ii) Each such notice of conversion (A) shall
specify the date fixed for conversion and the number of Common Shares
issuable to the holder of a share of this Series upon such conversion,
(B) shall state the offices or agencies to be maintained by the
Corporation for the purpose of such conversion, upon presentation and
surrender of such shares of this Series and (C) if less than all the
shares of this Series are to be converted, shall specify the number of
shares of this Series held by each holder, and the serial numbers of
the certificates thereof, to be converted. In case any certificate
representing shares of this Series is to be converted in part only, the
notice of conversion which relates to such certificate shall state the
number of shares of this Series represented by such certificate to be
converted and shall state that on and after the conversion date, upon
surrender of such certificate, a new certificate or certificates for a
number of shares of this Series equal to the unconverted portion
thereof will be issued.
"(j) The Corporation will at all times reserve and keep
available, solely for the purposes of the issuance of Common Shares
upon conversion of the shares of this Series, the full number of Common
Shares as shall be issuable upon the conversion of all such outstanding
shares of this Series.
"The Corporation will endeavor to comply with all securities
laws regulating the offer and delivery of Common Shares upon conversion
of the shares of this Series and, that if any Common Shares required to
be reserved for purposes of conversion of the shares hereunder require
registration with or approval of any governmental authority under any
U.S. (federal or state) or Canadian law before such Common Shares may
be validly issued or delivered upon conversion, the Corporation will,
in good faith and as expeditiously as possible, endeavor to secure such
registration or approval, as the case may be.
"All Common Shares which shall be issued upon conversion of
the shares of this Series will upon issuance be fully paid and
nonassessable and not subject to preemptive rights.
"(k) The issuance of certificates for Common Shares upon
conversion of shares of this Series shall be made without charge for
any stamp or other similar tax in respect of such issuance. However, if
any such certificate is to be issued in a name other than that of the
holder of record of the share or shares of this Series so converted,
the holder thereof shall pay to the Corporation the amount of any tax
which may be payable in respect of any transfer involved in such
issuance or shall establish to the satisfaction of the Corporation that
such tax has been paid or is not payable.
<PAGE>
-20-
"(l) In case (A) the Corporation shall take any action which
would require an adjustment in the number of Common Shares issuable to
holders of shares of this Series upon conversion thereof pursuant to
Section 7(g) above; or (B) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the
Corporation;
then the Corporation shall cause to be given to the holders of the
shares of this Series at least ten days prior to the applicable record
date hereinafter specified, a notice of (X) the date on which a record
is to be taken for the purpose of any dividend, distribution or grant
to holders of Common Shares which would require such an adjustment, or,
if a record is not to be taken, the date as of which the holders of
Common Shares of record to be entitled to such dividend, distribution,
or grant are to be determined or (Y) the date on which such
reorganization, reclassification, amalgamation, sale, transfer,
dissolution, liquidation or winding up is expected to become effective,
and the date as of which it is expected that holders of Common Shares
of record shall be entitled to exchange their Common Shares for
securities or other property or other assets deliverable upon such
reorganization, reclassification, amalgamation, sale, transfer,
dissolution, liquidation, or winding up. Failure to give such notice or
any defect therein shall not affect the legality or validity of any
proceedings described in subparagraphs (A) or (B) of this Section 7(l).
"8. Hold Period. A holder of shares of this Series shall in no
event sell or otherwise transfer any of the shares of this Series, or any Common
Shares issued upon the due conversion of any shares of this Series, for a period
of six months from the Initial Issuance Date. The Corporation shall issue or
cause to be issued certificates representing shares of this Series, and of
Common Shares issued upon due conversion of any shares of this Series, which
contain such legends as the Corporation in its discretion deems adequate to
reflect the hold period described in this Section 8.
"9. Miscellaneous.
"(a) For the purposes hereof:
"(i) the term "outstanding", when used in reference
to shares of this Series, shall mean issued shares of this
Series, excluding shares of this Series called for redemption;
and
"(ii) the term "subsidiary" shall mean any company a
majority of whose outstanding voting capital stock (other than
directors' qualifying shares), at the time as of which any
determination is being made, shall be owned by the parent of
such company either directly or through other subsidiaries;
and
"(iii) any shares of a series or class of shares of
the Corporation shall be deemed to rank:
"(A) prior to shares of this Series, whether
or not the dividend rates, dividend payment dates or
redemption or liquidation prices per share thereof be
different from those of shares of this Series, if the
holders of such shares of a series or class of shares
shall be entitled to receipt from the Corporation of
<PAGE>
-21-
dividends or of amounts distributable upon
liquidation, dissolution or winding up, in preference
or priority to the holders of shares of this Series,
as the case may be;
"(B) on a parity with or equal to shares of
this Series, whether or not the dividend rates,
dividend payment dates or redemption or liquidation
prices per share thereof be different from those of
shares of this Series, if the holders of such shares
of a series or class of shares shall be entitled to
the receipt from the Corporation of dividends or of
amounts distributable upon liquidation to their
respective dividend rates or liquidation prices,
without preference or priority one over the other as
between the holders of such shares of a series or
class of shares and the holders of shares of this
Series; and
"(C) subordinate to shares of this Series,
whether or not the dividend rates, dividend payment
dates or redemption or liquidation prices per share
thereof be different from those of shares of this
Series, if the rights of the holders of such shares
of a series or class of shares shall be subordinate
to the rights of the holders of shares of this Series
in respect of the receipt from the Corporation of
dividends and of amounts distributable upon
liquidation, dissolution or winding up, including,
without limitation, the Common Shares of the
Corporation.
"(b) So long as any shares of this Series are outstanding, in
the event of any conflict between the provisions hereof and any
corporate document of the Corporation (both as presently existing or
hereafter amended and supplemented) the provisions hereof, as the same
may be amended or supplemented, shall be and remain controlling.
"(c) The holders of the shares of this Series shall have no
preemptive rights.
<PAGE>
SCHEDULE "B"
On July 27, 1993, the Corporation was incorporated pursuant to the provisions of
the Business Corporations Act (Alberta) (the "ABCA") under the name "575035
Alberta Ltd.".
On November 18, 1993, the Corporation filed Articles of Amendment pursuant to
the ABCA changing its name to "Adventure Capital Corporation" and removing its
private company restrictions.
On January 26, 1994, the Corporation filed Articles of Amendment pursuant to the
ABCA reorganizing its share capital, deleting the authorized Redeemable
Preferred Shares of the Corporation and altering the rights, privileges,
restrictions and conditions attached to the authorized Common Shares of the
Corporation.
On October 12, 1994, the Corporation filed Articles of Amendment pursuant to the
ABCA changing its name to "HealthCare Capital Corp.".
On January 31, 1997, the Corporation filed Articles of Amendment pursuant to the
ABCA authorizing the creation of an unlimited number of Preferred Shares,
issuable in series.
On December 16, 1997, the Corporation filed Articles of Amendment pursuant to
the ABCA creating its first series of preferred shares designated as "Series A
Convertible Preferred Shares".
On February 9, 1998, the Corporation filed Articles of Amendment pursuant to the
ABCA changing its corporate name to "Sonus Corp." and changing each one (1)
Common Share of the Corporation into one-fifth (1/5) of a Common Share.
Concurrently, the Corporation was required re-state its Articles, a requirement
of the Registrar of Corporations to accommodate the implementation of the online
electronic filing system in Alberta, administered by Alberta Registries (CORES).
<PAGE>
SCHEDULE "C"
i) Meetings of shareholders of the Corporation may be held in the Yukon,
in Vancouver, British Columbia or in Portland, Oregon, U.S.A. as the
directors may designate in the notice relating to such meeting.
ii) Subject to the provisions of the Business Corporations Act (Yukon
Territories), the directors may, between annual general meetings,
appoint one or more additional directors of the Corporation to serve
until the next annual general meeting, but the number of additional
directors shall not at any time exceed one third of the number of
directors who held office at the expiration of the last annual meeting
of the Corporation.
<PAGE>
YUKON BUSINESS CORPORATIONS ACT
(SECTION 30 OR 179)
Form 5-01
ARTICLES OF AMENDMENT
- --------------------------------------------------------------------------------
1. Name of Corporation: SONUS CORP.
- --------------------------------------------------------------------------------
2. Corporate Access No: 26907
- --------------------------------------------------------------------------------
3. The Articles of the above-named corporation are amended pursuant to a Court
Order:
Yes ------ No --X--
- --------------------------------------------------------------------------------
4. The Articles of the above-named corporation are amended as follows:
The Terms of Series B Convertible Preferred Shares (without par
value) hereto annexed are attached to and form part of the
Articles of Corporation.
- --------------------------------------------------------------------------------
5. Date Signature Title
October 1, 1999 /s/ Rodney Snow Solicitor
- --------------------------------------------------------------------------------
FILED
OCT 1 1999
[ILLEGIBLE INITIALS]
DEPUTY REGISTRAR
OF CORPORATIONS
<PAGE>
SONUS CORP.
TERMS OF SERIES B CONVERTIBLE PREFERRED SHARES
(Without Par Value)
"1. Number and Designation. The number of shares to constitute this series
shall be 2,500,000 and the designation of such shares shall be the "Series B
Convertible Preferred Shares" (hereinafter called "this Series"). The number of
shares constituting this Series may be decreased from time to time by action of
the Board, but not below the number of shares of this Series then outstanding.
All shares of this Series shall be identical with each other in all respects.
The shares of this Series shall rank senior to the common shares (the "Common
Shares") of the Corporation and equal to the Series A Convertible Preferred
Shares ("Series A Convertible Shares") as to dividends and upon liquidation, as
described below. Any amounts herein referencing share prices or numbers of
shares shall be subject to appropriate adjustments in the event of any stock
splits, consolidations or the like.
"2. Dividend Rights.
"(a) Subject to the provisions of this Section 2, the holders of shares of
this Series shall be entitled to receive, when and as declared by the Board, out
of any funds legally available therefor, preferential cumulative dividends
("Dividends") (i) at a rate per annum per share equal to eight percent (8.0%) of
the Conversion Price (as hereinafter defined), payable as provided in Section
2(b) hereof, through October 31, 2004; (ii) from November 1, 2004 through
October 31, 2005; at a rate per annum per share equal to twelve percent (12.0%)
of the Conversion Price, payable in U.S. dollars; (iii) from November 1, 2005
through October 31, 2006, at a rate per annum per share equal to fifteen percent
(15.0%) of the Conversion Price, payable in U.S. dollars; and (iv) from and
after November 1, 2006, at a rate per annum per share equal to eighteen percent
(18.0%) of the Conversion Price, payable in U.S. dollars. Full cumulative
Dividends shall be paid before any dividends shall be set apart for or paid in
any year upon the Common Shares or any other shares ranking as to dividends
junior to this Series (such Common Shares and other shares being
<PAGE>
referred to hereinafter collectively as "Junior Stock"). Accruals of Dividends
under Section 2(b)(i) shall not bear interest. All Dividends declared upon the
shares of this Series shall be declared pro rata per share.
"(b) (i) No Dividends on this Series will be declared until October 31,
2000. At such time, if the Corporation's EBTA, as reported in or derived from
the Corporation's annual report filed with the Securities and Exchange
Commission, for the fiscal year ended July 31, 2000, is equal to or greater than
U.S. $0.20 (excluding CFO Costs) per fully diluted Common Share, as measured to
include Common Shares issuable upon the conversion of the shares of this Series
and the Series A Convertible Shares but to exclude the Common Shares issuable
upon the exercise of the Warburg Warrants (the "Fully Diluted Common Shares"),
then the holders of shares of this Series shall be entitled to receive when and
as declared by the Board out of assets legally available therefor a Dividend in
respect of the period beginning on the Initial Issuance Date (as defined below)
and ending on October 31, 2000, and each quarter thereafter, in each case
payable in U.S. dollars, before any dividends shall be set apart for or paid
upon any Junior Stock in any year. "EBTA" means net income (excluding profit or
loss on disposal of a significant part of the Corporation's assets or separate
segment thereof, gains on restructuring payables, gains or losses on the
extinguishment of debt, expropriations of property, gains or losses that are the
direct result of a major casualty, or one-time losses resulting from prohibition
under a newly-enacted law or regulation) before income taxes, Dividends on the
shares of this Series and the Corporation's Series A Convertible Shares, and
amortization of goodwill and covenants not to compete. "CFO Costs" means the
costs, if such person is hired by the Corporation on or before January 31, 2000,
of (i) retaining an executive search firm to hire a chief financial officer for
the Corporation and (ii) relocating such person. "Warburg Warrants" means the
warrants to purchase 2,000,000 Common Shares issued to Warburg, Pincus Ventures,
L.P. ("Warburg") pursuant to that certain amended and restated warrant agreement
between the Corporation and Warburg dated as of the Initial Issuance Date.
(ii) If EBTA per Fully Diluted Common Share for the fiscal year ended July
31, 2000 is less than U.S. $0.20 (excluding CFO Costs), then Dividends will not
be payable until such time as the Corporation meets the quarterly EBTA
-2-
<PAGE>
targets set forth below for four (4) consecutive fiscal quarters. From and after
such time, Dividends will be payable quarterly in cash in U.S. dollars, before
any dividends shall be set apart for or paid upon any Junior Stock in any year.
If the Corporation has not met the quarterly EBTA targets set forth below for
four (4) consecutive fiscal quarters by the fiscal quarter ended July 31, 2002,
then Dividends will not be payable on shares of this Series.
Period Target EBTA per Fully Diluted
- ------ -----------------------------
Common Share
------------
Fiscal quarter ending 10/31/99 U.S. $0.02
Fiscal quarter ending 1/31/00 0.03
Fiscal quarter ending 4/30/00 0.07
Fiscal quarter ending 7/31/00 0.08
Fiscal quarter ending 10/31/00 0.07
Fiscal quarter ending 1/31/01 0.10
Fiscal quarter ending 4/30/01 0.15
Fiscal quarter ending 7/31/01 0.17
Fiscal quarter ending 10/31/01 0.16
Fiscal quarter ending 1/31/02 0.20
Fiscal quarter ending 4/30/02 0.26
Fiscal quarter ending 7/31/02 0.30
"(c) To the extent payable pursuant to Section 2(b) hereof, Dividends on
this Series shall accrue quarterly on October 31, January 31, April 30 and July
31 of each year, beginning October 31, 1999, and shall be cumulative from the
date of initial issuance of the shares of this Series (the "Initial Issuance
Date"), whether or not earned or declared and whether or not in any fiscal year
there shall be assets,
-3-
<PAGE>
net profits or surplus legally available for the payment of such Dividends in
respect of such fiscal year, so that if in any fiscal year or years, Dividends
are not paid upon shares of this Series in the full amounts specified in Section
2(a) hereof, unpaid Dividends which are payable under Section 2(b) hereof shall
accumulate as against the holders of the Junior Stock and any sums in any later
years shall be paid to the holders of this Series with respect to any prior year
or years when Dividends were not paid.
"(d) The record date for the determination of the holders of shares of this
Series who shall be entitled to receive Dividends (the "Record Date") shall be
thirty (30) days prior to any payment date, and only the holders of shares of
this Series of record on the Record Date shall be entitled to receive such
Dividends.
"(e) Dividends payable on shares of this Series for any period other than a
full dividend period shall be computed on the basis of a 360-day year consisting
of twelve 30-day months. Any Dividend payment made on shares of this Series
shall first be credited against the earliest accumulated but unpaid Dividends
due with respect to the shares of this Series.
"(f) No dividends shall be declared or paid or set aside for payment on any
share capital of the Corporation ranking, as to dividends, on a parity with or
subordinate to the shares of this Series for any period unless full accumulated
Dividends have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set aside for such payment on the shares
of this Series for all Dividend periods terminating on or prior to the date of
payment of such dividends. When Dividends are not paid in full on the shares of
this Series and any other preferred shares of the Corporation ranking with
respect to payment of dividends on a parity with the shares of this Series, all
dividends declared or paid upon shares of this Series and such other preferred
shares shall be declared and paid pro rata so that the amount of dividends
declared and paid on the shares of this Series and such other preferred shares
shall in all cases bear to each other the same ratio that accumulated dividends
per share (which in the case of noncumulative preferred shares shall not include
any accumulation in respect of unpaid dividends for prior dividend periods) on
shares of this Series and such other preferred shares bear to each other. Except
as provided in the preceding sentence, unless full accumulated
-4-
<PAGE>
Dividends have been paid or declared and a sum sufficient for the payment
thereof set aside for payment, no dividends (other than dividends or
distributions paid in Common Shares, or options, warrants or rights to subscribe
for or purchase Common Shares or, in each case, any other series of shares of
the Corporation ranking subordinate to the shares of this Series as to dividends
and upon liquidation) shall be declared and paid or a sum sufficient for the
payment thereof set aside for payment or any other distribution declared or made
upon or in respect of the Common Shares, Series A Convertible Shares or any
other class of shares of the Corporation ranking subordinate to or on a parity
with the shares of this Series as to dividends or upon liquidation. No Common
Shares, Series A Convertible Shares or shares of any other class of shares of
the Corporation ranking subordinate to or on a parity with the shares of this
Series as to dividends or upon liquidation shall be redeemed, purchased, retired
or otherwise acquired for any consideration (and no funds shall be paid to or
made available for a sinking fund for the redemption of any such share capital)
by the Corporation (except by conversion into or exchange for shares of the
Corporation ranking subordinate to the shares of this Series as to dividends and
upon liquidation or except with respect to Common Shares that the Corporation
has become obligated to redeem prior to the issuance of any shares of this
Series upon the occurrence of specified circumstances) unless, in each case, the
full accumulated Dividends in respect of this Series shall have been paid or
declared and a sum sufficient for the payment thereof set aside for payment.
Holders of shares of this Series shall not be entitled to any dividend, whether
payable in cash, property or stock, in excess of the full Dividends on such
shares.
"(g) Upon conversion of any shares of this Series by any holder thereof
pursuant to Section 7 hereof, any Dividends accrued and payable to such holder
shall be forfeited and the Corporation shall have no further obligation to such
holder of shares of this Series for such accumulated Dividends.
"3. Liquidation Rights. (a) In the event of any voluntary or involuntary
dissolution, liquidation, or winding up of the affairs of the Corporation, after
payment or provision for payment of the debts and other liabilities of the
Corporation and any preferential amounts payable with respect to securities of
the Corporation ranking prior to the shares of this Series ("Senior Preferred
Shares"), the
-5-
<PAGE>
holders of each share of this Series shall be entitled to receive out of the
assets of the Corporation available for distribution to shareholders, before any
distribution of assets is made to holders of Junior Stock, a liquidating
distribution in an amount equal to the Conversion Rate multiplied by the greater
of (i) the Conversion Price per share of this Series plus an amount equal to any
accrued and unpaid Dividends, whether or not declared (including accumulated
Dividends), to and including the date of distribution or (ii) the per share
amount distributable to the holders of shares of this Series as if such holders
had converted their shares of this Series into Common Shares pursuant to Section
7 hereof immediately prior to such dissolution, liquidation or winding up of the
affairs of the Corporation (plus accumulated Dividends, whether or not
declared). Amounts payable pursuant to clause (i) or (ii) of this Section 3(a)
shall be distributed ratably among the holders of shares of this Series in
proportion to the number of shares of this Series held. After payment to the
holders of shares of this Series of the full amount to which such holders are
entitled as set forth above, the holders of shares of this Series shall have no
right or claim to any of the remaining assets of the Corporation.
"(b) If upon any such dissolution, liquidation or winding up of the affairs
of the Corporation, the assets of the Corporation distributable among the
holders of shares of this Series and the holders of all other classes or series
of shares of the Corporation ranking on a parity with the shares of this Series
shall be insufficient to permit the payment to them of the full preferential
amounts to which they are entitled, then the entire assets of the Corporation so
to be distributed shall be distributed ratably among the holders of shares of
this Series and such other classes or series of shares of the Corporation in
proportion to the sum of the accumulated dividends and the liquidation
preferences per share.
"(c) The sale, conveyance, mortgage, pledge or lease of all or
substantially all the assets of the Corporation shall be deemed to be a
liquidation, dissolution or winding up of the Corporation for purposes of this
Section 3.
