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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended October 31, 2000
Commission File Number 1-13851
SONUS CORP.
(Exact name of registrant as specified in its charter)
Yukon Territory, Canada Not Applicable
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
111 S.W. Fifth Avenue, Suite 1620, Portland, Oregon 97204
(Address of principal executive offices)
503-225-9152
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 6,102,164 Common Shares,
without par or nominal value, outstanding as of December 12, 2000.
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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, the Company's ability to collect its
accounts receivable in a timely manner, 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.
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Note: On December 14, 2000, the Company retained Ernst & Young LLP as its
independent auditor. Ernst & Young LLP has not had sufficient time to conduct a
review of the following financial statements as required by the rules and
regulations of the Securities and Exchange Commission. Ernst & Young LLP will
review the financial statements as soon as practicable.
SONUS CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
OCTOBER 31, JULY 31,
2000 2000
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,334 $ 788
Accounts receivable, net of allowance for doubtful
accounts of $3,874 and $3,691, respectively. 7,901 6,359
Other receivables 1,804 1,497
Inventory 769 952
Prepaid expenses 541 396
------------- ------------
Total current assets 12,349 9,992
Property and equipment, net 7,689 8,090
Other assets 24 24
Goodwill and covenants not to compete, net 19,406 19,678
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$ 39,468 $ 37,784
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,552 $ 5,460
Accrued payroll 1,441 1,643
Other accrued liabilities 1,694 1,441
Capital lease obligations, current portion 270 289
Long-term debt, current portion 1,908 2,176
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Total current liabilities 12,865 11,009
Capital lease obligations, less current portion 121 181
Long-term debt, less current portion 925 1,078
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Total liabilities 13,911 12,268
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Shareholders' equity:
Series A convertible preferred stock, no par
value per share, 2,666,666 shares authorized,
issued, and outstanding (liquidation preference of $20,565) 15,701 15,701
Series B convertible preferred stock, no par
value per share, 2,500,000 shares authorized,
issued, and outstanding (liquidation preference of $11,667) 9,860 9,860
Common stock, no par value per share, unlimited
number of shares authorized, 6,095,706 issued
and outstanding (6,098,706 at July 31, 2000) 14,891 14,916
Notes receivable from shareholders (93) (93)
Accumulated deficit (14,592) (14,696)
Accumulated other comprehensive loss (210) (172)
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Total shareholders' equity 25,557 25,516
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$ 39,468 $ 37,784
============= ============
See accompanying notes to consolidated financial statements.
</TABLE>
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SONUS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended
October 31,
----------------------
2000 1999
------ ------
Revenues:
Product 10,938 $ 8,862
Service 882 876
Other 1,742 404
------ ------
Net revenues 13,562 10,142
Costs and expenses:
Cost of products sold 4,335 3,051
Clinical expenses 4,976 4,886
General and administrative expenses 3,074 2,038
Depreciation and amortization 986 698
------ ------
Total costs and expenses 13,371 10,673
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Income (loss) from operations 191 (531)
Other income (expense):
Interest income 20 41
Interest expense (84) (97)
Other, net (23) 2
------ ------
Net income (loss) $ 104 $ (585)
====== ======
Net income (loss) per share of common stock:
Basic $ 0.02 $ (0.10)
Diluted $ 0.01 $ (0.10)
Weighted average shares outstanding:
Basic 6,076 6,085
Diluted 11,283 6,085
See accompanying notes to consolidated financial statements.
4
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SONUS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
October 31,
------------------------------
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 104 $ (585)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Provision for bad debt expense 182 98
Depreciation and amortization 986 698
Changes in operating assets and liabilities:
Accounts receivable (1,720) (619)
Other receivables (310) (166)
Inventory 181 (12)
Prepaid expenses (145) (92)
Accounts payable and accrued liabilities 2,148 977
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Net cash provided by operating activities 1,426 299
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (214) (1,196)
Deferred acquisition costs and other, net 7 (34)
Net cash paid on business acquisitions (11) (90)
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Net cash used in investing activities (218) (1,320)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long term debt
and capital lease obligations (611) (420)
Deferred financing costs, net (7) ---
Issuance of preferred stock, net of costs --- 9,900
Repurchase of common stock (25) (10)
----------- -----------
Net cash provided by (used in) financing activities (643) 9,470
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Net increase in cash and cash equivalents 565 8,449
Effect on cash and cash equivalents of changes
in foreign translation rate (19) 16
Cash and cash equivalents, beginning of period 788 498
----------- -----------
Cash and cash equivalents, end of period $ 1,334 $ 8,963
=========== ===========
Supplemental disclosure of cash flow information
Interest paid during the period $ 76 $ 72
Supplemental disclosure of non-cash investing and financing activities:
Issuance and assumption of long-term debt in acquisitions 86 ---
Acquisition of clinical equipment and computer hardware with
capital lease obligations --- 566
</TABLE>
See accompanying notes to consolidated financial statements.