"4. Optional Redemption. (a) The shares of this Series may not be redeemed
before the fifth anniversary of the Initial Issuance Date. Thereafter, each
share of this Series shall be redeemable (subject to subsection 4(d) below) at
the option of the Corporation, in whole or in
-6-
<PAGE>
part, at the redemption price, which shall be an amount equal to the Conversion
Rate multiplied by the greater of (i) the Conversion Price per share of this
Series plus the amount of any accrued and unpaid Dividends per share of this
Series (including accumulated Dividends, whether or not declared), or (ii) the
Fair Market Value of a share of this Series (as defined below). For purposes
hereof, the Fair Market Value shall be determined by a nationally recognized
independent investment banking firm mutually agreed to by the Corporation and
the holder of a majority of the shares of this Series then outstanding, whose
determination shall be conclusive.
"(b)(i) In case the Corporation shall desire to exercise its right to
redeem any shares of this Series, it shall give notice of such redemption to
holders of the shares of this Series to be redeemed as hereinafter provided in
this Section 4(b).
"(ii) Notice of redemption shall be given to the holders of shares of
this Series to be redeemed by mailing such notice by first-class mail to
their last addresses as they shall appear upon the register for the shares
of this Series not less than 120 calendar days prior to the date fixed for
redemption.
"(iii) Each such notice of redemption (A) shall specify the date fixed
for redemption and the redemption price at which shares of this Series are
to be redeemed, (B) shall state that payment of the redemption price for
the shares of this Series to be redeemed will be made at the principal
executive offices of the Corporation, upon presentation and surrender of
certificates representing such shares of this Series, and (C) if less than
all the shares of this Series are to be redeemed, shall specify the number
of shares of this Series held by each holder to be redeemed. In case any
certificate representing shares of this Series is to be redeemed in part
only, the notice of redemption which relates to such certificate shall
state the number of shares of this Series represented by such certificate
to be redeemed and shall state that on and after the redemption date, upon
surrender of such certificate, a new certificate or certificates for the
number of shares of this Series equal to the unredeemed portion thereof
will be issued.
-7-
<PAGE>
"(iv) If less than all the shares of this Series are to be redeemed,
the Corporation shall effect such redemption pro rata among the holders
thereof (based on the number of shares of this Series held on the date of
notice of redemption).
"(c) (i) If the giving of notice of redemption shall have been completed as
provided above, the shares of this Series specified in such notice shall become
redeemable, and shall be redeemed by the Corporation upon presentation and
surrender of the certificate representing such shares, on the date and at the
place stated in such notice at the redemption price, and on and after such date
fixed for redemption, notwithstanding that any certificate for shares of this
Series so called for redemption shall not have been surrendered for
cancellation, unless there shall have been a default in payment of the
redemption price, all shares of this Series called for redemption shall no
longer be deemed to be outstanding, and all rights with respect to such shares
of this Series shall forthwith cease and terminate except only the right of the
holders thereof to receive from the Corporation the redemption price, without
interest, of the shares to be redeemed, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be outstanding for
any purpose whatsoever.
"(ii) Upon presentation of any certificate representing shares of this
Series only a portion of which are to be redeemed, the Corporation shall
immediately issue, at its expense, a new certificate or certificates
representing the shares of this Series not redeemed.
"(d) Except as provided in paragraph (a) above, the Corporation shall have
no right to redeem the shares of this Series. Any shares of this Series so
redeemed shall be permanently retired, shall no longer be deemed outstanding and
shall not under any circumstances be reissued, and the Corporation may from time
to time take such appropriate corporate action as may be necessary to reduce the
authorized shares of this Series accordingly. Nothing herein contained shall
prevent or restrict the purchase by the Corporation, from time to time either at
public or private sale, of the whole or any part of the shares of this Series at
such price or prices as the Corporation may determine, subject to the provisions
of applicable law.
-8-
<PAGE>
"5. No Mandatory Redemption. The shares of this Series shall not be subject
to mandatory redemption by the Corporation.
"6. Voting Rights. (a) Each issued and outstanding share of this Series
shall be entitled to the number of votes equal to the Conversion Rate (as
adjusted from time to time pursuant to Section 7(a) hereof), at each meeting of
shareholders of the Corporation with respect to any and all matters presented to
the shareholders of the Corporation for their action or consideration. Except as
provided by law, by the provisions of paragraph (b) below or by the provisions
establishing the terms of any other class of preferred stock of the Corporation,
holders of the shares of this Series and of any other outstanding preferred
stock, including without limitation the Series A Convertible Shares, shall vote
together with the holders of Common Shares as a single class.
(b) In addition to any other rights provided by law, the Corporation shall
not amend, alter or repeal the preferences, special rights or other powers of
the shares of this Series or any other provision of the Corporation's constating
documents that would adversely affect the rights of the holders of the shares of
this Series, including, without limitation, any increase in the number of shares
of this Series, without the written consent or affirmative vote of the holders
of at least 66-2/3% of the then outstanding aggregate number of such adversely
affected shares of this Series, given in writing or by vote at a meeting,
consenting or voting (as the case may be) separately as a class. For this
purpose, the authorization or issuance of any series of preferred stock of the
Corporation with preference or priority over, or being on a parity with the
shares of this Series as to the right to receive either dividends or amounts
distributable upon liquidation, dissolution or winding up of the Corporation
shall be deemed to adversely affect the shares of this Series.
"7. Conversion. (a) (i) Each share of this Series may be converted at any
time, at the option of the holder thereof, in the manner hereinafter provided,
into fully-paid and nonassessable Common Shares, provided, however, that on any
redemption of any shares of this Series or any liquidation of the Corporation,
the right of conversion shall terminate at the close of business on the full
business day next preceding the date fixed for such redemption or for the
payment of any amounts distributable
-9-
<PAGE>
on liquidation to the holders of the shares of this Series. The number of Common
Shares of the Corporation into which each share of this Series is convertible
(the "Conversion Rate") shall equal, for each one share of this Series, such
number of Common Shares equal to (I)(A) the sum of (1) U.S. $10,000,000 plus (2)
the sum of any Adjustment Amounts for any fiscal periods preceding the last
completed fiscal period (the sum of the amounts in (A)(1) and (A)(2), the "Base
Factor") plus (B) the Adjustment Amount, if any, for the last completed fiscal
period, divided by (II) the conversion price for shares of this Series (the
"Conversion Price"), divided by (III) 2,500,000. The initial Conversion Rate
shall be one Common Share for each one share of this Series surrendered for
conversion, representing an initial Conversion Price (for purposes of Section
7(g)) of U.S. $4.00 per share of the Corporation's Common Shares. The applicable
Conversion Rate and Conversion Price from time to time in effect are subject to
adjustment as hereinafter provided.
(ii) For purposes hereof, the term "Adjustment Amount" shall mean (a)
$800,000 as of October 31, 2000, (b) two percent (2.0%) of the Base Factor
in effect at such time, for any adjustment occurring from November 1, 2000
through October 31, 2004; (c) three percent (3.0%) of the Base Factor in
effect at such time, for any adjustment occurring from November 1, 2004
through October 31, 2005; (d) three and three-quarters percent (3.75%) of
the Base Factor in effect at such time, for any adjustment occurring from
November 1, 2005 through October 31, 2006; and (e) four and one-half
percent (4.5%) of the Base Factor in effect at such time, for any
adjustment occurring from and after November 1, 2006; provided, however,
that in the event that EBTA per Fully Diluted Common Share for the fiscal
year ended July 31, 2000 is greater than or equal to U.S. $0.20 (excluding
CFO Costs), then the Adjustment Amount for all purposes shall be zero; and
provided, further, that in the event the EBTA per Fully Diluted Common
Share for the fiscal year ended July 31, 2000 is less than U.S. $0.20
(excluding CFO Costs) and the Corporation meets the quarterly EBTA targets
set forth below for four (4) consecutive fiscal quarters thereafter, the
Adjustment Amount shall be zero in respect of any fiscal quarter ended on
or after the last day of such fourth consecutive fiscal quarter. For
purposes of paragraph (i) above and clauses (b)-(e) of this paragraph (ii),
the Adjustment Amount shall be determined and the Conversion Rate shall be
adjusted as of the end of each
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<PAGE>
fiscal quarter. Any conversion of shares of this Series shall be made at
the Conversion Rate in effect as of the end of the fiscal quarter ended
immediately prior to the date of such conversion.
Period Target EBTA per Fully Diluted
- ------ -----------------------------
Common Share
------------
Fiscal quarter ending 10/31/99 U.S. $0.02
Fiscal quarter ending 1/31/00 0.03
Fiscal quarter ending 4/30/00 0.07
Fiscal quarter ending 7/31/00 0.08
Fiscal quarter ending 10/31/00 0.07
Fiscal quarter ending 1/31/01 0.10
Fiscal quarter ending 4/30/01 0.15
Fiscal quarter ending 7/31/01 0.17
Fiscal quarter ending 10/31/01 0.16
Fiscal quarter ending 1/31/02 0.20
Fiscal quarter ending 4/30/02 0.26
Fiscal quarter ending 7/31/02 0.30
(iii) As of October 31, 2000, the Conversion Price will be reduced by
the Per Share Valuation Adjustment, if any. "Per Share Valuation
Adjustment" means the Valuation Adjustment divided by the sum of (i) the
total number of issued and outstanding Common Shares as of September 30,
1999 plus (ii) the total number of Shares into which the outstanding Series
A Convertible Preferred Shares are convertible plus (iii) the total number
of Shares into which the outstanding convertible notes of the Corporation
are convertible as of September 30, 1999 plus (iv) the total number of
Shares into which the outstanding shares of this Series are convertible as
of October 31, 2000. "Valuation Adjustment" means the Reserve Deficiency
multiplied by a
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<PAGE>
factor of 7. "Reserve Deficiency" means the amount, if any, by which
$4,736,000 exceeds the amounts collected by the Corporation on or before
July 31, 2000 for services performed on or before July 31, 1999. No later
than October 31, 2000, the Chief Financial Officer of the Corporation shall
certify as to the Reserve Deficiency to each record holder of shares of
this Series. At the request of any record holder of the shares of this
Series, the Corporation shall cause the Reserve Deficiency to be verified
by an audit performed by an internationally-recognized independent public
accounting firm.
"(b) Whenever the Conversion Price or the Conversion Rate shall be
adjusted as provided in Section 7(a)(i) or Section 7(g) hereof, the
Corporation shall forthwith file at each office designated for the
conversion of the shares of this Series, a statement, signed by any of the
Chairman of the Board, the President, any Vice President or the Treasurer
of the Corporation, showing in reasonable detail the facts requiring such
adjustment. The Corporation shall also cause a notice setting forth any
such adjustments to be sent by mail, first class, postage prepaid, to each
record holder of shares of this Series at his or its address appearing on
the stock register. If such notice relates to an adjustment resulting from
an event referred to in paragraph 7(g)(vii), such notice shall be included
as part of the notice required to be mailed and published under the
provisions of paragraph 7(g)(vii) hereof.
"(c) The right of conversion shall be exercised by the holder by the
surrender of the certificates representing shares of this Series to be
converted to the Corporation at any time during normal business hours at
the office or agency then maintained by it for the conversion of shares of
this Series (the "Conversion Office"), accompanied by written notice to the
Corporation of such holder's election to convert and, if so required by the
Corporation or any conversion agent, by an instrument of transfer, in form
satisfactory to the Corporation and to any conversion agent, duly executed
by the registered holder or by such holder's duly authorized attorney, and
transfer tax stamps or funds therefor, if required pursuant to Section
7(k).
"(d) As promptly as practicable after the surrender for conversion of
one or more certificates representing any shares of this Series in the
manner provided in Section 7(c) and the payment in cash of any amount
required by the provisions of Section 7(k), the Corporation will deliver or
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<PAGE>
cause to be delivered at the Conversion Office to or upon the written order
of the holder of such shares, a certificate or certificates representing
the number of full Common Shares issuable upon such conversion, issued in
such name or names as such holder may direct, subject to any applicable
contractual restrictions and any restrictions imposed by applicable
securities laws. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of
certificates representing shares of this Series in proper order for
conversion, and all rights of the holder of such shares as a holder of such
shares shall cease at such time, and the person or persons in whose name or
names the certificates for such Common Shares are to be issued shall be
treated for all purposes as having become the record holder or holders
thereof at such time; provided, however, that any such surrender on any
date when the stock transfer books of the Corporation shall be closed shall
constitute the person or persons in whose name or names the certificates
for such Common Shares are to be issued as the record holder or holders
thereof for all purposes immediately prior to the close of business on the
next succeeding day on which such stock transfer books are opened.
"(e) Upon conversion in the manner provided in this Section 7 of only
a portion of the number of shares of this Series represented by a
certificate so surrendered for conversion, the Corporation shall issue and
deliver or cause to be delivered at the Conversion Office to or upon the
written order of the holder of the certificate so surrendered for
conversion, at the expense of the Corporation, a new certificate or
certificates representing the number of shares of this Series representing
the unconverted portion of the certificate so surrendered, issued in such
name or names as such holder may direct, subject to any applicable
contractual restrictions and any restrictions imposed by applicable
securities laws.
"(f) All shares of this Series which shall have been surrendered for
conversion as herein provided shall no longer be deemed to be outstanding
and all rights with respect to such shares, including the rights, if any,
to receive notices and to vote, shall forthwith cease and terminate except
only the right of the holder thereof to receive Common Shares in exchange
therefor. Any shares of this Series so converted shall be retired and
canceled and shall not be reissued, and the Corporation may from time to
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<PAGE>
time take such appropriate action as may be necessary to reduce the
authorized shares of this Series accordingly.
"(g) Anti-Dilution Provisions.
(i) In order to prevent dilution of the right granted hereunder, the
Conversion Price shall be subject to adjustment from time to time in accordance
with this paragraph 7(g)(i). At any given time the Conversion Price shall be
that dollar (or part of a dollar) amount the payment of which shall be
sufficient at the given time to acquire one Common Share of the Corporation upon
conversion of shares of this Series. Upon each adjustment of the Conversion
Price pursuant to this Section 7(g), the registered holder of shares of this
Series shall thereafter be entitled to acquire upon exercise, at the Conversion
Price resulting from such adjustment, the number of Common Shares of the
Corporation obtainable by multiplying the Conversion Price in effect immediately
prior to such adjustment by the number of shares of Common Shares of the
Corporation acquirable immediately prior to such adjustment and dividing the
product thereof by the Conversion Price resulting from such a adjustment. For
purposes of this Section 7(g), the term "Number of Common Shares Deemed
Outstanding" at any given time shall mean the sum of (x) the number of shares of
the Corporation's Common Shares outstanding at such time, (y) the number of
Common Shares of the Corporation issuable assuming conversion at such time of
all outstanding shares of the Corporation's other series of convertible
preferred stock, if any, and (z) the number of Common Shares of the Corporation
deemed to be outstanding at such time under subparagraphs 7(g)(ii)(1) to (8),
inclusive. For all purposes hereof, the term "Market Price," as to the Common
Shares as of any specified date, shall mean: (i) if the Common Shares are listed
or admitted for trading on one or more United States national securities
exchanges, the daily closing price for the Common Shares on the principal
exchange in the United States on which the Common Shares are listed; (ii) if the
Common Shares are not listed or admitted for trading on any United States
national securities exchange, the daily closing price for the Common Shares on
the Nasdaq National or Nasdaq Small-Cap Market ("Nasdaq"); (iii) if the Common
Shares are not listed or admitted for trading on a United States national
securities exchange or on Nasdaq, the daily closing price of the Common Shares
on the principal stock exchange in Canada on which the Common Shares are listed
(expressed in United States dollars based upon the noon buying rate in New York
City for cable transfers in Canadian dollars as certified for customs purposes
by the Federal Reserve Bank of New York); (iv) if the Common Shares are not
listed or admitted to trading on any United States national or Canadian
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national securities exchange or on Nasdaq, the average of the reported bid and
asked prices on the trading day preceding such date in the over-the-counter
market as furnished by the National Quotation Bureau, Inc., or, if such firm is
not then engaged in the business of reporting such prices, as furnished by any
member of the National Association of Securities Dealers, Inc. selected by the
Corporation; or (v) if the Common Shares are not publicly traded, the Market
Price for such day shall be the fair market value thereof determined jointly by
the Corporation and the holder of a majority of the shares of this Series then
outstanding; provided, however, that if such parties are unable to reach
agreement within a reasonable period of time, the Market Price shall be
determined in good faith by the independent investment banking firm selected
jointly by the Corporation and the holder of a majority of the shares of this
Series then outstanding or, if that selection cannot be made within an
additional 15 days, by an independent investment banking firm selected by the
American Arbitration Association in accordance with its rules.
(ii) Except as provided in paragraph 7(g)(iii) or 7(g)(vi) below, if and
whenever on or after the Initial Issuance Date, the Corporation shall issue or
sell, or shall in accordance with subparagraphs 7(g)(ii)(1) to (8), inclusive,
be deemed to have issued or sold (such issuance or sale, whether actual or
deemed, the "Triggering Transaction") any Common Shares for a consideration per
share less than,
(I) (if the Common Shares are not traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market) the
Conversion Price in effect immediately prior to the time of such issuance
or sale, then forthwith upon such Triggering Transaction the Conversion
Price shall, subject to subparagraphs (1) to (8) of this Section 7(g)(ii),
be reduced to the Conversion Price (calculated to the nearest tenth of a
cent) determined by dividing: (i) an amount equal to the sum of (x) the
product derived by multiplying the Number of Common Shares Deemed
Outstanding immediately prior to such Triggering Transaction by the
Conversion Price then in effect, plus (y) the consideration, if any,
received by the Corporation upon consummation of such Triggering
Transaction, by (H) an amount equal to the sum of (x) the Number of Common
Shares Deemed Outstanding immediately prior to such Triggering Transaction
plus (y) the number of Common Shares issued (or deemed to be issued in
accordance with subparagraphs 7(g)(ii)(l) to (8)) in connection with the
Triggering Transaction; or
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(II) (if the Common Shares are traded on the New York Stock Exchange,
the American Stock Exchange or the Nasdaq National Market) the average
Market Price for the ten trading days immediately preceding such issuance
or sale, then forthwith upon such Triggering Transaction, the Conversion
Price shall, subject to subparagraphs (1) to (8) of this Section 7(g)(ii),
be reduced to the Conversion Price (calculated to the nearest tenth of a
cent) determined by multiplying the Conversion Price in effect immediately
prior to the time of such Triggering Transaction by a fraction, the
numerator of which shall be the sum of (x) the Number of Common Shares
Deemed Outstanding immediately prior to such Triggering Transaction and (y)
the number of Common Shares which the aggregate consideration received by
the Corporation upon such Triggering Transaction would purchase at the
average Market Price for the ten trading days immediately preceding such
Triggering Transaction, and the denominator of which shall be the Number of
Common Shares Deemed Outstanding immediately after such Triggering
Transaction.
For purposes of determining the adjusted Conversion Price under this
paragraph 7(g)(ii), the following subsections (1) to (8), inclusive, shall be
applicable:
(1) In case the Corporation at any time shall in any manner grant
(whether directly or by assumption in an amalgamation or otherwise)
any rights to subscribe for or to purchase, or any options for the
purchase of, Common Shares or any stock or other securities
convertible into or exchangeable for Common Shares (such rights or
options being herein called "Options" and such convertible or
exchangeable stock or securities being herein called "Convertible
Securities"), whether or not such Options or the right to convert or
exchange any such Convertible Securities are immediately exercisable,
and the price per share for which the Common Shares are issuable upon
exercise, conversion or exchange (determined by dividing (x) the total
amount, if any, received or receivable by the Corporation as
consideration for the granting of such Options, plus the aggregate
amount of additional consideration payable to the Corporation upon the
exercise of all such Options, plus, in the case of such Options which
relate to Convertible Securities, the aggregate amount of additional
consideration, if any, payable upon the issue or sale of such
Convertible Securities and upon the conversion or exchange thereof,
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by (y) the total maximum number of Common Shares issuable upon the
exercise of such Options or the conversion or exchange of such
Convertible Securities) shall be less than the average Market Price in
effect for the ten trading days immediately prior to the time of the
granting of such Options (if the Common Shares are traded on the New
York Stock Exchange, the American Stock Exchange or the Nasdaq
National Market) or the Conversion Price in effect immediately prior
to the time of the granting of such Options (if the Common Shares are
not traded on the New York Stock Exchange, the American Stock Exchange
or the Nasdaq National Market), then the total maximum number of
Common Shares issuable upon the exercise of such Options or, in the
case of Options for Convertible Securities, upon the conversion or
exchange of such Convertible Securities, shall (as of the date of
granting of such Options) be deemed to be outstanding and to have been
issued and sold by the Corporation for such price per share. No
adjustment of the Conversion Price shall be made upon the actual
issuance of such Common Shares or such Convertible Securities upon the
exercise of such Options, except as otherwise provided in subparagraph
(3) below.
(2) In case the Corporation at any time shall in any manner issue
(whether directly or by assumption in an amalgamation or otherwise) or
sell any Convertible Securities, whether or not the rights to exchange
or convert thereunder are immediately exercisable, and the price per
share for which Common Shares are issuable upon such conversion or
exchange (determined by dividing (x) the total amount received or
receivable by the Corporation as consideration for the issue or sale
of such Convertible Securities, plus the aggregate amount of
additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (y) the total maximum number of
Common Shares issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the average Market Price in
effect for the ten trading days immediately prior to the time of such
issue or sale (if the Common Shares are traded on the New York Stock
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Exchange, the American Stock Exchange or the Nasdaq National Market)
or the Conversion Price in effect immediately prior to the time of
such issue or sale (if the Common Shares are not traded on the New
York Stock Exchange, the American Stock Exchange or the Nasdaq
National Market), then the total maximum number of Common Shares
issuable upon conversion or exchange of all such Convertible
Securities shall (as of the date of the issue or sale of such
Convertible Securities) be deemed to be outstanding and to have been
issued and sold by the Corporation for such price per share. No
adjustment of the Conversion Price shall be made upon the actual
issuance of such Common Shares upon exercise of the rights to exchange
or convert under such Convertible Securities, except as otherwise
provided in subparagraph (3) below.
(3) If the purchase price provided for in any Options referred to
in subparagraph (1), the additional consideration, if any, payable
upon the conversion or exchange of any Convertible Securities referred
to in subparagraphs (1) or (2), or the rate at which any Convertible
Securities referred to in subparagraph (1) or (2) are convertible into
or exchangeable for Common Shares shall change at any time (other than
under or by reason of provisions designed to protect against dilution
of the type set forth in paragraphs 7(g)(ii) or 7(g)(iv)), the
Conversion Price in effect at the time of such change shall forthwith
be readjusted to the Conversion Price which would have been in effect
at such time had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional
consideration or rate, as the case may be, at the time initially
granted, issued or sold. If the purchase price provided for in any
Option referred to in subparagraph (1) or the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraphs (1) or (2), or the
rate at which any Convertible Securities referred to in subparagraphs
(1) or (2) are convertible into or exchangeable for Common Shares,
shall be reduced at any time under or by reason of provisions with
respect thereto designed to protect against dilution, then in case of
the delivery of Common Shares upon the exercise of any such Option or
upon conversion or exchange of any such Convertible Security, the
Conversion Price then in effect hereunder shall forthwith be adjusted
to such respective amount as would have been obtained had such Option
or Convertible Security never been issued as to such Common Shares and
had adjustments been made upon the
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issuance of the Common Shares delivered as aforesaid, but only if as a
result of such adjustment the Conversion Price then in effect
hereunder is hereby reduced.
(4) On the expiration of any Option or the termination of any
right to convert or exchange any Convertible Securities, the
Conversion Price then in effect hereunder shall forthwith be increased
to the Conversion Price which would have been in effect at the time of
such expiration or termination had such Option or Convertible
Securities, to the extent outstanding immediately prior to such
expiration or termination, never been issued.
(5) In case any Options shall be issued in connection with the
issue or sale of other securities of the Corporation, together
comprising one integral transaction in which no specific consideration
is allocated to such Options by the parties thereto, such Options
shall be deemed to have been issued without consideration.
(6) In case any Common Shares, Options or Convertible Securities
shall be issued or sold or deemed to have been issued or sold for
cash, the consideration received therefor shall be deemed to be the
amount received by the Corporation therefor (before deduction for
expenses or underwriters' discounts or commissions related to such
issue or sale). In case any Common Shares, Options or Convertible
Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be the fair value of such consideration as
determined in good faith by the Board of Directors of the Corporation.
(7) In case the Corporation shall declare a dividend or make any
other distribution upon the share capital of the Corporation payable
in Common Shares, Options, or Convertible Securities, then in such
case any Common Shares, Options or Convertible Securities, as the case
may be, issuable in payment of such dividend or distribution shall be
deemed to have been issued or sold without consideration.
(8) For purposes of this paragraph 7(g)(ii), in case the
Corporation shall take a record of the holders
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of its Common Shares for the purpose of entitling them (x) to receive
a dividend or other distribution payable in Common Shares, Options or
in Convertible Securities, or (y) to subscribe for or purchase Common
Shares, Options or Convertible Securities, then such record date shall
be deemed to be the date of the issue or sale of the Common Shares
deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the
granting of such right or subscription or purchase, as the case may
be.
(iii) In the event the Corporation shall declare a dividend upon the
Common Shares (other than a dividend payable in Common Shares covered by
subparagraph 7(g)(ii)(7)) payable otherwise than out of earnings or earned
surplus, determined in accordance with U.S. generally accepted accounting
principles, including the making of appropriate deductions for minority
interests, if any, in subsidiaries (herein referred to as "Liquidating
Dividends"), then, as soon as possible after the conversion of any shares of
this Series, the Corporation shall, subject to applicable law, pay to the person
converting such shares of this Series an amount equal to the aggregate value at
the time of such exercise of all Liquidating Dividends (including but not
limited to the Common Shares which would have been issued at the time of such
earlier exercise and all other securities which would have been issued with
respect to such Common Shares by reason of stock splits, stock dividends,
amalgamations or reorganizations, or for any other reason). For the purposes of
this paragraph 7(g)(iii), a dividend other than in cash shall be considered
payable out of earnings or earned surplus only to the extent that such earnings
or earned surplus are charged an amount equal to the fair value of such dividend
as determined in good faith by the Board.
(iv) In case the Corporation shall at any time subdivide (other than
by means of a dividend payable in Common Shares covered by paragraph
7(g)(ii)(7)) its outstanding Common Shares into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision shall be
proportionately reduced, and, conversely, in case the outstanding Common Shares
of the Corporation shall be combined into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased.
(v) If any capital reorganization or reclassification of the share
capital of the Corporation, or amalgamation of the Corporation with another
corporation, or the sale of all or
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substantially all of its assets to another corporation shall be effected in such
a way that holders of Common Shares shall be entitled to receive stock,
securities, cash or other property with respect to or in exchange for Common
Shares, then, as a condition of such reorganization, reclassification,
amalgamation or sale, lawful and adequate provision shall be made whereby the
holders of shares of this Series shall have the right to acquire and receive
upon conversion of the shares of this Series, which right shall be prior to the
rights of the holders of Junior Stock (but after and subject to the rights of
holders of Senior Preferred Shares, if any), such shares of stock, securities,
cash or other property issuable or payable (as part of the reorganization,
reclassification, amalgamation or sale) with respect to or in exchange for such
number of outstanding Common Shares of the Corporation as would have been
received upon conversion of the shares of this Series at the Conversion Price
then in effect. The Corporation will not effect any such amalgamation or sale,
unless prior to the consummation thereof the amalgamated corporation or the
corporation purchasing such assets shall assume by written instrument mailed or
delivered to the holders of the shares of this Series at the last address of
each such holder appearing on the books of the Corporation, the obligation to
deliver to each such holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
receive. If a purchase, tender or exchange offer is made to and accepted by the
holders of more than 50% of the outstanding Common Shares of the Corporation,
the Corporation shall not effect any amalgamation or sale with the person having
made such offer or with any Affiliate (as defined below) of such person, unless
prior to the consummation of such amalgamation or sale the holders of the shares
of this Series shall have been given a reasonable opportunity to then elect to
receive upon the conversion of the shares of this Series either the stock,
securities or assets then issuable with respect to the Common Shares of the
Corporation or the stock, securities or assets, or the equivalent, issued to
previous holders of the Common Shares in accordance with such offer. For
purposes hereof, the term "Affiliate" with respect to any given person shall
mean any person controlling, controlled by or under common control with the
given person.
(vi) The provisions of this Section 7(g) shall not apply to any Common
Shares issued, issuable or deemed outstanding under subparagraphs 7(g)(ii)(1) to
(8) inclusive: (i) to any person pursuant to any stock option, stock purchase or
similar plan or arrangement for the benefit of employees of the
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Corporation or its subsidiaries in effect on the Initial Issuance Date or
thereafter adopted by the Board of Directors of the Corporation, (ii) pursuant
to options, warrants and conversion rights in existence on the Initial Issuance
Date, (iii) upon exercise of the Warburg Warrants or (iv) on conversion of the
shares of this Series or the sale of any additional shares of this Series.
(vii) In the event that:
(1) the Corporation shall declare any cash dividend upon its
Common Shares, or
(2) the Corporation shall declare any dividend upon its Common
Shares payable in stock or make any special dividend or other distribution
to the holders of its Common Shares, or
(3) the Corporation shall offer for subscription pro rata to the
holders of its Common Shares any additional shares of stock of any class or
other rights, or
(4) there shall be any capital reorganization or reclassification
of the share capital of the Corporation, including any subdivision or
combination of its outstanding Common Shares, or amalgamation of the
Corporation with, or sale of all or substantially all of its assets to,
another corporation, or
(5) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in connection with such event, the Corporation shall give to the holders
of the shares of this Series:
(A) at least twenty (20) days' prior written notice of the date
on which the books of the Corporation shall close or a
record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in
respect of any such reorganization, reclassification,
amalgamation, sale, dissolution, liquidation or winding up;
and
(B) in the case of any such reorganization, reclassification,
amalgamation, sale, dissolution, liquidation or winding up,
at least twenty (20)
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days' prior written notice of the date when the same shall
take place.
Such notice in accordance with the foregoing clause (A) shall also specify, in
the case of any such dividend, distribution or subscription rights, the date on
which the holders of Common Shares shall be entitled thereto, and such notice in
accordance with the foregoing clause (B) shall also specify the date on which
the holders of Common Shares shall be entitled to exchange their Common Shares
for securities or other property deliverable upon such reorganization,
reclassification, amalgamation, sale, dissolution, liquidation or winding up, as
the case may be. Each such written notice shall be given by first class mail,
postage prepaid, addressed to the holders of the shares of this Series at the
last address of each such holder appearing on the books of the Corporation.
(viii) If at any time or from time to time on or after the
Initial Issuance Date, the Corporation shall grant, issue or sell any Options,
Convertible Securities or rights to purchase property (the "Purchase Rights")
pro rata to the record holders of the Common Shares of the Corporation and such
grants, issuances or sales do not result in an adjustment of the Conversion
Price under paragraph 7(g)(ii) hereof, then each holder of shares of this Series
shall be entitled to acquire (within thirty (30) days after the later to occur
of the initial exercise date of such Purchase Rights or receipt by such holder
of the notice concerning Purchase Rights to which such holder shall be entitled
under paragraph 7(g)(vii)) and upon the terms applicable to such Purchase Rights
either:
(A) the aggregate Purchase Rights which such holder could
have acquired if it had held the number of Common Shares
acquirable upon conversion of shares of this Series
immediately before the grant, issuance or sale of such
Purchase Rights; provided that if any Purchase Rights were
distributed to holders of Common Shares without the payment
of additional consideration by such holders, corresponding
Purchase Rights shall be distributed to the exercising
holders of the shares of this Series as soon as possible
after such exercise and it shall not be necessary for the
exercising holder of the shares of this Series specifically
to request delivery of such rights; or
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(B) in the event that any such Purchase Rights shall have
expired or shall expire prior to the end of said thirty (30)
day period, the number of Common Shares or the amount of
property which such holder could have acquired upon such
exercise at the time or times at which the Corporation
granted, issued or sold such expired Purchase Rights.
(ix) If any event occurs as to which, in the opinion of the
Board, the provisions of this Section 7(g) are not strictly applicable or if
strictly applicable would not fairly protect the rights of the holders of the
shares of this Series in accordance with the essential intent and principles of
such provisions, then the Board shall make an adjustment in the application of
such provisions, in accordance with such essential intent and principles, so as
to protect such rights as aforesaid, but in no event shall any adjustment have
the effect of increasing the Conversion Price as otherwise determined pursuant
to any of the provisions of this Section 7(g) except in the case of a
combination of shares of a type contemplated in paragraph 7(g)(iv) and then in
no event to an amount larger than the Conversion Price as adjusted pursuant to
paragraph 7(g)(iv).
"(h) No fractional Common Shares shall be issued upon the
conversion of any share or shares of this Series. If any
fractional interest in a Common Share would, except for the
provisions of this Section 7(h), be deliverable upon the
conversion of any share or shares of this Series, the Corporation
shall in lieu of delivering the fractional Common Share therefor
satisfy such fractional interest by payment to the holder of such
surrendered share or shares of this Series of an amount in cash
equal (computed to the nearest cent) to the current market value
of such fractional interest, computed on the basis of the Market
Price of the Common Shares on the date of such conversion,
provided, however, that no amount shall be paid by the
Corporation to such holder of less than U.S. $5.00.
"(i) The Corporation shall be entitled to effect the
mandatory conversion, in whole or in part, of the shares of this
Series in accordance with this Section 7 if all of the following
conditions ("Mandatory Conversion Conditions") have been
satisfied as of the date of the notice described below:
(a) the Common Shares are traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National
Market at a Market Price greater than U.S. $8.00 per Common
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Share on each of the 10 consecutive trading days preceding such
date; and (b) the Corporation's EBTA for the three consecutive
fiscal quarters preceding such date, as reported in or derived
from the Corporation's quarterly or annual reports filed with the
Securities and Exchange Commission, shall have averaged at least
U.S. $0.35 per Fully Diluted Common Share per fiscal quarter. All
references to per share amounts or prices with respect to the
above conditions shall be appropriately adjusted for any
subdivision, consolidation, or reclassification of the Common
Shares.
Upon such mandatory conversion, each share of this Series
subject to such conversion shall be converted into Common Shares
at the then effective Conversion Price for such shares. In case
the Corporation shall desire to exercise the right to convert all
or, as the case may be, any shares of this Series in accordance
with the right to do so, it shall provide notice to the holders
of the shares of this Series to be converted as hereinafter
provided in this Section 7(i)."
"(i) A notice of conversion shall be given to the
holders of shares of this Series to be converted by mailing by
first-class mail to their last addresses as they shall appear
upon the register for shares of this Series not less than 120
calendar days prior to the date fixed for conversion.
"(ii) Each such notice of conversion (A) shall specify
the date fixed for conversion and the number of Common Shares
issuable to the holder of a share of this Series upon such
conversion, (B) shall state the offices or agencies to be
maintained by the Corporation for the purpose of such conversion,
upon presentation and surrender of such shares of this Series and
(C) if less than all the shares of this Series are to be
converted, shall specify the number of shares of this Series held
by each holder, and the serial numbers of the certificates
thereof, to be converted. In case any certificate representing
shares of this Series is to be converted in part only, the notice
of conversion which relates to such certificate shall state the
number of shares of this Series represented by such certificate
to be converted and shall state that on and after the conversion
date, upon surrender of such certificate, a new certificate or
certificates for a number of shares of this Series equal to the
unconverted portion thereof will be issued.
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"(j) The Corporation will at all times reserve and keep
available, solely for the purposes of the issuance of Common
Shares upon conversion of the shares of this Series, the full
number of Common Shares as shall be issuable upon the conversion
of all such outstanding shares of this Series.
The Corporation will endeavor to comply with all securities
laws regulating the offer and delivery of Common Shares upon
conversion of the shares of this Series and, that if any Common
Shares required to be reserved for purposes of conversion of the
shares hereunder require registration with or approval of any
governmental authority under any U.S. (federal or state) or
Canadian law or the laws of any province or territory of Canada
before such Common Shares may be validly issued or delivered upon
conversion, the Corporation will, in good faith and as
expeditiously as possible, endeavor to secure such registration
or approval, as the case may be.
"All Common Shares which shall be issued upon conversion of
the shares of this Series will upon issuance be fully paid and
nonassessable and not subject to preemptive rights.
"(k) The issuance of certificates for Common Shares upon
conversion of shares of this Series shall be made without charge
for any stamp or other similar tax in respect of such issuance.
However, if any such certificate is to be issued in a name other
than that of the holder of record of the share or shares of this
Series so converted, the holder thereof shall pay to the
Corporation the amount of any tax which may be payable in respect
of any transfer involved in such issuance or shall establish to
the satisfaction of the Corporation that such tax has been paid
or is not payable.
"(l) In case (A) the Corporation shall take any action which
would require an adjustment in the number of Common Shares
issuable to holders of shares of this Series upon conversion
thereof pursuant to Section 7(g) above; or (B) there shall be a
voluntary or involuntary dissolution, liquidation or winding up
of the affairs of the Corporation; then the Corporation shall
cause to be given to the holders of the shares of this Series at
least ten days prior to the applicable record date hereinafter
specified, a notice of (X) the date on which a record is to be
taken for the purpose of any dividend, distribution or grant to
holders of Common Shares which would require such an adjustment,
or, if a record is not to be taken, the date as of which the
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holders of Common Shares of record to be entitled to such
dividend, distribution, or grant are to be determined or (Y) the
date on which such reorganization, reclassification,
amalgamation, sale, transfer, dissolution, liquidation or winding
up is expected to become effective, and the date as of which it
is expected that holders of Common Shares of record shall be
entitled to exchange their Common Shares for securities or other
property or other assets deliverable upon such reorganization,
reclassification, amalgamation, sale, transfer, dissolution,
liquidation, or winding up. Failure to give such notice or any
defect therein shall not affect the legality or validity of any
proceedings described in subparagraphs (A) or (B) of this Section
7(l).
"8. Miscellaneous.
"(a) For the purposes hereof:
"(i) the term "outstanding", when used in reference to
shares of this Series, shall mean issued shares of this
Series, excluding shares of this Series called for
redemption; and
"(ii) any shares of a series or class of shares of the
Corporation shall be deemed to rank:
"(A) prior to shares of this Series, whether or
not the dividend rates, dividend payment dates or
redemption or liquidation prices per share thereof be
different from those of shares of this Series, if the
holders of such shares of a series or class of shares
shall be entitled to receipt from the Corporation of
dividends or of amounts distributable upon liquidation,
dissolution or winding up, in preference or priority to
the holders of shares of this Series, as the case may
be;
"(B) on a parity with or equal to shares of this
Series, whether or not the dividend rates, dividend
payment dates or redemption or liquidation prices per
share thereof be different from those of shares of this
Series, if the holders of such shares of a series or
class of shares shall be entitled to the receipt from
the Corporation of dividends or of amounts
distributable upon liquidation to their respective
dividend rates or liquidation prices, without
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preference or priority one over the other as between
the holders of such shares of a series or class of
shares and the holders of shares of this Series; and
"(C) subordinate to shares of this Series, whether
or not the dividend rates, dividend payment dates or
redemption or liquidation prices per share thereof be
different from those of shares of this Series, if the
rights of the holders of such shares of a series or
class of shares shall be subordinate to the rights of
the holders of shares of this Series in respect of the
receipt from the Corporation of dividends and of
amounts distributable upon liquidation, dissolution or
winding up, including, without limitation, the Common
Shares of the Corporation.
"(b) So long as any shares of this Series are outstanding,
in the event of any conflict between the provisions hereof and
any corporate document of the Corporation (both as presently
existing or hereafter amended and supplemented) the provisions
hereof, as the same may be amended or supplemented, shall be and
remain controlling.
"(c) The holders of the shares of this Series shall have no
preemptive rights.
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EXECUTION COPY
SONUS CORP.
---------------------------------------
AMENDED AND RESTATED
WARRANT AGREEMENT
---------------------------------------
WARRANTS TO PURCHASE 2,000,000 COMMON SHARES
---------------------------------------
THIS AMENDED AND RESTATED WARRANT AGREEMENT (this "Agreement") dated as
of October 1, 1999 is made and entered into by and between Sonus Corp., a
corporation continued and existing under the laws of Yukon Territory, Canada
(the "Company"), and Warburg, Pincus Ventures, L.P., a Delaware limited
partnership (the "Warrantholder").
Subject to the terms and conditions hereof, pursuant to a Securities
Purchase Agreement dated as of October 1, 1999, by and between the Company and
the Warrantholder (the "Securities Purchase Agreement"), the Company agrees to
(a) amend and restate, as hereinafter described, the terms of the warrants
described in and issued pursuant to that certain Warrant Agreement dated as of
December 24, 1997, by and between the Company and the Warrantholder, as
represented by Warrant Certificate No. W-1 of the Company dated December 24,
1997 (the "Old Warrant Certificate"); (b) cancel the Old Warrant Certificate;
and (c) issue to the Warrantholder, Amended and Restated Warrant Certificate No.