5
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SONUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim Financial Statements
The interim financial statements should be read in conjunction with the
Company's Annual Report on Form 10-KSB for the fiscal year ended July 31, 2000.
All adjustments, consisting only of normal recurring adjustments which are, in
the opinion of management, necessary for a fair statement of the results for the
interim periods presented have been made. The results of operations for an
interim period are not necessarily indicative of the results of operations for a
full year.
2. Acquisitions
During the three months ended October 31, 2000, the Company acquired
four hearing care centers in four separate transactions. The aggregate purchase
price for the acquisitions consisted of cash payments of $11,000, deferred
payments due 90 days after the date of acquisition of $25,000, and promissory
notes issued by the Company of $86,000 payable over three years. As a result of
the acquisitions, the Company recorded $42,000 in property and equipment, $1,000
in other assets, and $79,000 in goodwill.
3. Comprehensive Income (Loss)
Three months ended
October 31
-----------------------
2000 1999
---- ----
(in thousands)
Net income (loss) $ 104 $ (585)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (38) (19)
------- --------
Comprehensive income (loss) $ 66 $ (604)
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4. Segment Information
The Company has a single operating segment: the sale and
servicing of hearing instruments and the provision of audiology
services primarily to individual consumers. No customer constituted
more than 5% of total revenues. Revenues by country were as follows:
Three months ended
October 31,
2000 1999
---- ----
(in thousands)
United States $ 12,741 $ 9,279
Canada 821 863
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Total $13,562 $10,142
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5. Property and Equipment
Property and equipment consist of the following:
October 31, 2000 July 31, 2000
---------------- -------------
(in thousands)
Professional equipment $ 2,765 $ 2,695
Office equipment 1,158 1,155
Leasehold improvements 1,618 1,599
Computer equipment and software 7,011 6,941
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12,552 12,390
Less accumulated depreciation (4,863) (4,300)
------- -------
$ 7,689 $ 8,090
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7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Three Months Ended October 31, 2000 Compared to Three Months Ended October 31,
1999
Revenues. Total revenues for the three months ended October 31, 2000,
were $13,562,000, representing a 34% increase over revenues of $10,142,000 for
the comparable period in fiscal 2000. The increase was due to the net addition
of 10 hearing care centers that were not owned by the Company at October 31,
1999, and increased revenues from the Sonus Network (the Company's franchise
program) and Hear PO Corp. (the Company's hearing health benefit subsidiary).
Same-store revenue was even for the three months ended October 31, 2000,
compared to the three months ended October 31, 1999. Product revenues were
$10,938,000 for the three months ended October 31, 2000, up 23% from $8,862,000
for the same period in fiscal 2000. Product revenues represented 81% and 87% of
total revenues for the three-month periods ended October 31, 2000 and 1999,
respectively. Audiological service revenues increased 1% to $882,000 for the
three months ended October 31, 2000, from $876,000 for the comparable period in
fiscal 2000. Other revenues increased 331% to $1,742,000 for the three months
ended October 31, 2000, from $404,000 for the three months ended October 31,
1999. The increase was due to increased revenues from The Sonus Network.
Product Gross Profit. Product gross profit for the three months ended
October 31, 2000, was $6,603,000 or 60% of product revenues, compared to
$5,811,000 or 66% of product revenues for the comparable period in fiscal 2000.
The decrease in product gross profit percentage was due to increased sales
during the first quarter of fiscal 2001 of higher-cost hearing aids, a higher
proportion of revenue from Hear PO Corp., which has lower gross profit margins
than the Company's hearing care centers and an increase in reserves for
insurance reimbursements.
Clinical Expenses. As a percentage of revenues, clinical expenses
decreased to 37% for the three months ended October 31, 2000, compared to 48%
for the three months ended October 31, 1999. The decrease was due to the
Company's increased revenues, as well as improved operating efficiencies.
Clinical expenses for the three months ended October 31, 2000, were $4,976,000,
representing an increase of 2% over clinical expenses of $4,886,000 for the
comparable period in fiscal 2000. Clinical expenses include all personnel,
marketing, occupancy, and other operating expenses at the clinic level.