W-1 of the Company, the form of which is attached hereto as Exhibit 1,
representing warrants (the "Warrants") to purchase up to an aggregate of
2,000,000 common shares without par value of the Company (the "Common Shares"),
at the Warrant Price (as hereinafter defined), subject to adjustment pursuant to
Section 6 hereof. As used herein (i) the term "Shares" shall mean, unless the
context otherwise requires, collectively the Common Shares issuable upon
exercise of the Warrants together with any other securities or other property
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issuable upon such exercise as provided in Section 6 of this Agreement; (ii) the
term "Warrants" shall include any and all warrants outstanding pursuant to this
Agreement, including those evidenced by a certificate or certificates issued
upon division, exchange or substitution pursuant to this Agreement; (iii) the
term "Warrant Price" shall mean the price per Share at which Shares shall at any
time be purchasable upon exercise of the Warrants, such price to equal U.S.
$6.75, subject to adjustment pursuant to Section 6 hereof, provided that if the
Series A Amendment Filing Date has not occurred on or prior to March 31, 2000,
then from and after March 31, 2000, such price shall equal U.S. $4.00, subject
to adjustment pursuant to Section 6 hereof; and (iv) the term "Series A
Amendment Filing Date" shall mean the date upon which the amendment and
restatement of the terms of the Series A Convertible Shares, in the form
attached to the Securities Purchase Agreement as Exhibit B, shall have occurred,
as preceded by the passing of resolutions by a majority of not less than
two-thirds of the votes cast by the holders of the Common Shares, the Series A
Convertible Shares and Series B Convertible Shares of the Company, each voting
separately as a class, as evidenced by (1) a duly executed report of an
inspector of election, (2) a copy of the articles of amendment amending the
terms of the Series A Convertible Shares, certified by the registrar of
Corporations of the Yukon Territory and (3) an opinion of counsel to the
Company, addressed to the Investor, in the form attached hereto as Exhibit 4,
and such other documentation as the Investor may reasonably request; provided
that no Series A Amendment Filing Date shall occur after March 31, 2000. Terms
which are capitalized but not defined herein shall have the same meanings as in
the Securities Purchase Agreement. Any amounts herein referencing share prices
or numbers of shares shall be subject to appropriate adjustments in the event of
any stock splits, consolidations or the like.
For the purpose of defining the terms and provisions of the Warrants
and the respective rights and obligations thereunder, the Company and the
Warrantholder, for value received, hereby agree as follows:
Section 1. Restrictions on Transfer and Form of Warrants.
1.1. Registration. Certificates evidencing the Warrants shall be
numbered and shall be registered on the books of the Company when issued, in
accordance with Yukon Territory corporate practice.
1.2. Restriction on Transfer of the Warrants. The Warrants shall not be
transferable and may not be sold, assigned,
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hypothecated or otherwise transferred by the Warrantholder without the express
written consent of the Company, such consent not to be unreasonably withheld.
Any transferee permitted under this Section 1.2 shall acquire title to such
transferred Warrants and to all rights represented thereby.
1.3. Form of Warrants. The form of certificate evidencing the Warrants
shall be substantially as set forth in Exhibit 1 hereto. Certificates evidencing
the Warrants shall be executed on behalf of the Company by its President or by
any Vice President, shall be attested to by its Secretary or any Assistant
Secretary, and shall be dated as of the date of execution thereof.
1.4. Legends on Warrants and Common Shares. The Warrants, and the
Shares issuable upon the exercise thereof, have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"). Each certificate for
the Warrants shall bear the following legend:
"THE WARRANTS REPRESENTED BY THIS CERTIFICATE, AND THE COMMON
SHARES ISSUABLE UPON EXERCISE OF SUCH WARRANTS, HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 OR
THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY
PROVINCE OF CANADA. SUCH WARRANTS MAY NOT BE SOLD, OFFERED FOR
SALE, ASSIGNED, EXCHANGED, PLEDGED OR HYPOTHECATED OR
OTHERWISE TRANSFERRED, IN ANY MANNER, AND SUCH COMMON SHARES
MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED OR HYPOTHECATED OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION
OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THE WARRANTS
REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRADED IN CANADA
EXCEPT AS PERMITTED BY RELEVANT CANADIAN SECURITIES LAWS."
Each certificate for the Shares shall bear the following legend:
"THE COMMON SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933
OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR
ANY PROVINCE OF CANADA AND MAY NOT BE SOLD, ASSIGNED,
EXCHANGED OR
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OTHERWISE TRANSFERRED, IN THE ABSENCE OF SUCH REGISTRATION OR
AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY,
THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE THIS
CERTIFICATE MAY NOT CONSTITUTE 'GOOD DELIVERY' IN SATISFACTION
OF A TRADE MADE ON A STOCK EXCHANGE IN CANADA. THIS
CERTIFICATE IS NOT TRANSFERABLE IN CANADA UNTIL MARCH 30, 2000
EXCEPT PURSUANT TO AN EXEMPTION FROM THE PROSPECTUS
REQUIREMENTS CONTAINED IN THE APPLICABLE SECURITIES
LEGISLATION."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to a registration statement under the
Securities Act of the Common Shares represented thereby) shall also bear a like
legend unless, in the opinion of counsel reasonably satisfactory to the Company,
the securities represented thereby need no longer be subject to such
restrictions.
Section 2. Term of Warrants; Exercise of Warrants.
(a) Subject to the terms of this Agreement, the Warrantholder
shall have the right, at any time and from time to time during the period
commencing at 9:00 a.m., Pacific Time, on October 1, 1999, (the "Commencement
Date") and ending at 5:00 p.m., Pacific Time, on October 1, 2004 (the
"Termination Date") to purchase from the Company up to the number of fully paid
and nonassessable Shares which the Warrantholder may at the time be entitled to
purchase pursuant to this Agreement, upon surrender to the Company at its
principal office of the certificates evidencing the Warrants to be exercised,
with the purchase form, in the form attached hereto as Exhibit 2, duly completed
and signed, and upon payment to the Company of an amount (the "Exercise
Payment") equal to the Warrant Price multiplied by the number of Shares being
purchased pursuant to such exercise, payable in cash, by certified or official
bank check, or by wire transfer.
(b) At any time subsequent to the first anniversary of the
Commencement Date, in lieu of exercising the Warrants as provided in Section
2(a) above, and subject to all applicable law and all applicable regulatory
approvals, limitations and restrictions, the Warrantholder may elect to receive,
without any cash payment, a number of Shares equal to the value (as determined
below) of any or all of the Warrants held of record by
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the Warrantholder, upon surrender to the Company at its principal office of the
certificates evidencing such Warrants, with the attached cashless exercise form
attached hereto as Exhibit 3 duly completed and signed, in which event the
Company shall issue to the Warrantholder a number of Shares computed using the
following formula:
X = Y(A-B)
A
where
X = the number of Common Shares to be issued pursuant to this
Section 2(b).
Y = the number of Common Shares issuable upon exercise of the
surrendered Warrants.
A = the average of the Market Prices of the Common Shares for
the sixty (60) calendar days immediately preceding the
date upon which the certificates evidencing the
surrendered Warrants are received by the Company at its
principal office.
B = the Warrant Price on such date.
For all purposes of this Agreement the term "Market Price" as of any
specified date shall mean: (i) if the Common Shares are listed or admitted for
trading on one or more United States national securities exchanges, the daily
closing price for the Common Shares on the principal exchange in the United
States on which the Common Shares are listed; (ii) if the Common Shares are not
listed or admitted for trading on any United States national securities
exchange, the daily closing price for the Common Shares on the Nasdaq National
or Nasdaq Small-Cap Market ("Nasdaq"); (iii) if the Common Shares are not listed
or admitted for trading on a United States national securities exchange or on
Nasdaq, the daily closing price of the Common Shares on the principal stock
exchange in Canada on which the Common Shares are listed (expressed in United
States dollars based upon the noon buying rate in New York City for cable
transfers in Canadian dollars as certified for customs purposes by the Federal
Reserve Bank of New York); (iv) if the Common Shares are not listed or admitted
to trading on any United States national or Canadian national securities
exchange or on Nasdaq, the average of the reported bid and asked prices on the
trading day preceding such date in the over-the-counter market as furnished by
the National
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<PAGE>
Quotation Bureau, Inc., or, if such firm is not then engaged in the business of
reporting such prices, as furnished by any member of the National Association of
Securities Dealers, Inc. selected by the Company; or (y) if the Common Shares
are not publicly traded, the Market Price for such day shall be the fair market
value thereof determined jointly by the Company and the Warrantholder; provided,
however, that if such parties are unable to reach agreement within a reasonable
period of time, the Market Price shall be determined in good faith by an
independent investment banking firm selected jointly by the Company and the
Warrantholder or, if that selection cannot be made within an additional 15 days,
by an independent investment banking firm selected by the American Arbitration
Association in accordance with its rules.
(c) The Company may, at any time, elect to force the exercise
of the Warrants by the Warrantholder subject to the terms of this Agreement
provided that the Company shall have satisfied all of the following conditions
prior to the date of such election by the Company:
(i) the Common Shares are listed on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market;
(ii) the Common Shares are traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market at
a Market Price greater than U.S. $8.00 per share for the 10 consecutive
trading days immediately preceding the date of such election; and
(iii) The Company's net income (excluding profit or loss
on disposal of a significant part of the Company's assets or separate
segment thereof, gains on restructuring payables, gains or losses on
the extinguishment of debt, expropriations of property, gains or losses
that are the direct result of a major casualty, or one-time losses
resulting from prohibitions under a newly-enacted law or regulation)
for the three consecutive fiscal quarters ended immediately prior to
the date of such election, as reported in or derived from its quarterly
or annual reports filed with the Securities and Exchange Commission,
before income taxes, dividends on the Company's Series A Convertible
Preferred Shares and Series B Convertible Preferred Shares
(collectively, the "Convertible Shares") and amortization of goodwill
and covenants not to compete for such quarterly periods, shall have
averaged at least U.S. $0.35 per fully diluted Common Share per fiscal
quarter, provided, however,
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that in making such calculation, the Common Shares issuable upon
exercise of the Warrants shall be excluded but Common Shares issuable
upon the conversion of the Convertible Shares shall not.
The foregoing conditions (i), (ii) and (iii) shall hereinafter be collectively
referred to as the "Triggering Conditions." All references to per share amounts
or prices with respect to the Triggering Conditions shall be appropriately
adjusted for any stock splits, consolidations or the like.
The Company shall give the Warrantholder written notice that the
Triggering Conditions have been satisfied and that the Company intends to force
the exercise of the Warrants. In this event, the Termination Date shall be the
date ten (10) business days after such notice shall be effectively delivered to
the Warrantholder as provided in Section 10 of this Agreement.
In the event of a forced exercise of Warrants pursuant to this Section
2(c), in lieu of exercising the Warrants as provided in Section 2(a) above, and
subject to all applicable law and all applicable regulatory approvals,
limitations and restrictions, the Warrantholder may elect to receive, without
any cash payment, a number of Shares equal to the value (as determined below) of
any or all of the Warrants held of record by the Warrantholder, upon surrender
to the Company at its principal office of the certificates evidencing such
Warrants, with the attached cashless exercise form thereof duly completed and
signed, in which event the Company shall issue to the holder a number of Shares
computed using the formula set forth in Section 2(b) except the term "A" in such
formula, the Market Price of the Common Shares, shall be calculated based on the
ten (10) trading days immediately preceding the date on which the certificates
evidencing the surrendered Warrants are received by the Company at its principal
offices.
(d) Upon the surrender of Warrant certificates and payment of the
Exercise Payment (in cash, except in the event of a cashless exercise), the
Company, at its expense, shall issue and cause to be delivered with all
reasonable dispatch, and in any event within ten (10) days thereafter, to the
Warrantholder a certificate or certificates for the number of full Shares so
acquired upon the exercise of the Warrant, together with cash in respect of any
fractional Shares otherwise issuable upon such surrender, determined in
accordance with Section 7 hereof. Such certificate or certificates shall be
deemed to have been issued, and the Warrantholder shall be deemed to have become
a holder of record of such Shares, as of the date of surrender of the
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Warrants being exercised and (in the case of exercise pursuant to Section 2(a))
payment of the Exercise Payment notwithstanding that the certificate or
certificates representing such securities shall not actually have been delivered
or that the stock transfer books of the Company shall then be closed. The
Warrants shall be exercisable at the election of the Warrantholder either in
full or from time to time in part and, in the event that a certificate
evidencing Warrants is exercised in respect of fewer than all of the Shares
specified therein at any time prior to the Termination Date, a new certificate
evidencing the remaining portion of the Warrants shall be issued by the Company.
Section 3. Payment of Taxes. The Company will pay all transfer and
stamp taxes and fees, if any, attributable to the initial issuance of the
Warrants or the issuance of Shares upon exercise of the Warrants.
Section 4. Mutilated or Missing Warrants. In case the certificate or
certificates evidencing any Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the affected Warrantholder,
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated certificate or certificates, or in lieu of and substitution for the
certificate or certificates lost, stolen or destroyed, a new Warrant certificate
or certificates of like tenor and representing an equivalent right or interest,
but only upon receipt of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of such Warrant and, if requested, at the
cost and expense of the Warrantholder (in the case of loss, theft or
destruction), an unsecured bond of indemnity in form and amount reasonably
satisfactory to the Company. Such substitute Warrant certificate shall also
comply with such other reasonable regulations as the Company may prescribe.
Section 5. Reservation of Common Shares. There has been reserved, and
the Company shall at all times keep reserved and available so long as any
Warrants remain outstanding, out of its authorized share capital, such number of
Shares as shall be subject to purchase under all outstanding Warrants. Every
transfer agent for the Common Shares and other securities of the Company
issuable upon the exercise of Warrants will be irrevocably authorized and
directed at all times to reserve such number of authorized Common Shares and
other securities as shall be requisite for such purposes. The Company will keep
a copy of this Agreement on file with every transfer agent for the Common
Shares. The Company will supply every such transfer agent with duly executed
stock and other certificates, as appropriate, for
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such purpose and will provide or otherwise make available any cash which may be
payable as provided in Section 7 hereof.
Section 6. Adjustment of Number and Kind of Securities. The number and
kind of securities purchasable upon the exercise of the Warrants and the Warrant
Price shall be subject to adjustment from time to time upon the happening of
certain events, as follows:
6.1. Anti-Dilution Provisions And Other Adjustments. In order to
prevent dilution of the rights granted hereunder, the Warrant Price shall be
subject to adjustment from time to time in accordance with this Section 6. Upon
each adjustment of the Warrant Price pursuant to this Section 6, the
Warrantholder shall thereafter be entitled to acquire upon exercise, at the
Warrant Price resulting from such adjustment, the number of Shares obtainable by
multiplying the Warrant Price in effect immediately prior to such adjustment by
the number of Shares acquirable immediately prior to such adjustment and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
(a) Adjustment for Issue or Sale of Common Shares at Less than
Specified Prices. Except as provided in Sections 6.3 or 6.5 below, if and
whenever on or after the date hereof the Company shall issue or sell, or shall
in accordance with subparagraphs 6.1(a)(1) to (8), inclusive, be deemed to have
issued or sold (such issuance or sale, whether actual or deemed, a "Triggering
Transaction") any Common Shares for a consideration per share less than
(I) (if the Common Shares are not traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market)
U.S. $6.75 then forthwith upon such issue or sale the Warrant Price
shall, subject to subparagraphs (1) to (8) of this Section 6.1(a), be
reduced to the Warrant Price (calculated to the nearest tenth of a
cent) determined by dividing: (i) an amount equal to the sum of (x) the
product derived by multiplying the Number of Common Shares Deemed
Outstanding immediately prior to such Triggering Transaction by the
Warrant Price then in effect, plus (y) the consideration, if any,
received by the Company upon consummation of such Triggering
Transaction, by (ii) an amount equal to the sum of (x) the Number of
Common Shares Deemed Outstanding immediately prior to such Triggering
Transaction plus (y) the number of shares of Common Stock issued (or
deemed to be issued in accordance with subparagraphs 6.1(a)(1) to (8))
in connection with the Triggering Transaction; or
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(II) (if the Common Shares are traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market)
the average Market Price for the ten trading days immediately preceding
such issuance or sale, then forthwith upon such Triggering Transaction,
the Warrant Price shall, subject to subparagraphs (1) to (8) of this
Section 6.1(a), be reduced to the Warrant Price (calculated to the
nearest tenth of a cent) determined by multiplying the Warrant Price in
effect immediately prior to the time of such Triggering Transaction by
a fraction, the numerator of which shall be the sum of (x) the Number
of Common Shares Deemed Outstanding immediately prior to such
Triggering Transaction and (y) the number of Common Shares which the
aggregate consideration received by the Company upon such Triggering
Transaction would purchase at the average Market Price for the ten
trading days immediately preceding such Triggering Transaction, and the
denominator of which shall be the Number of Common Shares Deemed
Outstanding immediately after such Triggering Transaction.
For purposes of this Section 6, the term "Number of Common Shares
Deemed Outstanding" at any given time shall mean the sum of (i) the number of
Common Shares outstanding at such time, and (ii) the number of Common Shares
deemed to be outstanding under subparagraphs 6.1(a)(1) to (8), inclusive, at
such time.
For purposes of determining the adjusted Warrant Price under this
Section 6.1(a), the following subsections (1) to (8), inclusive, shall be
applicable:
(1) In case the Company at any time shall in any manner grant
(whether directly or by assumption in an amalgamation or otherwise) any
rights to subscribe for or to purchase, or any options for the purchase
of, Common Shares or any stock or other securities convertible into or
exchangeable for Common Shares (such rights or options being herein
called "Options" and such convertible or exchangeable stock or
securities being herein called "Convertible Securities"), whether or
not such Options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price per
share for which the Common Shares are issuable upon exercise,
conversion or exchange (determined by dividing (x) the total amount, if
any, received or receivable by the Company as consideration for the
granting of such Options, plus the minimum aggregate amount of
additional consideration payable to the Company upon the exercise of
all such Options, plus, in the case of such Options which relate to
Convertible Securities, the
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minimum aggregate amount of additional consideration, if any, payable
upon the issue or sale of such Convertible Securities and upon the
conversion or exchange thereof, by (y) the total maximum number of
Common Shares issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities) shall be less
than the average Market Price in effect for the ten trading days
immediately prior to the time of the granting of such Option (if the
Common Shares are traded on The New York Stock Exchange, The American
Stock Exchange or The National Nasdaq Market) or U.S. $6.75 (if the
Common Shares are not traded on The New York Stock Exchange, The
American Stock Exchange, or the Nasdaq National Market) then the total
maximum amount of Common Shares issuable upon the exercise of such
Options, or, in the case of Options for Convertible Securities, upon
the conversion or exchange of such Convertible Securities, shall (as of
the date of granting of such Options) be deemed to be outstanding and
to have been issued and sold by the Company for such price per share.
No adjustment of the Warrant Price shall be made upon the actual issue
of such Common Shares or such Convertible Securities upon the exercise
of such Options, except as otherwise provided in subparagraph (3)
below.
(2) In case the Company at any time shall in any manner issue
(whether directly or by assumption in an amalgamation or otherwise) or
sell any Convertible Securities, whether or not the rights to exchange
or convert thereunder are immediately exercisable, and the price per
share for which Common Shares are issuable upon such conversion or
exchange (determined by dividing (x) the total amount received or
receivable by the Company as consideration for the issue or sale of
such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the
conversion or exchange thereof, by (y) the total maximum number of
Common Shares issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the average Market Price in
effect for the ten trading days immediately prior to the time of such
issue or sale (if the Common Shares are traded on The New York Stock
Exchange, The American Stock Exchange, or The Nasdaq National Market)
or U.S. $6.75 (if the Common Shares are not traded on The New York
Stock Exchange, The American Stock Exchange, or The Nasdaq National
Market), then the total maximum number of Common Shares issuable upon
conversion or exchange of all such Convertible Securities shall (as of
the date of the
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issue or sale of such Convertible Securities) be deemed to be
outstanding and to have been issued and sold by the Company for such
price per share. No adjustment of the Warrant Price shall be made upon
the actual issue of such Common Shares upon exercise of the rights to
exchange or convert under such Convertible Securities, except as
otherwise provided in subparagraph (3) below.
(3) If the purchase price provided for in any Options referred to
in subparagraph (1), the additional consideration, if any, payable upon
the conversion or exchange of any Convertible Securities referred to in
subparagraphs (1) or (2), or the rate at which any Convertible
Securities referred to in subparagraph (1) or (2) are convertible into
or exchangeable for Common Shares shall change at any time (other than
under or by reason of provisions designed to protect against dilution
of the type set forth in Section 6.1 (a) or (b)), the Warrant Price in
effect at the time of such change shall forthwith be readjusted to the
Warrant Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or conversion rate, as
the case may be, at the time initially granted, issued or sold. If the
purchase price provided for in any Option referred to in subparagraph
(1) or the rate at which any Convertible Securities referred to in
subparagraphs (1) or (2) are convertible into or exchangeable for
Common Shares, shall be reduced at any time under or by reason of
provisions with respect thereto designed to protect against dilution,
then in case of the delivery of Common Shares upon the exercise of any
such Option or upon conversion or exchange of any such Convertible
Security, the Warrant Price then in effect hereunder shall forthwith be
adjusted to such respective amount as would have been obtained had such
Option or Convertible Security never been issued as to such Common
Shares and had adjustments been made upon the issuance of the Common
Shares delivered as aforesaid, but only if as a result of such
adjustment the Warrant Price then in effect hereunder is hereby
reduced.
(4) On the expiration of any Option or the termination of any
right to convert or exchange any Convertible Securities, the Warrant
Price then in effect hereunder shall forthwith be increased to the
Warrant Price which would have been in effect at the time of such
expiration or termination had such Option or Convertible Securities, to
the extent
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outstanding immediately prior to such expiration or termination, never
been issued.
(5) In case any Options shall be issued in connection with the
issue or sale of other securities of the Company, together comprising
one integral transaction in which no specific consideration is
allocated to such Options by the parties thereto, such Options shall be
deemed to have been issued without consideration.
(6) In case any Common Shares, Options or Convertible Securities
shall be issued or sold or deemed to have been issued or sold for cash,
the consideration received therefor shall be deemed to be the amount
received by the Company therefor. In case any Common Shares, Options or
Convertible Securities shall be issued or sold for a consideration
other than cash, the amount of the consideration other than cash
received by the Company shall be the fair value of such consideration
as determined in good faith by the Board of Directors of the Company.
In case any Common Shares, Options or Convertible Securities shall be
issued in connection with any amalgamation in which the Company is an
amalgamating corporation, the amount of consideration therefor shall be
deemed to be the fair value of such portion of the net assets and
business of the other corporation which is a party to the amalgamation
as shall be attributed by the Board of Directors of the Company in good
faith to such Common Shares, Options or Convertible Securities, as the
case may be.
(7) In case the Company shall declare a dividend or make any other
distribution upon the stock of the Company payable in Options or
Convertible Securities, then in such case any Options or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without
consideration.
(8) For purposes of this Section 6.1(a), in case the Company shall
take a record of the holders of its Common Shares for the purpose of
entitling them (x) to receive a dividend or other distribution payable
in Common Shares, Options or in Convertible Securities, or (y) to
subscribe for or purchase Common Shares, Options or Convertible
Securities, then such record date shall be deemed to be the date of the
issue or sale of the Common Shares deemed to have been issued or sold
upon the declaration of such dividend or the making of such other
distribution or the
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date of the granting of such right or subscription or purchase, as the
case may be.
(b) In case the Company shall (i) pay a dividend in Common Shares
or make a distribution in Common Shares or (ii) subdivide its outstanding Common
Shares, the Warrant Price in effect immediately prior to such subdivision or
dividend shall be proportionately reduced by the same ratio as the dividend or
subdivision. In case the Company shall at any time combine its outstanding
Common Shares, the Warrant Price in effect immediately prior to such combination
shall be proportionately increased by the same ratio as the combination. Any
adjustment made pursuant to this subsection 6.1 (b) shall become effective
immediately on the effective date of such event retroactive to the record date,
if any, for such event.
(c) Whenever the number of Common Shares purchasable upon the
exercise of Warrants is adjusted as herein provided, the Company shall cause to
be promptly delivered to the Warrantholder notice of such adjustment and a
certificate of the chief financial officer of the Company setting forth the
number of Common Shares purchasable upon the exercise of the Warrants after such
adjustment, the Warrant Price that will be effective after such adjustment, a
brief statement of the facts requiring such adjustment and the computation by
which such adjustment was made. If such notice relates to an adjustment
resulting from an event referred to in Section 8, such notice shall be included
as part of the notice required to be delivered and published under the
provisions of Section 8 hereof.
6.2. No Adjustment for Dividends. Except as provided in this Section 6,
no adjustment to the Warrants or any provision or condition thereof in respect
of any dividends or distributions out of earnings shall be made during the term
of the Warrants or upon the exercise of Warrants.
6.3. Dividends Not Paid Out of Earnings or Earned Surplus. In the event
the Company shall declare a dividend upon the Common Shares (other than a
dividend payable in Common Shares) payable otherwise than out of earnings or
earned surplus, determined in accordance with generally accepted accounting
principles, including the making of appropriate deductions for minority
interests, if any, in subsidiaries (herein referred to as "Liquidating
Dividends"), then, as soon as possible after the exercise of this Warrant, the
Company shall pay to the person exercising such Warrant an amount equal to the
aggregate value at the time of such exercise of all Liquidating Dividends
(including but not limited to the Common Shares which would have been issued
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at the time of such earlier exercise and all other securities which would have
been issued with respect to such Common Shares by reason of stock splits, stock
dividends, amalgamations or reorganizations, or for any other reason). For the
purposes of this subsection 6.3, a dividend other than in cash shall be
considered payable out of earnings or earned surplus only to the extent that
such earnings or earned surplus are charged an amount equal to the fair value of
such dividend as determined in good faith by the Board of Directors of the
Company.
6.4. Reclassification, Amalgamation, etc. If any capital reorganization
or reclassification of the share capital of the Company, or amalgamation of the
Company with another corporation, or the sale of all or substantially all of its
assets to another corporation shall be effected in such a way that holders of
Common Shares shall be entitled to receive stock, securities, cash or other
property with respect to or in exchange for Common Shares, then, as a condition
of such reorganization, reclassification, amalgamation or sale, lawful and
adequate provision shall be made whereby the Warrantholder shall have the right
to acquire and receive upon exercise of this Warrant such shares of stock,
securities, cash or other property issuable or payable (as part of the
reorganization, reclassification, amalgamation or sale) with respect to or in
exchange for such number of outstanding Shares as would have been received upon
exercise of this Warrant at the Warrant Price then in effect. The Company will
not effect any such amalgamation or sale, unless prior to the consummation
thereof the amalgamated corporation or the corporation purchasing such assets
shall assume by written instrument mailed or delivered to the Warrantholder the
obligation to deliver to such holder such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such holder may be entitled to
purchase. If a purchase, tender or exchange offer is made to and accepted by the
holders of more than 50% of the outstanding Common Shares of the Company, the
Company shall not effect any amalgamation or sale with the person having made
such offer or with any Affiliate of such person, unless prior to the
consummation of such amalgamation or sale the Warrantholder shall have been
given a reasonable opportunity to then elect to receive upon the exercise of
this Warrant either the stock, securities or assets then issuable with respect
to the Common Shares of the Company or the stock, securities or assets, or the
equivalent, issued to previous holders of the Common Shares in accordance with
such offer. For purposes hereof the term "Affiliate" with respect to any given
person shall mean any person controlling, controlled by or under common control
with the given person. In the event of a
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merger described in Section 368(a)(2)(E) of the Internal Revenue Code of 1986
(or any successor provision), in which the Company is the surviving corporation,
the right to purchase Shares upon exercise of the Warrants shall terminate on
the date of such merger and thereupon the Warrants shall become null and void,
but only if the controlling corporation (after such event) shall agree to
substitute for the Warrants its warrants entitling the Warrantholder to purchase
the kind and amount of shares and other securities and property which it would
have been entitled to receive had the Warrants been exercised immediately prior
to such merger. Any such agreements referred to in this subsection 6.3 shall
provide for adjustments, which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 6, and shall contain
substantially the same terms, conditions and provisions as are contained herein
immediately prior to such event. The provisions of this subsection 6.4 shall
similarly apply to successive amalgamations, sales or conveyances.
6.5. No Adjustment for Exercise of Certain Options, Warrants, Etc. The
provisions of this Section 6 shall not apply to any Common Shares issued,
issuable or deemed outstanding under subparagraphs 6.1(a)(1) to (8) inclusive:
(i) to any person pursuant to any stock option, stock purchase or similar plan
or arrangement for the benefit of employees, consultants or directors of the
Company or its subsidiaries in effect on the date hereof or hereafter adopted by
the Board of Directors of the Company, or (ii) pursuant to options, warrants and
conversion rights in existence on the date hereof, including the Convertible
Shares.
6.6. Grant Issue or Sale of Options, Convertible Securities, or Rights.
If at any time or from time to time on or after the date of this Agreement, the
Company shall grant, issue or sell any Options, Convertible Securities or rights
to purchase property (the "Purchase Rights") pro rata to the record holders of
any class of share capital of the Company and such grants, issuances or sales do
not result in an adjustment of the Warrant Price under Section 6.1(a) hereof,
then the Warrantholder shall be entitled to acquire (within thirty (30) days
after the later to occur of the initial exercise date of such Purchase Rights or
receipt by the Warrantholder of the notice concerning Purchase Rights to which
the Warrantholder shall be entitled under Section 8) and upon the terms
applicable to such Purchase Rights either:
(a) the aggregate Purchase Rights which the Warrantholder could
have acquired if it had held the number of Shares acquirable upon
exercise of this Warrant
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<PAGE>
immediately before the grant issuance or sale of such Purchase Rights;
provided that if any Purchase Rights were distributed to the
Warrantholder of Common Shares without the payment of additional
consideration by such holders, corresponding Purchase Rights shall be
distributed to the Warrantholder as soon as possible after exercise of
this Warrant and it shall not be necessary for the Warrantholder
specifically to request delivery of such rights; or
(b) in the event that any such Purchase Rights shall have expired
or shall expire prior to the end of said thirty (30) day period, the
number of Shares or the amount of property which the Warrantholder
could have acquired upon such exercise at the time or times at which
the Company granted, issued or sold such expired Purchase Rights.
6.7. Nominal Value of Common Shares. Before taking any action which
would cause an adjustment effectively reducing the portion of the Warrant Price
allocable to each Share below the then nominal value per Share issuable upon
exercise of the Warrants, the Company will take any corporate action which may,
in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable Shares upon exercise of
the Warrants.
6.8. Independent Public Accountants. The Company may retain a firm of
independent public accountants of recognized national standing in the United
States (which may be any such firm regularly employed by the Company) to make
any computation required under this Section.
6.9. Statement on Warrant Certificates. Irrespective of any adjustments
in the number of securities issuable upon exercise of Warrants, Warrant
certificates theretofore or thereafter issued may continue to express the same
number of securities as are stated in the similar Warrant certificates initially
issuable pursuant to this Agreement. However, the Company may, at any time in
its reasonable discretion, make any change in the form of Warrant certificate
that it may deem appropriate and that does not affect the substance thereof; and
any Warrant certificate hereafter issued, whether upon registration of transfer
of, or in exchange or substitution for, an outstanding Warrant certificate, may
be in the form so changed.
6.10. Adjustment by Board of Directors. If any event occurs as to
which, in the opinion of the Board of Directors of the Company, the provisions
of this Section 6 are not strictly
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applicable or if strictly applicable would not fairly protect the rights of the
Warrantholder in accordance with the essential intent and principles of such
provisions, then the Board of Directors shall make an adjustment in the
application of such provisions, in accordance with such essential intent and
principles, so as to protect such rights as aforesaid, but in no event shall any
adjustment have the effect of increasing the Warrant Price as otherwise
determined pursuant to any of the provisions of this Section 6 except in the
case of a combination of shares of a type contemplated in Section 6.1(a) and
then in no event to an amount larger than the Warrant Price as adjusted pursuant
to Section 6.1(a).
Section 7. Fractional Interests. The Company shall not issue fractional
Common Shares upon any exercise of any Warrants. If any fraction of a Common
Share would, except for the provisions of this Section 7, be issuable on the
exercise of any Warrants, the Company shall pay an amount in cash equal to the
Market Price (as defined in Section 2(b) hereof, except if the Common Shares are
not publicly traded, as determined in good faith by the Board of Directors of
the Company) multiplied by such fraction, provided, however, that no amount
shall be paid by the Company of less than U.S. $5.00.
Section 8. No Rights as Shareholder, Notices to Warrantholder. Nothing
contained in this Agreement or in the Warrants shall be construed as conferring
upon the Warrantholder any rights as a shareholder of the Company, including
(without limitation) the right to vote, receive dividends, consent or receive
notices as a shareholder in respect of any meeting of shareholders for the
election of directors of the Company or any other matter, except as provided
herein. If, however, at any time prior to the expiration of the Warrants and
prior to their exercise in full, any one or more of the following events shall
occur:
(a) any action which would require an adjustment pursuant to
Section 6.1 or 6.3; or
(b) the Company shall declare any cash dividend upon its Common
Shares; or
(c) the Company shall declare any dividend upon its Common Shares
payable in stock or make any special dividend or other distribution to
the holders of its Common Shares; or
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(d) the Company shall offer Purchase Rights to the holders of its
Common Shares; or
(e) there shall be any capital reorganization or reclassification
of the share capital of the Company, including any subdivision or
combination of its outstanding Common Shares, or amalgamation of the
Company with, or sale of all or substantially all of its assets to,
another corporation; or
(f) there shall be a dissolution, liquidation or winding up of the
Company (other than in connection with an amalgamation or sale of its
property, assets and business as an entirety or substantially as an
entirety);
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section 10 hereof, at least 20 days prior to (i)
the date fixed as a record date or the date of closing the transfer books for
the determination of the shareholders entitled to any relevant dividend,
distribution, Purchase Rights or other rights or for the determination of
shareholders entitled to vote on such proposed reorganization, reclassification,
amalgamation, sale, dissolution, liquidation or winding up and (ii) the date
when any such reorganization, reclassification, amalgamation, sale, dissolution,
liquidation or winding up shall take place. Such notice in accordance with the
foregoing clause (i) shall also specify, in the case of any such dividend,
distribution or Purchase Rights, the date on which the holders of Common Shares
shall be entitled thereto, and such notice in accordance with the foregoing
clause (ii) shall also specify the date on which the holders of Common Shares
shall be entitled to exchange their Common Shares for securities or other
property deliverable upon such reorganization, reclassification, amalgamation,
sale, dissolution, liquidation or winding up, as the case may be.
Section 9. No Dilution or Impairment. The Company will not, by
amendment of its charter or through reorganization, amalgamation, dissolution,
sale of assets or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the Warrantholder against dilution or other impairment. Without
limiting the generality of the foregoing, the Company will not increase the par
value of any shares receivable upon the exercise of this Warrant above the
amount payable therefor upon such exercise, and at all times will
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take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and non-assessable shares upon
the exercise of this Warrant.
Section 10. Notices. Any notice hereunder shall be in writing and shall
be effective when delivered in person or by facsimile transmission, or seven
business days after being mailed by certified or registered mail, postage
prepaid, return receipt requested, to the appropriate party at the following
addresses:
If to the Warrantholder:
Warburg Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017-3147
Facsimile: 212-878-9351
Attention: Mr. Joel Ackerman
with a copy to:
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
Facsimile: 212-728-8111
Attention: Steven J. Gartner, Esq.
If to the Company:
Sonus Corp.
111 SW Fifth Avenue, Suite 1620
Portland, Oregon 97204
Facsimile: 503-225-9309
Attention: Mr. Brandon M. Dawson
with copy to:
Sonus Corp.
111 SW Fifth Avenue, Suite 1620
Portland, Oregon 97204
Facsimile: 503-225-9309
Attention: Brian Thompson, Esq.
or, in each case, to such other address as the parties may hereinafter designate
by like notice.
Section 11. Successors. All the covenants and provisions of this
Agreement for the benefit of the Warrantholder or the Company shall bind and
inure to the benefit of their successors
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and, in the case of the Warrantholder, permitted assigns. This Agreement shall
not be assignable by the Company.
Section 12. Amalgamation of the Company. The Company shall not
amalgamate with any other corporation or sell all or substantially all of its
property to another corporation, unless the provisions of Section 6.4 are
complied with.
Section 13. Remedies. The Company stipulates that the remedies at law
of the Warrantholder in the event of any default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that the same may be specifically enforced.
Section 14. Subdivisions of Rights. The Warrants (as well as any new
warrants issued pursuant to the provisions of this Section) are exchangeable,
upon the surrender hereof by the Warrantholder at the principal office of the
Company for any number of new warrants of like tenor and date representing in
the aggregate the right to subscribe for and purchase the number of Shares which
may be subscribed for and purchased hereunder.
Section 15. Applicable Law, Submission to Jurisdiction. This Agreement
shall be deemed to be a contract made under the laws of the State of New York
and for all purposes shall be construed in accordance with the internal laws of
said State (without reference to its rules as to conflicts of laws). The Company
hereby agrees to the non-exclusive jurisdiction of the courts of the State of
New York or the federal courts sitting in the City of New York in connection
with any action arising out of this Agreement.
Section 16. Benefits of this Agreement. Except as provided in Section
1.2 and Section 11, nothing in this Agreement shall be construed to give to any
person or corporation other than the Company and the Warrantholder any legal or
equitable right, remedy or claim under this Agreement. Except as provided in
Section 1.2 and Section 11, this Agreement shall be for the sole and exclusive
benefit of the Company and the Warrantholder.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the date and year first above written.
SONUS CORP.
By: /s/ Brandon M. Dawson
Name: Brandon M. Dawson
Title: Chairman and Chief Executive Officer
WARBURG, PINCUS VENTURES, L.P.
By: Warburg, Pincus & Co.,
General Partner
By: Authorized Signature
Name:
Title:
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<PAGE>
EXHIBIT 1
[FORM OF WARRANT CERTIFICATE]
"THE WARRANTS REPRESENTED BY THIS CERTIFICATE, AND THE COMMON SHARES
ISSUABLE UPON EXERCISE OF SUCH WARRANTS, HAVE NOT BEEN REGISTERED UNDER
THE UNITED STATES SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY
STATE OF THE UNITED STATES OR ANY PROVINCE OF CANADA. SUCH WARRANTS MAY
NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, EXCHANGED, PLEDGED OR
HYPOTHECATED OR OTHERWISE TRANSFERRED, IN ANY MANNER, AND SUCH COMMON
SHARES MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED OR HYPOTHECATED OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF
COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE." THE WARRANTS REPRESENTED BY THIS
CERTIFICATE MAY NOT BE TRADED IN CANADA EXCEPT AS PERMITTED BY RELEVANT
CANADIAN SECURITIES LAWS.
AMENDED AND RESTATED
WARRANT CERTIFICATE NO. W-1
SONUS CORP.
(ORGANIZED UNDER THE LAWS
OF YUKON TERRITORY)
October 1, 1999
WARRANTS TO PURCHASE COMMON SHARES
This certifies that, for value received, Warburg, Pincus Ventures, L.P.
(the "Warrantholder") is the registered owner of 2,000,000 warrants (the
"Warrants") each to purchase from Sonus Corp. (the "Company"), at any time prior
to 5:00 p.m., Pacific Time, on October 1, 2004, one common share of the Company,
without par value (a "Common Share") at a purchase price per Common Share (the
"Warrant Price"), equal to U.S. $6.75, provided that if the Series A Amendment
Filing Date has not occurred on or prior to March 31, 2000, then from and after
March 31, 2000, the Warrant Price shall equal U.S. $4.00. The Warrants are
subject
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<PAGE>
to, and the Warrantholder, by acceptance of this certificate, consents to, all
the terms and provisions of, the Amended and Restated Warrant Agreement dated as
of October 1, 1999, between the Warrantholder and the Company (the "Warrant
Agreement"). Any capitalized terms used herein and not defined herein shall have
the meanings assigned to such terms in the Warrant Agreement.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form herein duly
executed (with a signature guarantee as provided therein), and simultaneous
payment of the Warrant Price for each Warrant exercised, at the principal office
of the Company. Payment of such price shall be made at the option of the
Warrantholder in cash by certified or official bank check or by wire transfer.
Subject to the terms and conditions set forth in Section 2 of the Warrant
Agreement, the Warrantholder may also receive Common Shares without any cash
payment by presentation of this Warrant Certificate with the Cashless Exercise
Form herein duly executed (with a signature guarantee as provided therein) at
the principal office of the Company.