General and Administrative Expenses. As a percentage of revenues,
general and administrative expenses increased to 23% for the three-month period
ended October 31, 2000, versus 20% for the same period in the prior fiscal year.
General and administrative expenses increased 51% from $2,038,000 for the three
months ended October 31, 1999, to $3,074,000 for the three months ended October
31, 2000. The increase in general and administrative expenses was due to
additional marketing (including a national advertising campaign) and promotional
costs related to the Company's franchise program and increased personnel costs
and other corporate expenses related to building the appropriate infrastructure
to support the growth of the Company.
8
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Depreciation and Amortization Expense. As a percentage of revenues,
depreciation and amortization expense remained constant at 7% for each of the
three-month periods ended October 31, 2000 and 1999. Depreciation and
amortization expense for the three months ended October 31, 2000, was $986,000,
an increase of 41% over the depreciation and amortization expense of $698,000
for the same period in the prior fiscal year. The increase resulted from the
depreciation of fixed assets and amortization of goodwill and covenants not to
compete associated with the additional centers acquired by the Company during
the twelve-month period ended October 31, 2000 and from additional depreciation
related to new computer software that was placed in service in May 2000.
Interest Income and Expense. Interest income for the three months ended
October 31, 2000, decreased to $20,000 from $41,000 for the same period in the
prior fiscal year. The decrease was due to lower balances of cash and short-term
investments held by the Company. Interest expense for the three months ended
October 31, 2000, was $84,000 compared to $97,000 for the three months ended
October 31, 1999.
Net Income. The Company's net income for the three months ended October
31, 2000, was $104,000 compared to a net loss of $585,000 for the three months
ended October 31, 1999. The Company had income from operations before
depreciation and amortization for the three months ended October 31, 2000, of
$1,177,000 compared to income from operations before depreciation and
amortization of $167,000 for the three months ended October 31, 1999.
LIQUIDITY AND CASH RESERVES
For the three months ended October 31, 2000, net cash provided by
operating activities was $1,426,000 compared to $299,000 for the three months
ended October 31, 1999. Net cash provided by operating activities for the three
months ended October 31, 2000, was attributable to net income of $104,000, an
increase in accounts payable and accrued liabilities of $2,148,000, a decrease
in inventory of $181,000, and non-cash depreciation and amortization and
provision for bad debt expense of $986,000 and $182,000, respectively. This was
offset by increases in accounts receivable, other receivables, and prepaid
expenses of $1,720,000, $310,000, and $145,000, respectively. Net cash provided
by operating activities for the three months ended October 31, 1999, was
primarily attributable to an increase in accounts payable and accrued
liabilities of $977,000, and non-cash depreciation and amortization and
provision for bad debt expense of $698,000 and $98,000, respectively, offset by
the net loss of $585,000 and increases in accounts receivable, other
receivables, and prepaid expenses of $619,000, $166,000, and $92,000,
respectively.
Net cash used in investing activities in the three months ended October
31, 2000, was $218,000, consisting primarily of the purchase of property and
equipment of $214,000 and net cash paid on business acquisitions of $11,000. In
the three months ended October 31, 1999, investing activities used net cash of
$1,320,000, primarily as a result of the purchase of property and equipment of
$1,196,000 and net cash paid on business acquisitions of $90,000.
Net cash used in financing activities was $643,000 in the three months
ended October 31, 2000, compared to net cash provided by financing activities of
$9,470,000 for the three months ended October 31, 1999. The change was primarily
due to an increase in repayments of long-term debt and capital lease obligations
during the three months ended October 31, 2000 of $191,000 and to the issuance
on October 1, 1999 of 2,500,000 Series B Convertible Preferred Shares in a
private placement for net proceeds of $9,900,000 in cash.
The Company believes that its cash and short-term investments, revolving
line of credit, and cash generated from operations will be sufficient to meet
its anticipated cash needs for working capital and capital expenditures for at
least the next twelve months. However, the Company's ability to generate net
cash from operations will depend heavily on its ability to collect existing
accounts receivable in a timely manner. The Company may seek additional funding
to support 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
No disclosure is required under this item.
9
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits filed as part of this report or incorporated by
reference herein are listed in the accompanying exhibit index.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the fiscal quarter ended October 31, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONUS CORP.
By: /s/ Paul C. Campbell
-------------------------------
Paul C. Campbell
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Authorized
Signatory)
By: /s/ Douglas A. Pease
-------------------------------
Douglas A. Pease
Controller
(Principal Accounting Officer)
DATED: December 22, 2000
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EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.
11