Upon any partial exercise of the Warrants evidenced hereby, there shall
be signed and issued to the Warrantholder a new Warrant Certificate in respect
of the Common Shares as to which the Warrants evidenced hereby shall not have
been exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Common Shares as here evidenced by the
Warrant or Warrants exchanged. No fractional Common Shares will be issued upon
the exercise of rights to purchase hereunder, but the Company shall pay the cash
value of any fraction otherwise issuable upon the exercise of one or more
Warrants, as provided in the Warrant Agreement.
The Warrants evidenced hereby are transferable only in accordance with
the terms and conditions set forth in Section 1.2 of the Warrant Agreement.
This Warrant Certificate does not entitle the Warrantholder to any of
the rights of a shareholder of the Company.
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<PAGE>
SONUS CORP.
By: /s/ Brandon M. Dawson
Title: Chairman and Chief Executive Officer
ATTEST:
/s/ Brian S. Thompson
Title: Secretary
Dated: October 1, 1999
<PAGE>
EXHIBIT 2
PURCHASE FORM
Sonus Corp.
111 SW Fifth Avenue, Suite 1620
Portland, Oregon 97204
Pursuant to Section 2(a) of the Warrant Agreement, as amended, the
undersigned hereby irrevocably elects to exercise the right of purchase
represented by this Warrant Certificate for, and to purchase thereunder, ------
common shares of the Company (the "Common Shares"), and requests that
certificates for such Common Shares be issued in the name of:
Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017-3147
Taxpayer Identification Number: -------------------
If this Warrant Certificate is hereby being exercised with respect to fewer than
all the Common Shares specified herein, please issue a new Warrant Certificate
for the unexercised balance of the Warrants, registered in the name of the
undersigned Warrantholder as below indicated and delivered to the address stated
below.
Dated:-----------------------
Name of Warrantholder:
Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017-3147
By: Warburg, Pincus & Co.
General Partner
By:---------------------
Name:
Title:
<PAGE>
EXHIBIT 3
CASHLESS EXERCISE FORM
Sonus Corp.
111 SW Fifth Avenue, Suite 1620
Portland, Oregon 97204
Pursuant to Section 2(b) of the Warrant Agreement, the undersigned
hereby irrevocably elects to exercise the right represented by this Warrant
Certificate for, and to receive thereunder, without any cash payment, --------
common shares of the Company (the "Common Shares") as provided for therein, and
requests that certificates for such Common Shares be issued in the name of:
Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017-3147
Taxpayer Identification Number: ------------------
If this Warrant Certificate is hereby being exercised with respect to fewer than
all the Common Shares specified herein, please issue a new Warrant Certificate
for the unexercised balance of the Warrants, registered in the name of the
undersigned Warrantholder as below indicated and delivered to the address stated
below.
Dated:-----------------------
Name of Warrantholder:
Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017-3147
By: Warburg, Pincus & Co.
General Partner
By:---------------------
Print Name:
Title:
<PAGE>
EXHIBIT 4
FORM OF OPINION OF DAVIS & COMPANY
FORM OF
CONVERTIBLE SUBORDINATED NOTE
as amended through October 31, 1999
October 31, 1996
1. HealthCare Capital Corp., a corporation duly organized and existing
under the laws of the Province of Alberta, Canada ("HealthCare"), and HealthCare
Hearing Clinics, Inc., a corporation duly organized and existing under the laws
of the State of Washington ("HHC"), for value received hereby jointly and
severally promise to pay to the order of ------------------ ("Holder") the
principal sum of ------------------------------------, without interest, on
August 1, 1999, at the office of Holder at
- -----------------------------------------, or at such other place as Holder may
designate in writing, in such coin or currency of the United States of America
as at the time of payment is legal tender for the payment of public and private
debts. HealthCare and HHC are sometimes collectively referred to herein as the
"Companies".
2. Deleted.
3. The Companies, for themselves and their successors and assigns,
covenant and agree, and by its acceptance hereof Holder likewise covenants and
agrees, that the payment of the principal of this note is hereby expressly
subordinated, to the extent and in the manner hereinafter set forth, in right of
payment to the prior payment in full of all Senior Indebtedness. As used herein
"Senior Indebtedness" means the principal of (and premium, if any) and unpaid
interest on indebtedness for borrowed money of HealthCare or HHC (including
guarantees by HealthCare or HHC of indebtedness for borrowed money of others),
whether outstanding on the date hereof or hereafter created, incurred, assumed,
or guaranteed.
4. Upon any distribution of assets by HealthCare or HHC upon any
dissolution, winding up, liquidation, or reorganization of HealthCare or HHC, as
the case may be, whether in bankruptcy, insolvency, reorganization, or
receivership proceedings or upon an assignment for the benefit of creditors or
any other marshalling of the assets and liabilities of HealthCare or HHC or any
other winding up of the Companies (subject to the power of a court of competent
jurisdiction to make other equitable provision reflecting the rights conferred
hereby upon the Senior Indebtedness and the holders thereof with respect to this
note and Holder by a lawful plan of reorganization under applicable bankruptcy
law):
(a) The holders of all Senior Indebtedness shall first be entitled
to receive payment in full of the principal thereof (and
premium, if any) and the interest due thereon before Holder is
entitled to receive any payment upon the indebtedness
evidenced by this note;
(b) Any payment or distribution of assets of the Companies of any
kind or character, whether in cash, property, or securities,
to which Holder would be entitled except for the provisions of
this Section 4 shall be paid by the liquidating trustee or
agent or other person making such payment or distribution,
whether a trustee in bankruptcy, a receiver or liquidating
trustee or otherwise, directly to the holders
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<PAGE>
of Senior Indebtedness or their representative or
representatives or to the trustee or trustees under any
indenture under which any instruments evidencing any of such
Senior Indebtedness may have been issued, ratably accordingly
to the aggregate amounts remaining unpaid on account of the
principal of (and premium, if any) and interest on the Senior
Indebtedness held or represented by each, to the extent
necessary to make payment in full of all Senior Indebtedness
remaining unpaid, after giving effect to any concurrent
payment or distribution to the holders of such Senior
Indebtedness; and
(c) In the event that, notwithstanding the foregoing, any payment
or distribution of assets of the Companies of any kind or
character, whether in cash, property, or securities, shall be
received by Holder before all Senior Indebtedness is paid in
full, such payment or distribution shall be paid over to the
holders of such Senior Indebtedness or their representative or
representatives or to the trustee or trustees under any
indenture under which any instruments evidencing any of such
Senior Indebtedness may have been issued, ratably as
aforesaid, for application to the payment of all Senior
Indebtedness remaining unpaid until all such Senior
Indebtedness shall have been paid in full, after giving effect
to any concurrent payment or distribution to the holders of
such Senior Indebtedness; provided, however, that any such
payment or distribution received by Holder shall not be
required to be paid over to a holder of such Senior
Indebtedness as aforesaid if upon notice from Holder to such
holder of Senior Indebtedness, which notice shall state that
such payment or distribution has been received by Holder and
request that such holder notify Holder of the amounts then due
and owing to such holder on such Senior Indebtedness, such
holder of such Senior Indebtedness shall fail to so notify
Holder of such amounts then due and owing. The provisions of
this paragraph (c) shall not apply to any payment or
distribution of assets received by Holder prior to the date of
any distribution, assignment, marshalling, or other winding up
referred to in the first sentence of this Section 4.
Subject to the payment in full of all Senior Indebtedness, Holder shall be
subrogated to the rights of the holders of Senior Indebtedness to receive
payments or distributions of cash, property, or securities of HealthCare or HHC,
as the case may be, applicable to the Senior Indebtedness until the principal of
this note shall be paid in full and no such payments or distributions to Holder
of cash, property, or securities otherwise distributable to the Senior
Indebtedness shall, as between the Companies, their respective creditors, other
than the holders of Senior Indebtedness, and Holder, be deemed to be a payment
by the Companies to or on account of this note. It is understood that the
provisions of Sections 3 and 4 are solely for the purpose of defining the
relative rights of Holder, on the one hand, and the holders of the Senior
Indebtedness on the other hand, against the Companies and their properties.
Nothing contained in Sections 3 and 4 or elsewhere in this note is intended to
or shall impair, as between the Companies and Holder, the obligation of the
Companies, which is unconditional and absolute, to pay to Holder the principal
of this note as and when the same shall become due and payable in accordance
with its terms or to affect the relative rights of Holder and creditors of the
Companies other than the holders of Senior Indebtedness, nor shall anything
herein or in this note prevent Holder from exercising all remedies otherwise
permitted by applicable law upon default, subject to the rights, if any, under
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<PAGE>
Sections 3 and 4 of the holders of Senior Indebtedness in respect to cash,
property, or securities of the Companies received upon the exercise of any such
remedy.
5. In the event and during the continuation of any default of which
Holder shall have received written notice in the payment of principal of (or
premium, if any) or interest on any Senior Indebtedness beyond any applicable
period of grace, or in the event that any event of default with respect to any
Senior Indebtedness of which Holder shall have received written notice shall
have occurred and be continuing, or would occur as a result of the payment
referred to hereinafter, permitting the holders of such Senior Indebtedness (or
a trustee or other representative on behalf of the holders thereof) to
accelerate the maturity thereof, then, unless and until such default or event of
default shall have been cured or waived or shall have ceased to exist, no
payment of principal of this note shall be made by the Companies; provided,
however that such prohibition on the payment of principal of this note shall not
apply if all holders of Senior Indebtedness, upon receiving written notice from
the Companies requesting permission to make a payment of principal on this note,
fail to notify the Companies in writing within 30 days after the date the notice
requesting such permission is received that such permission is denied.
6. Nothing contained in Sections 3, 4, or 5 shall prevent the Companies
at any time except during the pendency of any of the conditions described in
Sections 4 and 5, from making the scheduled principal payment provided for in
Section 1.
7. Holder is entitled, at its option, at any time prior to 5 p.m.
Eastern Time on August 1, 1999, to convert the principal amount of this note (or
any portion hereof which is $1,000 or an integral multiple thereof) into shares
of Common Stock of HealthCare, as said shares shall be constituted at the date
of conversion, at the conversion price of $1.30 principal amount of this note
for each such share of Common Stock (calculated as to each conversion to the
nearest one-thousandth of a share), upon the surrender of this note to
HealthCare at the office of HealthCare, accompanied by written notice of
election to convert, in the form attached hereto as Exhibit A, duly executed by
Holder or by its duly authorized attorney. Share certificates will be delivered
to Holder within five business days. No adjustment is to be made on conversion
for dividends on Common Stock issued on conversion. HealthCare shall not be
required to issue fractional shares upon any such conversion, but shall make an
adjustment therefor in cash equal to the current market value of such fractional
interest computed to the nearest thousandth of a share either on the basis of
the last reported sale price of the Common Stock on the Alberta Stock Exchange
(or, if not listed on the Alberta Stock Exchange, then on such other exchange on
which the Common Stock is listed as HealthCare may designate) on the last
business day prior to the date of conversion or if there shall not have been a
sale on such last business day, on the average of the bid and asked quotations
therefor on such exchange on such last business day, or, if the Common Stock
shall not then be listed on any exchange, such adjustment shall be made using a
value of $1.30 per share.
8. The conversion price shall be adjusted from time to time as follows:
(a) In case HealthCare shall, at any time or from time to time
while this note is outstanding, (i) pay a dividend in shares
of its Common Stock, (ii) subdivide its outstanding shares of
Common Stock, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares, or (iv) issue by
reclassification of
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<PAGE>
its shares of Common Stock any shares of stock of HealthCare,
the conversion price in effect immediately prior thereto shall
be adjusted so that upon surrender of this note for
conversion, Holder shall be entitled to receive the number of
shares of Common Stock or other securities of HealthCare that
it would have owned or have been entitled to receive after the
happening of any of the events described above had this note
been converted immediately prior to the happening of such
event. Any adjustment made pursuant to this Section 8(a) shall
become effective in the case of a dividend on the payment date
retroactively to immediately after the opening of business on
the date following the record date for the determination of
shareholders entitled to receive such dividend, subject to the
provisions of Section 8(c), and shall become effective in the
case of a subdivision, combination or reclassification
immediately after the opening of business on the day following
the day when such subdivision, combination, or
reclassification, as the case may be, becomes effective.
(b) Except as herein otherwise provided, no adjustment in the
conversion price shall be made by reason of the issuance, in
exchange for cash, property or services, of shares of Common
Stock, or any securities convertible into or exchangeable for
shares of Common Stock, or carrying the right to purchase any
of the foregoing.
(c) If HealthCare shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive any
dividend, for any subscription or purchase rights or any
distribution and shall, thereafter and before the distribution
to stockholders of any such dividend, subscription or purchase
rights or distribution, legally abandon its plan to pay or
deliver such dividend, subscription or purchase rights or
distribution, then no adjustment of the conversion price shall
be required by reason of the taking of such record.
(d) No adjustment in the conversion price shall be required unless
such adjustment would require an increase or decrease of at
least 1 percent in such price; provided, however, that any
adjustment which by reason of this Section 8(d) is not
required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under
this Section 8 shall be made to the nearest cent or to the
nearest one thousandth of a share, as the case may be.
9. In case of any reclassification or change of outstanding shares of
Common Stock issuable upon conversion of this note (other than a change in par
value, or from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination), or in case of any consolidation of
HealthCare which one or more other corporations (other than a consolidation in
which HealthCare is the continuing corporation and which does not result in any
reclassification or change of outstanding shares of Common Stock issuable upon
conversion of this note), or in case of the merger of HealthCare into another
corporation, or in case of any sale or conveyance to another corporation of the
property of HealthCare as an entirety or substantially as an entirety,
HealthCare, or such successor or purchasing corporation, as the case may be,
Holder shall thereafter have the right to convert this note into the kind and
amount of shares of stock and other securities and property (including cash) or
any combination thereof receivable upon such reclassification, change,
consolidation, merger, sale, or conveyance by a holder of the
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<PAGE>
number of shares of Common Stock into which this note might have been converted
immediately prior to such reclassification, change, consolidation, merger, sale,
or conveyance, subject to adjustments which shall be as nearly equivalent as may
be practicable to the adjustments provided for in Section 8 and any such
adjustments which shall be approved by the Board of Directors shall be
conclusive for all purposes of this Section 9. The provisions of this Section 9
shall similarly apply to successive reclassification, changes, consolidations,
mergers, sales, and conveyances.
10. No recourse shall be had for the payment of the principal on this
note, or for any claim based hereon, or otherwise in respect hereof, against any
incorporator, stockholder, officer, or director, as such, past, present, or
future, of the Companies or of any successor corporations, whether by virtue of
any constitution, statute, or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the acceptance
hereof and as part of the consideration for the issue hereof, expressly waived
and released.
11. The occurrence of any one or more of the following events shall
constitute an Event of Default under this note:
(a) HealthCare or HHC shall fail to observe or perform any
obligation to be observed or performed by them under this note, under the
Asset Purchase Agreement effective as of October 31, 1996, between the
Companies and Holder, or under the Security Agreement within thirty (30)
days after written notice from Holder to perform or observe the obligation
or to substantially commence to observe or perform and thereafter
diligently complete observance or performance if complete observance or
performance of the obligation is not possible within thirty (30) days;
(b) Either HealthCare or HHC shall be in default under or fail to
make any payment of principal of or interest on any indebtedness for
borrowed money in a principal amount of at least Fifty Thousand Dollars
($50,000) and such default or failure shall continue beyond any applicable
grace period;
(c) Either HealthCare or HHC shall admit its inability to pay its
debts as they mature or shall make an assignment for the benefit of any of
its creditors;
(d) Proceedings in bankruptcy, or for reorganization of HealthCare
or HHC, or for the readjustment of any of HealthCare's or HHC's debts,
under any bankruptcy code or under any other laws, whether state or
federal, for the relief of debtors, now or hereafter existing, shall be
commenced against or by HealthCare or HHC, and such receiver or trustee
shall not be discharged within sixty (60) days of his appointment, or such
proceedings shall not be dismissed or discharged within sixty (60) days of
their commencement;
(e) A receiver or trustee shall be appointed for HealthCare or HHC
or for any substantial part of HealthCare's or HHC's assets, or any
proceedings shall be instituted for the dissolution or the full or partial
liquidation of HealthCare or HHC, and such receiver or trustee shall not
be discharged within sixty (60) days of his appointment, or such
proceedings shall not be dismissed or discharged within sixty (60) days of
their
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<PAGE>
commencement, or HealthCare or HHC shall discontinue business or
materially change the nature of their respective businesses;
(f) HealthCare or HHC shall suffer final judgments for payment of
money aggregating in excess of Fifty Thousand Dollars ($50,000) and shall
not discharge the same within a period of sixty (60) days unless, pending
further proceedings, execution has not been commenced or, if commenced,
has been effectively stayed.
12. Upon the occurrence of an Event of Default, Holder shall have the
right to accelerate this note and to declare the entire unpaid balance hereof
immediately due and payable.
13. This note has not been registered under the Securities Act of 1933.
This note has been acquired for investment purposes only and not with a view
toward distribution or resale, and may not be mortgaged, pledged, hypothecated,
or otherwise transferred without an effective registration statement for this
note under the Securities Act of 1933 or an opinion of counsel reasonably
acceptable to counsel for the Companies that registration is not required under
the Securities Act of 1933. This note is also subject to restrictions imposed by
applicable state securities laws.
14. This note is exempt from qualification under the Trust Indenture
Act of 1939. Therefore, Holder are aware that certain protections which might be
available under a note issued pursuant to a trust indenture qualified under the
Trust Indenture Act of 1939 will not be available.
15. No sinking fund will be established by the Companies to assist the
Companies in retiring this note upon maturity.
16. Holder shall not, by virtue of ownership of this note, be entitled
to any rights of a shareholder of HealthCare, but shall be entitled to receive
such annual reports as HealthCare shall distribute to its shareholders.
17. The Companies agree to pay all costs of collection of any amounts
due hereunder when incurred, including, without limitation, attorney fees and
expenses, including on any appeal.
18. The Companies hereby waive presentment, demand, notice, and protest
and any defense by reason of extension of time for payment or other indulgences.
Failure of Holder to assert any right herein shall not be deemed to be a waiver
thereof.
19. This note shall be governed by, and construed in accordance with,
the laws of the Commonwealth of Pennsylvania, including matters of construction,
validity, and performance.
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<PAGE>
20. This note may not be assigned, transferred, or negotiated to any
person by Holder within 12 months after the date hereof, except in accordance
with Regulation 204.011 of the Pennsylvania Code.
HEALTHCARE CAPITAL CORP., an Alberta,
Canada, corporation
By -----------------------------------
Brandon M. Dawson, President
HEALTHCARE HEARING CLINICS, INC., a
Washington corporation
By -----------------------------------
Brandon M. Dawson, President
Accepted:
By ------------------------------
Title ---------------------------
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<PAGE>
EXHIBIT A
FORM OF CONVERSION NOTICE
To HealthCare Capital Corp.
The undersigned holder of this note hereby irrevocably exercises the option to
convert this note, or portion hereof (which is $1,000 or an integral multiple
thereof) below designated, into shares of Common Stock of HealthCare Capital
Corp. in accordance with the terms of this note, and directs that the shares
issuable and deliverable upon the conversion, together with any check in payment
for fractional shares and the portion of this note representing any unconverted
principal amount hereof, be issued and delivered to the undersigned.
Principal amount to be converted (in an integral multiple of $1,000, if less
than all):
- -----------------------------------
Dated:--------------------- -----------------------------------
Signature
-8-
Cdn $48,633.85 March 19, 1998
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned ("Maker") promises to pay to the order of
Sonus Corp., an Alberta, Canada corporation (hereinafter referred to as
"Holder"), the principal sum of Forty-Eight Thousand Six Hundred Thirty-Three
and 85/100 Canadian Dollars (Cdn $48,633.85) with interest thereon at the rate
of seven and three-quarters percent (7.75%) per annum. Principal and interest
shall be payable in lawful money of the United States of America at 111 SW Fifth
Avenue, Suite 2390, Portland, Oregon 97204 or at such other place as Holder may
designate in writing. Principal and interest shall become due and payable on
December 31, 2000.
Maker agrees to pay all costs of collection of any amounts due hereunder when
incurred, including, without limitation, attorney's fees and expenses, including
on any appeal. Such costs shall be added to the balance of principal and
interest then due.
Maker, for himself and his successors and assigns, hereby waives presentment,
demand, notice and protest and any defense by reason of extension of time for
payment or other indulgences. Failure of the Holder to assert any right herein
shall not be deemed to be waiver hereof.
This Note is secured. Maker has executed a Pledge Agreement that describes the
collateral and the process for realization on the security in the event of a
default hereunder.
This Promissory Note shall be governed by and construed and enforced in
accordance with the laws of the State of Oregon.
Maker:
/s/ Brandon M. Dawson
Brandon M. Dawson, an individual
<PAGE>
PLEDGE AGREEMENT
DATE: May 1, 1998
PARTIES: SONUS CORP., an Alberta, ("Lender")
Canada corporation
AND: BRANDON M. DAWSON, an individual ("Borrower")
RECITAL:
Borrower has issued to Lender the following promissory notes (the "Notes"):
Date Amount
---- ------
5-8-97 US $67,500
12-26-97 Cdn $43,985.01
3-19-98 Cdn $48,633.85
4-24-98 US $91,000
To secure all amounts due now or later from Borrower to Lender under the Notes,
Borrower hereby grants and pledges to Lender a security interest in the
following described property:
Sixty Thousand (60,000) shares of the common stock of Lender as
evidenced by stock certificate no. ------- , accompanied by a stock
power duly executed in blank by Borrower (the "Shares").
AGREEMENT:
SECTION 1. POSSESSION
Lender shall retain possession of the Shares until all amounts due from Borrower
to Lender under the Notes are paid in full.
SECTION 2. DEFAULT
Borrower shall be in default under this Agreement if Borrower fails to make any
payment to Lender when due, or if borrower violates any terms of this Agreement
or the Notes. Upon default, Lender shall have all the rights of a secured party
under the Oregon
<PAGE>
Uniform Commercial Code, including, subject to Section 3, the right to sell the
Shares at either a private or public sale.
SECTION 3. SECURITIES LAWS
Borrower acknowledges that the sale of the Shares by Lender may be subject to
certain securities laws, and Borrower agrees that Lender may take any action
necessary in order to comply with such laws, including any and all necessary
restrictions with respect to the time, place, manner and conditions of sale.
IN WITNESS WHEREOF, Borrower has executed this Pledge Agreement on the day and
year first written above.
Borrower:
/s/ Brandon M. Dawson
Brandon M. Dawson
an individual
Lender:
Sonus Corp.
By: /s/ Edwin J. Kawasaki
Edwin J. Kawasaki
Vice President-Finance
NONCOMPETITION AGREEMENT
AGREEMENT dated January 25, 1999, between SONUS-USA, INC., a Washington
corporation ("SONUS") and GREGORY J. FRAZER ("Employee").
RECITALS
A. SONUS entered into stock purchase agreements with Employee
for the following companies on various dates:
Hearing Care Associates-Northridge, Inc.;
Hearing Care Associates-Glendale, Inc.;
Hearing Care Associates-Glendora, Inc.;
Hearing Care Associates-Los Angeles, Inc.;
Hearing Care Associates-Arcadia, Inc.;
Hearing Care Associates-Sherman Oaks, Inc.;
Audio-Vestibular Center, Inc.;
Hearing Care Associates-Lancaster, Inc.;
Hearing Care Associates-Santa Monica, Inc.;
Hearing Care Associates-Inglewood, Inc.; and
Hearing Care Associates-Montclair, Inc.
(collectively, "HCA Companies");
B. In connection with the purchase of HCA Companies, Employee
and SONUS entered into certain noncompetition agreements prohibiting employee
from competing with SONUS in certain geographic areas.
C. Employee was a principal shareholder, a member of the board
of directors, and a key executive officer of HCA Companies. Because of
Employee's detailed knowledge of HCA Companies and Employee's reputation and
relationship with patients, customers, suppliers, distributors, employees, and
other parties doing business with HCA Companies. SONUS recognizes the Employee
acknowledges the detrimental effect on and the decrease in value of the HCA
Companies that would result if Employee were to enter into competition with
SONUS.
D. SONUS and Employee have determined that it is in the best
interest of each of them to expand the geographic area covered by Employee's
covenant not to compete. Employee and SONUS acknowledge that the expanded
covenant not to compete is in connection with the sale of the HCA Companies.
<PAGE>
TERMS
In consideration of the covenants and agreements of the
parties herein contained, the parties agree as follows:
1. Covenant Not to Compete. For a period of three years after
the date Employee's employment with SONUS terminates for any reason, Employee
will not directly or indirectly engage in any Competitive Activities (as
hereinafter defined) within the Territory (as hereinafter defined). The term
"Competitive Activities" as used herein shall mean:
(i) directly or indirectly engaging in, continuing in or
carrying on any business substantially similar to that heretofore
conducted by SONUS, including owning or controlling any financial
interest in any corporation, partnership, firm or other form of
business organization which competes with SONUS or is engaged in or
carries on any aspect of such business or any business substantially
similar thereto;
(ii) consulting with, advising or assisting in any way with
respect to the operation of any hearing care business of the type
conducted by SONUS or any business substantially similar thereto,
whether or not for consideration, or any corporation, partnership, firm
or other business organization which is now, becomes or is actively
planning to become a competitor of SONUS including, but not limited to,
advertising or otherwise endorsing the products of any such competitor;
soliciting customers or otherwise serving as an intermediary for any
such competitor; loaning money or rendering any other form of financial
assistance to or engaging in any form of business transaction on other
than an arm's length basis with any such competitor; or
(iii) enticing away or otherwise persuading any employee of
SONUS to alter, modify or terminate his or her relationship with SONUS
as an employee
provided that this covenant shall not preclude the ownership by Employee of
securities of corporations which are listed on a national securities exchange or
traded in the national over-the-counter market in amounts which do not exceed 5
percent of the outstanding shares of any such corporation.
The parties agree that the geographic scope of this covenant not to
compete (the "Territory") shall cover the states of Arizona, New Mexico and the
area of California which lies north of Santa Barbara (except for a 20 mile
radius from Saratoga, California and a 10 mile radius from San Francisco,
California). In the event a court of competent jurisdiction determines that the
provisions of this covenant not to compete are excessively broad as to duration,
geographical scope or activity, it is expressly agreed that this covenant not to
compete shall be construed so that the remaining provisions shall not be
affected, but shall remain in full force and effect, and any such overbroad
provisions shall not be deemed, without further action on the part of any
person, to be modified, amended and/or limited, but only to the extent necessary
to render the same valid and enforceable in such jurisdiction.
-2-
<PAGE>
2. Covenant of Confidentiality. Employee shall not at any time
subsequent to the date hereof, except as explicitly requested by SONUS, (i) use
for any purpose, (ii) disclose to any person, or (iii) keep or make copies of
documents, tapes, discs or program containing, any confidential information
concerning the operations of SONUS. For purposes hereof, "confidential
information" shall mean and include, without limitation, trade rights, customer
lists and information, and all other information concerning operations,
equipment, products, marketing and distribution methods not previously disclosed
to the public directly by SONUS or otherwise in the public domain.
3. Consideration. In consideration of Employee's covenants set
forth herein, SONUS will pay to Employee (so long as he is not in material
breach of the terms hereof) the sum of $6,303 per month on the first day of each
month during the period beginning with January 1, 1999 and ending with September
1, 2001. Under no circumstances shall SONUS be relieved of its obligation to
make the foregoing payments pursuant to this Agreement as a result of the
termination of Employee's employment with SONUS, regardless of whether such
termination is by SONUS or Employee and regardless of whether it is with or
without good cause.
4. Equitable Relief of Violations. Employee agrees that the
provisions and restrictions contained in this Agreement are necessary to protect
the legitimate continuing interests of SONUS and that any violation or breach of
these provisions will result in irreparable injury to SONUS for which a remedy
at law would be inadequate and that, in addition to any relief at law which may
be available to SONUS for such violation or breach and regardless of any other
provision contained in this Agreement, SONUS shall be entitled to injunctive and
other equitable relief as a court may grant after considering the intent of this
Agreement.
If Employee violates the terms of this Agreement, such
violation shall constitute a breach of all other noncompetition agreements
entered into in connection with the purchase of HCA Companies (the "Prior
Agreements"), and if Employee violates the terms of the Prior Agreements, such
violation shall constitute a breach of this Agreement.
If SONUS violates the terms of this Agreement, such violation
shall constitute a breach of the Prior Agreements, and if SONUS violates the
terms of the Prior Agreements, such violation shall constitute a breach of this
Agreement.
5. Assignment. Neither this Agreement nor any interest herein
may be assigned by Employee. SONUS may freely assign this Agreement and any and
all interests herein to any "affiliate" (as such term is currently defined under
the Securities Act of 1934, as amended), or in connection with the transfer,
directly or indirectly, of all or substantially all, of the assets and
businesses acquired from Employee.
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<PAGE>
6. GENERAL.
6.1. Governing Law. This Agreement shall be subject to and
governed by the laws of the State of California, excluding any choice of law
rules that may direct the application of the laws of another jurisdiction.
6.2. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of Employee and SONUS and their respective heirs, legal
representatives, executors, administrators, successors, and permitted assigns.
6.3. Integration; Amendment; Waiver. This Agreement sets forth
all of the understandings of the parties with respect to its subject matter and
supersedes any and all other agreements, either oral or in writing, of the
parties with respect to the subject hereof. No change or modification of this
Agreement shall be valid unless in writing and signed by the party against which
it is to be enforced. No waiver of any provision of this Agreement shall be
valid unless written and signed by the person or party to be charged.
6.4. Severability. If any provision of this Agreement shall be
determined to be unenforceable because the terms are excessive or unreasonable
then such provision shall be reduced to the maximum reasonable limit and
enforced as reduced. In the event that any one or more of the provisions
contained in this Agreement shall be determined to be invalid, illegal, or
unenforceable in any respect, the enforceability of such provisions in every
other respect and of the remaining provisions of this Agreement shall not in any
way be impaired.
6.5. Headings. The headings of this Agreement are inserted for
convenience only and are not to be considered in the construction of the
provisions hereof.
6.6. Attorney Fees. In the event a suit or action is commenced
for the interpretation or enforcement of this Agreement, the prevailing party
shall be entitled to collect from the losing party in addition to all of the
costs and expenses, reasonable attorney fees at trial and on appeal.
-4-
<PAGE>
IN WITNESS WHEREOF the parties have executed and delivered this
Agreement as of the date first above written.
SONUS-USA, INC.
BY: /s/ Scott E. Klein
Scott E. Klein
Executive Vice President
EMPLOYEE
/s/ Gregory J. Frazer
Gregory J. Frazer
AMENDMENT AGREEMENT
AGREEMENT effective as of August 1, 1998 by and between
SONUS-USA, INC. (formerly known as HealthCare Hearing Clinics, Inc.), a
corporation duly organized and existing under the laws of the State of
Washington ("Sonus"), and GREGORY J. FRAZER ("Employee").
WITNESSETH:
WHEREAS, Sonus and Employee executed an Employment Agreement
dated as of October 1, 1996 (the "Employment Agreement");
WHEREAS, the parties desire to enter into this Amendment to
amend certain terms of the Employment Agreement;
NOW, THEREFORE, the parties hereto, intending to be legally
bound, and for valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, agree as follows:
1. Salary Reduction. Section 3.1 of the Employment Agreement
is hereby amended to provide that Employee's base salary shall be $80,000 per
year.
2. Prior Year Bonuses. Employee forever discharges and
releases Sonus from any and all bonuses due to Employee for Sonus' fiscal years
ended 1997 and 1998 pursuant to Section 3.2 of the Employment Agreement.
3. Car Allowances. Employee discharges and releases Sonus for
the remainder of the term of the Employment Agreement from any and all
automotive reimbursements due to Employee pursuant to Section 3.3(e) of the
Employment Agreement.
4. Overpayment. From August 1, 1998 to January 15, 1999, the
reductions contemplated by this Agreement in Sections 1 and 3 were not
implemented. Employee agrees to reimburse Sonus for such overpayment. Employee
was overpaid a total of $20,300, which is being paid to Sonus as follows:
Employee has delivered to Sonus its promissory note in the
principal amount of $20,300, payable in full on June 30, 1999
without interest. The promissory note may be satisfied, at
Employee's option, by offsetting the amount due under such
note against payments scheduled to be made by Sonus to
Employee in the future.
As a result of the overpayment, Sonus has issued Employee an
incorrect Form W-2. As soon as practicable, Sonus shall issue
Employee a corrected Form W-2. In addition, Sonus shall
reimburse Employee for any and all amounts withheld pursuant
to the Federal Insurance Contributions Act (the "Act") in
excess of the amounts properly withheld under such Act based
on the amount of wages paid as stated on the corrected Form
W-2.
<PAGE>
5. Required Acquisitions. Employee forever discharges and
releases Sonus from any and all requirements to purchase Employee's interest in
Hearing Care Associates-Encino and Employee's shares of Hearing Care
Associates-North Hollywood, Inc. as was originally set forth in a letter dated
September 26, 1996 by Brandon M. Dawson to Employee, et al.
6. Access to In-House Resources. Sonus agrees to provide
Employee with access to Sonus' in-house resources, at no charge, to discuss
legal issues regarding Hearing Care Associates-Encino and Hearing Care
Associates-North Hollywood, Inc. Employee acknowledges that Sonus, its employees
and agents do not represent Employee in any legal matters and that Employee has
been advised to seek his own counsel before proceeding with any transaction.
7. Indemnification. Sonus agrees to indemnify and hold
Employee harmless from and against all claims and liabilities arising out of
actions by Employee as an employee or director of Sonus (in addition to actions
taken by Sonus) from and after October 1, 1996. Employee agrees to indemnify and
hold Sonus harmless from and against all claims and liabilities arising out of
actions by Employee prior to October 1, 1996.
8. Full Force and Effect. Except as specifically amended
herein, the Employment Agreement shall remain in full force and effect in
accordance with its terms.
9. Entire Agreement. This Agreement represents the entire
agreement between the parties hereto. There are no other agreements, written or
oral between these parties relating to the subject matter hereof.
10. Counterparts. This Agreement may be executed in
counterparts, each of which shall constitute an original, and all of which taken
together shall constitute one and the same Agreement.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
SONUS
SONUS-USA, INC., a Washington corporation
BY: /s/ Scott E. Klein
Scott E. Klein
Executive Vice President
EMPLOYEE
/s/ Gregory J. Frazer
Gregory J. Frazer
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 (Nos. 333-57673 and 333-83151) and in the Registration Statement on Form S-3
(No. 333-23137) of Sonus Corp. of our report dated October 25, 1999, relating to
the consolidated balance sheets of Sonus Corp. and subsidiaries as of July 31,
1999 and 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended July 31, 1999, which report appears in the July 31, 1999 annual
report on Form 10-KSB of Sonus Corp.
/s/ KPMG LLP
Portland, Oregon
November 1, 1999
POWER OF ATTORNEY
Each person whose signature appears below designates and appoints BRANDON M.
DAWSON, SCOTT E. KLEIN and BRIAN S. THOMPSON, and any of them, his true and
lawful attorneys-in-fact and agents to sign the annual report on Form 10-KSB of
Sonus Corp., a Yukon Territory (Canada) corporation, for the fiscal year ended
July 31, 1999, and to file said report, with all exhibits thereto, with the
Securities and Exchange Commission under the Securities Act of 1934, as amended.
Each person whose signature appears below also grants full power and authority
to these attorneys-in-fact and agents to take any action and execute any
instruments that they deem necessary or desirable in connection with the
preparation and filing of the report, as fully as he could do in person, hereby
ratifying and confirming all that the attorneys-in-fact and agents or their
substitutes may lawfully do or cause to be done.
IN WITNESS WHEREOF, this power of attorney has been executed by each of the
undersigned as of the 25th day of October, 1999.
Signature Title
- --------- -----
/s/ Brandon M. Dawson Chairman and Chief Executive
Brandon M. Dawson Officer and Director
/s/ Scott E. Klein President and Chief Operating Officer
Scott E. Klein
/s/ Douglas A. Pease Controller
Douglas A. Pease
/s/ Hugh T. Hornibrook Director
Hugh T. Hornibrook
- ------------------------------ Director
Joel Ackerman
/s/ William DeJong Director
William DeJong
/s/ Haywood D. Cochrane, Jr. Director
Haywood D. Cochrane, Jr.
/s/ Gregory J. Frazer Director
Gregory J. Frazer, Ph.D.
/s/ David J. Wenstrup Director
David J. Wenstrup
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule constains summary financial information extracted from the
financial statements for Sonus Corp. and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0001029260
<NAME> Sonus Corp.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 498
<SECURITIES> 0
<RECEIVABLES> 4,573
<ALLOWANCES> (907)
<INVENTORY> 499
<CURRENT-ASSETS> 5,349
<PP&E> 8,799
<DEPRECIATION> 2,591
<TOTAL-ASSETS> 31,385
<CURRENT-LIABILITIES> 9,977
<BONDS> 2,593
0
15,701
<COMMON> 14,976
<OTHER-SE> (11,862)
<TOTAL-LIABILITY-AND-EQUITY> 31,385
<SALES> 29,044
<TOTAL-REVENUES> 33,759
<CGS> 10,766
<TOTAL-COSTS> 28,561
<OTHER-EXPENSES> 10,033
<LOSS-PROVISION> 398
<INTEREST-EXPENSE> 300
<INCOME-PRETAX> (4,884)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,884)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,884)
<EPS-BASIC> (0.80)
<EPS-DILUTED> (0.80)
</TABLE>
DESCRIPTION OF CAPITAL STOCK
OF SONUS CORP.
The authorized capital stock of Sonus Corp. (the "Company")
consists of an unlimited number of Common Shares, without nominal or par value
(the "Common Shares"), and an unlimited number of Preferred Shares, without
nominal or par value (the "Preferred Shares"). The Company was incorporated
under the laws of the province of Alberta, Canada in July 1993 and was continued
under the laws of the Yukon Territory, Canada in 1998.
The Company's Board of Directors (the "Board") has the
authority to issue Preferred Shares in one or more series and to fix the number
of shares comprising any such series and the designations, rights, privileges,
restrictions, and conditions attaching thereto, including the rate or amount of
dividends or the method of calculating dividends, the dates of payment of
dividends, the redemption, purchase, and/or conversion price or prices and the
terms and conditions of any such redemption, purchase, and/or conversion, and
any sinking fund or other provisions, without any further vote or action by the
holders of Common Shares. The outstanding series of Preferred Shares include a
series designated as Series A Convertible Preferred Shares (the "Series A
Shares"), consisting of 13,333,333 shares issued on December 24, 1997, and a
series designated as Series B Convertible Preferred Shares (the "Series B
Shares"), consisting of 2,500,000 shares issued on October 1, 1999. A summary of
certain of the preferences, limitations and relative rights of the Series A
Shares and Series B Shares is set forth below.
COMMON SHARES
Voting Rights. Holders of Common Shares are entitled to one
vote per share at all meetings of shareholders of the Company. Except as
otherwise required by law or unless the Board determines otherwise with respect
to a particular series of Preferred Shares, the Common Shares and all series of
the Preferred Shares having voting rights will vote together as one class. Under
the Business Corporations Act (Yukon), the holders of each class of shares are
generally entitled to vote as a separate class (whether or not such class
otherwise has voting rights) upon any proposal to amend the Company's Articles
to (i) increase or decrease the maximum number of authorized shares of that
class, (ii) increase the maximum number of authorized shares of another class
having rights or privileges equal or superior to those of that class, (iii)
effect an exchange, reclassification or cancellation of all or a portion of the
shares of that class, (iv) add, change or remove the rights, privileges,
restrictions or conditions attached to that class, (v) increase the rights or
privileges of any class having rights or privileges equal or superior to those
of that class, (vi) create a new class having rights or privileges equal or
superior to those of that class, (vii) change the rights or privileges of any
class with inferior rights or privileges such that they are equal to or superior
to those of that class; (viii) effect an exchange of shares of another class
into the shares of that class, or (ix) restrict the issue or transfer of the
shares of that class or extend or remove that restriction.
Other. All Common Shares rank ratably with regard to dividends
(if and when declared by the Board). In the event of a liquidation, dissolution,
or winding up of the Company, holders of Common Shares are entitled to share
equally and ratably in the assets of the Company, if any, remaining after the
payment of all liabilities of the Company and the liquidation
-1-
<PAGE>
preference of any outstanding class or series of Preferred Shares. The Common
Shares do not have preemptive rights. All outstanding Common Shares are fully
paid and nonassessable.
SERIES A CONVERTIBLE PREFERRED SHARES
Certain of the preferences, limitations and relative rights of
the Series A Shares are summarized below.
Voting Rights. Each Series A 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 Series A Share shall be convertible from time to time) in the
election of directors and in any other matters presented for action by the
Company's shareholders. Except to the extent otherwise required by law or the
Company's Articles, holders of Series A Shares and of any other outstanding
series of Preferred Shares will vote together with the holders of Common Shares
as a single class. See "Common Shares--Voting Rights." Any change in the rights
and preferences of the Series A Shares will require the approval of the holders
of at least 66-2/3% of the outstanding Series A Shares, voting separately as a
class.
Dividends. Each Series A Share is entitled to receive, when,
as and if declared by the Board out of the Company's assets legally available
for payment, cumulative dividends from the date of original issuance, payable
annually at a rate of 5% per annum on a base amount of $1.35 per share (the
"Base Amount"). All accrued and unpaid dividends will be forfeited upon the
conversion of the Series A Shares. The dividend rate will be subject to increase
on specified dates in the event that certain conditions (the "Triggering
Conditions") have not been met. The Triggering Conditions are as follows:
(a) The Common Shares are listed on the New York Stock
Exchange, the American Stock Exchange, or the Nasdaq National Market
(each a "U.S. Principal Market");
(b) The Common Shares are traded on a U.S. Principal Market at
a daily closing price greater than $12.00 per Common Share on each of
the ten consecutive trading days preceding the applicable date; and
(c) The Company's net income before income taxes, dividends on
the Series A Shares and Series B 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 $0.35 per
fully diluted Common Share per fiscal quarter (for purposes of making
this calculation, the Common Shares issuable upon the exercise of the
Warburg Warrants (as defined below under the heading "Warrants") will
not be counted).
If the Triggering Conditions have not been met by:
(x) January 1, 2003, the dividend rate will thereafter be 15%
per annum of the Base Amount;
(y) January 1, 2004, the dividend rate will thereafter be 18%
per annum of the Base Amount; or
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<PAGE>
(z) January 1, 2005, the dividend rate will thereafter be 21%
per annum of the Base Amount.
As soon as the Triggering Conditions have been satisfied, the
dividend rate will revert to 5% per annum of the Base Amount. All references to
per share amounts or prices with respect to the Triggering Conditions will be
adjusted for any subdivision, consolidation, or reclassification of the Common
Shares.
Dividends on the Series A Shares may, in the discretion of the
Board and subject to applicable regulatory approvals at the time of payment, be
paid in Common Shares based on the market price of such shares. Accruals of
dividends on Series A Shares will not bear interest.
No dividends on the Common Shares, the Series B Shares, or any
other share capital ranking, as to dividends, equal to or junior to the Series A
Shares as to dividends may be declared or paid unless full accumulated dividends
on the Series A Shares have been paid or declared and sufficient funds set aside
for such payment. The foregoing prohibition will not apply to dividends or
distributions payable in Common Shares or certain other comparable actions.
Liquidation Preference. In the event of any voluntary or
involuntary liquidation, dissolution, or winding up of the Company, subject to
the rights of holders of any securities of the Company ranking senior to the
Series A Shares upon liquidation, the holders of Series A 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 Series A 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 Series
A 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 Series A Shares. After payment of the full
amount of the liquidating distribution to which they are entitled, the holders
of Series A Shares will have no right to any of the remaining assets of the
Company.
Optional Redemption. The Series A Shares may not be redeemed
before December 24, 2002. Thereafter, the Series A 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 Series A 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 Series
A Shares. The Series A Shares are not subject to mandatory redemption or any
sinking fund provisions.
Conversion Rights. The Series A 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 currently equal to one Common Share for every
five Series A Shares surrendered for conversion. The conversion rate is subject
to further adjustment for stock dividends, stock splits,
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<PAGE>
recapitalizations, and other anti-dilution adjustments. Upon the conversion of
any Series A Shares, any accrued and unpaid dividends with respect to such
shares will be forfeited. The Company has the right to force conversion of the
Series A Shares, in whole or in part, upon satisfaction of all the Triggering
Conditions. Common Shares issuable upon conversion of the Series A Shares will
be fully paid and nonassessable and will not have preemptive rights.
Preemptive Rights. The Series A Shares do not have preemptive rights.
SERIES B CONVERTIBLE PREFERRED SHARES
Certain of the preferences, limitations and relative rights of
the Series B Shares are summarized below.
Voting Rights. Each Series B Share is entitled to one vote (or
such other number of votes equal to the number of Common Shares into which such
Series B Share shall be convertible from time to time) in the election of
directors and in any other matters presented for action by the Company's
shareholders. Except to the extent otherwise required by law or the Company's
Articles, holders of Series B Shares and of any other outstanding series of
Preferred Shares will vote together with the holders of Common Shares as a
single class. See "Common Shares--Voting Rights." Any change in the rights and
preferences of Series B Shares will require the approval of the holders of at
least 66-2/3% of the outstanding Series B Shares, voting separately as a class.
Dividends. No dividends will be declared on Series B Shares
until October 31, 2000. At October 31, 2000, if the Company meets the 2000
Earnings Target (as defined below), each Series B Share will be entitled to
receive, when and as declared by the Board out of the Company's assets legally
available for payment, preferential, cumulative dividends in respect of the
period beginning October 1, 1999, and ending October 31, 2000, and quarterly
thereafter, payable in U.S. dollars, at a rate of 8% per annum until October 31,
2004; 12% per annum from November 1, 2004 through October 31, 2005; 15% per
annum from November 1, 2005 through October 31, 2006; and 18% per annum from and
after November 1, 2006, each on a base amount of $4.00 per share (the "Base
Amount").
The 2000 Earnings Target will be deemed to have been met if
the Company's "EBTA," defined as net income before income taxes, dividends on
Series A Shares and Series B Shares, and amortization of goodwill and covenants
not to compete, for the fiscal year ending July 31, 2000, is equal to or greater
than $0.20 per fully diluted Common Share. For purposes of calculating EBTA,
certain costs incurred by the Company in connection with the hiring of a Chief
Financial Officer ("CFO Costs") will be added back to net income provided such
person is hired on or before January 31, 2000. Common Shares issuable upon
exercise of the Warburg Warrants will be excluded for purposes of calculating
the number of fully diluted Common Shares.
If the 2000 Earnings Target is not met, dividends will not be
payable until the Company meets the quarterly earnings targets set forth below
(the "Quarterly Earnings Targets") for four consecutive fiscal quarters. The
Quarterly Earnings Targets are as follows:
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<PAGE>
Target EBTA per Fully
Period Diluted Common Share
------ --------------------
Fiscal quarter ending 10/31/99 $ 0.02
Fiscal quarter ending 1/31/00 0.03
Fiscal quarter ending 4/30/00 0.07
Fiscal quarter ending 7/31/00 0.08
Fiscal quarter ending 10/31/00 0.07
Fiscal quarter ending 1/31/01 0.10
Fiscal quarter ending 4/30/01 0.15
Fiscal quarter ending 7/31/01 0.17
Fiscal quarter ending 10/31/01 0.16
Fiscal quarter ending 1/31/02 0.20
Fiscal quarter ending 4/30/02 0.26
Fiscal quarter ending 7/31/02 0.30
If the Quarterly Earnings Targets are not met for four
consecutive fiscal quarters by the fiscal quarter ended July 31, 2002, dividends
will not accrue or be payable on Series B Shares.
All accrued and unpaid dividends will be forfeited upon the
conversion of Series B Shares. Accruals of dividends on Series B Shares will not
bear interest.
No dividends on the Common Shares, the Series A Shares, or any
other share capital ranking, as to dividends, equal to or junior to Series B
Shares as to dividends may be declared or paid unless full accumulated dividends
on Series B Shares have been paid or declared and sufficient funds set aside for
such payment. The foregoing prohibition will not apply to dividends or
distributions payable in Common Shares or certain other comparable actions.
Liquidation Preference. In the event of any voluntary or
involuntary dissolution, liquidation, or winding up of the Company, subject to
the rights of holders of any securities of the Company ranking senior to Series
B Shares upon liquidation, the holders of Series B 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 Series B Shares upon
liquidation, a liquidating distribution in an amount equal to the greater of (i)
$4.00 per share (subject to adjustment as provided in the Articles) plus any
accrued and unpaid dividends or (ii) the amount that would have been
distributable to such holders if they had converted their Series B Shares into
Common Shares immediately prior to such dissolution, liquidation, or winding up,
plus any accrued and unpaid dividends, whether or not declared. 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 Series B Shares. After payment of the
full amount of the liquidating distribution to which they are entitled, the
holders of Series B Shares will have no right to any of the remaining assets of
the Company.
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<PAGE>
Optional Redemption. The Series B Shares may not be redeemed
before October 1, 2004. Thereafter, Series B Shares may be redeemed at the
option of the Company, in whole or in part, for an amount per share equal to the
applicable Conversion Rate then in effect multiplied by the greater of (1) the
conversion price then in effect plus any accrued and unpaid dividends per Series
B Share or (2) the fair market value of a Series B Share as determined by a
nationally recognized independent investment banking firm selected by mutual
agreement of the Company and the holder(s) of a majority of the outstanding
Series B Shares. Series B Shares are not subject to mandatory redemption or any
sinking fund provisions.
Conversion Rights. Series B Shares may be converted at any
time, in whole or in part, at the option of the holder thereof, into Common
Shares. The number of Common Shares issuable upon conversion of each Series B
Share (the "Conversion Rate") will be equal to an amount determined by adding
$10,000,000 (the original purchase price), plus an adjustment factor (as
described below) (the "Adjustment Factor"), and dividing that result by the
conversion price, and then again by 2,500,000 (the number of Series B Shares
originally sold) (the "Conversion Rate Formula"). The initial Adjustment Factor
is zero and the initial conversion price is $4.00, resulting in an initial
Conversion Rate of one Common Share per Series B Share surrendered for
conversion.
The Conversion Rate is subject to increase in the event that
the Company fails to achieve the 2000 Earnings Target and, if such target is not
achieved, to further increase until the Quarterly Earnings Targets are met for
four consecutive quarters (each is referred to herein as an "Earnings
Adjustment"), as described below. In addition, the conversion price is subject
to decrease to the extent that the Company's receivables as of July 31, 1999,
that are collected by July 31, 2000, total less than $4,736,000 ("Receivables
Adjustment").
The Receivables Adjustment, if any, will be calculated as
follows. In the event the Company fails to collect the full amount of
receivables as of July 31, 1999, the conversion price for Series B Shares will
be reduced by an adjustment amount determined by multiplying the amount by which
$4,736,000 exceeds actual amounts collected by the Company on or before July 31,
2000, by a factor of 7, and dividing that result by the sum of (i) the total
number of issued and outstanding Common Shares as of September 30, 1999, plus
(ii) the total number of Common Shares into which outstanding Series B Shares
are convertible, plus (iii) the total number of Common Shares into which the
outstanding convertible notes of the Company are convertible as of September 30,
1999, plus (iv) the total number of Shares into which the outstanding Series B
Shares are convertible as of October 31, 2000. The new conversion price
following a Receivables Adjustment will be calculated by subtracting the
adjustment amount calculated in accordance with the foregoing from the
conversion price then in effect.
An Earnings Adjustment will occur if the Company fails to
achieve the 2000 Earnings Target. This initial Earnings Adjustment would cause
the Conversion Rate to increase beginning October 31, 2000, such that
approximately 200,000 additional Common Shares would be issuable upon conversion
at that date with respect to the four fiscal quarters then ended. Additional
Earnings Adjustments will be made each quarter thereafter until the Company
meets the Quarterly Earnings Targets for four consecutive quarters.
-6-
<PAGE>
The amount of the Adjustment Factor to be applied to determine
the new Conversion Rate resulting from failure to reach the Quarterly Earnings
Targets will be determined, initially, by taking 2 percent of the sum of the
original purchase price ($10,000,000) plus the sum of all prior Earnings
Adjustments (including an adjustment resulting from a failure to achieve the
2000 Earnings Target). After November 1, 2004, the percentage for purposes of
calculating the adjustment amount will increase to 3 percent for Earnings
Adjustments occurring on or before October 31, 2005; 3 3/4 percent for Earnings
Adjustments occurring on or after November 1, 2005, and on or before October 31,
2006; and 4 1/2 percent for any Earnings Adjustment occurring on or after
November 1, 2006. The resulting Adjustment Factor will then be inserted into the
Conversion Rate Formula to determine the new Conversion Rate. Once the Company
has met the specified Quarterly Earnings Targets for four consecutive fiscal
quarters, no further Earnings Adjustments in the Conversion Rate will be made.
In the event the Company meets the Quarterly Earnings Targets for four
consecutive fiscal quarters, Adjustments will cease as of any fiscal quarter
ending on or after the last day of the quarter as to which such targets are met.
The Conversion Rate is subject to further adjustment for stock
dividends, stock splits, recapitalizations, and other anti-dilution adjustments.
Upon the conversion of any Series B Shares, any accrued and unpaid dividends
with respect to such shares will be forfeited.
The Company has the right to effect the mandatory conversion
of the Series B Shares, in whole or in part, if all of the following conditions
have been satisfied:
(a) The Common Shares are traded on the New York Stock
Exchange, the American Stock Exchange, or the Nasdaq National Market at
a daily closing price greater than $8.00 per Common Share on each of
the ten consecutive trading days preceding the applicable date; and
(b) The Company's EBTA for the three preceding consecutive
fiscal quarters shall have averaged at least $.35 per fully diluted
Common Share per fiscal quarter. Common Shares issuable upon the
exercise of the Warburg Warrants are excluded for purposes of this
calculation.
All references to per share amounts or prices with respect to
the above conditions will be adjusted for any subdivision, consolidation, or
reclassification of the Common Shares.
Common Shares issuable upon conversion of the Series B Shares
will be fully paid and nonassessable and will not have preemptive rights.
Preemptive Rights. The Series B Shares do not have preemptive rights.
WARRANTS
At October 29, 1999, the Company had outstanding 2,000,000 purchase
warrants to purchase Common Shares issued in connection with the private
placement of the Series A Shares in December 1997 (the "Warburg Warrants"). Each
share purchase warrant is exercisable for one Common Share at an exercise price
of $6.75 per share until October 1, 2004. The Company may force the exercise of
the warrants upon satisfaction of all the Triggering Conditions.
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<PAGE>
CONVERTIBLE SECURITIES AND STOCK OPTIONS
At October 29, 1999, the Company had outstanding convertible
subordinated notes in an aggregate principal amount of $930,839 convertible into
143,206 Common Shares, 13,333,333 Series A Shares convertible into 2,666,666
Common Shares, 2,500,000 Series B Shares convertible into 2,500,000 Common
Shares, and stock options held by employees, directors and officers of, and
consultants to, the Company exercisable for a total of 2,369,000 Common Shares.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
Following is a summary of the principal Canadian federal
income tax considerations under the Income Tax Act (Canada) (the "Tax Act") and
the regulations thereunder generally applicable to a holder of Common Shares
who, for purposes of the Tax Act, holds such shares as capital property and
deals at arm's length with the Company. Generally, Common Shares will be
considered to be capital property to a holder provided the holder does not hold
the Common Shares in the course of carrying on a business of trading or dealing
in securities and has not acquired them in one or more transactions considered
to be an adventure in the nature of trade. Special rules apply to non-resident
insurers that carry on an insurance business in Canada and elsewhere.
This summary is based upon the provisions of the Tax Act in
force as of October 29, 1999, all specific proposals to amend the Tax Act that
have been publicly announced prior to such date (the "Proposed Amendments"), and
the Company's understanding of the current published administrative and
assessing policies and practices of Revenue Canada, Customs, Excise and Taxation
("Revenue Canada"). For the purposes of this summary, it has been assumed that
the Tax Act will be amended as proposed, although no assurance can be given in
this regard. This summary is not exhaustive of all possible federal income tax
consequences and, except for the Proposed Amendments, does not anticipate any
changes in the law, whether by legislative, governmental or judicial decision or
action, nor does it take into account provincial, territorial or foreign tax
considerations, which may differ significantly from those discussed herein. This
summary is not applicable to holders who are "specified financial institutions"
for purposes of the Tax Act, a holder that is a "financial institution" as
defined in the Tax Act for purposes of mark-to-market rules, or to a holder of
an interest that would be a "tax shelter investment" as defined in the Tax Act.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED
TO BE, AND SHOULD NOT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR
HOLDER. ACCORDINGLY, HOLDERS SHOULD CONSULT THEIR INDEPENDENT TAX ADVISERS FOR
ADVICE WITH RESPECT TO THE INCOME TAX CONSEQUENCES RELEVANT TO THEIR PARTICULAR
CIRCUMSTANCES.
The following applies to holders of Common Shares who are not
resident in Canada for purposes of the Tax Act and who do not use or hold and
are not deemed to use or hold their Common Shares in, or in the course of,
carrying on a business in Canada.
Dispositions of Common Shares. A non-resident holder will,
upon a disposition or deemed disposition of Common Shares, not be subject to
taxation in Canada on any gain
-8-
<PAGE>
realized on the disposition unless the shares are "taxable Canadian property"
for the purposes of the Tax Act and no relief is afforded under an applicable
tax convention between Canada and the country of residence of the holder. Since
the Common Shares are listed on a prescribed stock exchange for the purposes of
the Tax Act, Common Shares held by a non-resident holder will generally not be
"taxable Canadian property" unless, at any time during the five-year period
immediately preceding the disposition, the non-resident holder, persons with
whom the non-resident holder did not deal at arm's length, or the non-resident
holder together with such persons, owned or had the right to acquire 25% or more
of the issued shares of any class of the capital of the Company. Any interest in
shares or options in respect of shares will be considered to be the equivalent
of ownership of such shares for purposes of the definition of taxable Canadian
property.
Non-residents whose shares constitute "taxable Canadian
property" will be subject to taxation in respect of a disposition or deemed
disposition of Common Shares on the same basis as Canadian residents unless
otherwise exempted by an applicable tax convention between Canada and the
country of residence of the holder.
Pursuant to the Canada-United States Income Tax Convention,
1980 (the "Convention"), shareholders of the Company that are residents in the
United States for the purposes of the Convention and whose shares might
otherwise be "taxable Canadian property" may be exempt from Canadian taxation in
respect of any gains on the disposition of the Common Shares, provided the
principal value of the Company is not derived from real property located in
Canada at the time of disposition.
Non-resident holders who might hold their Common Shares as
"taxable Canadian property" should consult their own tax advisers with respect
to the income tax consequences of a disposition of their Common Shares.
Non-resident holders whose shares are repurchased by the
Company, except in respect of certain purchases made by the Company in the open
market, will be deemed to have received the payment of a dividend by the Company
in an amount equal to the excess paid over the paid-up capital of the Common
Shares so purchased. Such deemed dividend will be excluded from the holder's
proceeds of disposition of such Common Shares for the purposes of computing any
capital gain or loss but will be subject to Canadian non-resident withholding
tax in the manner described below under "Dividends."
Dividends. Dividends received by a non-resident holder of
Common Shares will be subject to Canadian withholding tax at the rate of 25% of
the amount thereof unless the rate is reduced under the provisions of an
applicable tax convention between Canada and the country of residence of the
holder. The provisions of the Convention generally reduce the rate to 15%. A
further reduction to 5% under the Convention will be available if the recipient
is a company which owns at least 10% of the voting shares of the Company.
INVESTMENT CANADA ACT
The Investment Canada Act (the "ICA") prohibits the
acquisition of control of a Canadian business by non-Canadians without review
and approval of the Investment Review
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<PAGE>
Division of Industry Canada, the agency that administers the ICA, unless such
acquisition is exempt from review under the provisions of the ICA. The
Investment Review Division of Industry Canada must be notified of such exempt
acquisitions. The ICA covers acquisitions of control of corporate enterprises,
whether by purchase of assets, shares or "voting interests" of an entity that
controls, directly or indirectly, another entity carrying on a Canadian
business.
Apart from the ICA, there are no other limitations on the
right of nonresident or foreign owners to hold or vote securities imposed by
Canadian law or the Company's Articles. There are no other decrees or
regulations in Canada that restrict the export or import of capital, including
foreign exchange controls, or that affect the remittance of dividends, interest
or other payments to nonresident holders of the Company's Common Shares, except
as discussed elsewhere herein.
OTHER
The foregoing is only a brief description of the rights and
limitations of the Company's capital stock and is subject to and qualified by
reference to all applicable provisions of the Business Corporations Act (Yukon)
and the Company's Articles.
CIBC Mellon Trust Company and ChaseMellon Shareholder Services
L.L.C. are co-transfer agents and co-registrars for the Common Shares.
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