SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
(Amendment No. 1)
(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, 2000
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:
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
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:
$43,959,000.
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 November 10, 2000: $17,029,169.
State the number of shares outstanding of each of the issuer's classes
of common equity: Common Shares, without nominal or par value, 6,095,706 shares,
as of November 10, 2000.
Transitional Small Business Disclosure Format: Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE: NONE
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EXPLANATORY NOTE
Sonus Corp. (the "Company") is filing this Amendment No. 1 on Form 10-KSB/A
as an amendment to its Annual Report to Form 10-KSB for the fiscal year ended
July 31, 2000 (the "Form 10-KSB"). The purposes of this Amendment are to amend
and restate in their entirety Item 1 of Part I and all of Part III of the Form
10-KSB.
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.
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 106 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.
In addition to its company-owned hearing centers, the Company operates,
through Sonus-USA, a franchise licensing program called The Sonus Network, with
478 current locations. 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 301 Sonus Network
licensees located in 43 states and the District of Columbia.
The Company, through its subsidiary Hear PO Corp. ("Hear PO"), also operates
as an independent provider association and hearing care benefit administrator.
Hear PO obtains contracts to provide hearing care benefits to managed care group
and corporate health care organizations through its approximately 1,400
affiliated audiologists and sells Hear PO brand private label hearing
instruments. Hear PO currently has contracts to provide hearing care benefits to
over 57 million covered lives.
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Each of the hearing care centers owned by the Company provides a full range
of audiological products and services to hearing impaired individuals. During
the fiscal year ended July 31, 2000, approximately 85% of the Company's revenues
were derived from product sales, including hearing instruments, batteries, and
accessories, 8% were derived from audiological services, and 7% were from other
sources, including The Sonus Network and Hear PO. 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 sells products 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 2000 issue of THE HEARING REVIEW, a hearing industry trade journal,
indicates that approximately 31% of HISs in the U.S. are at least 61 years of
age, 33% are 51-60 years of age, 25% are 41-50 years of age and only 11% are age
40 or under, compared to 8%, 30%, 46% and 16%, 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.
Managed care arrangements may also favor the consolidation of hearing care
practices. Managed care organizations contract with health care providers such
as the Company to provide health care services and products to their members.
These organizations seek to establish relationships with providers whose offices
are convenient for the organization's members and that can offer quality
services and products at very competitive prices. Managed care organizations
also typically seek to shift some of the economic risk of providing health care
to the provider of the care. This shifting of risk is accomplished in a number
of ways, including capping fees, requiring discounted fees, or paying a set fee
per patient irrespective of the amount of care delivered to that patient. As
managed care arrangements become more pervasive, the Company believes that
hearing care professionals will have an even greater need for the geographic
reach, economies of scale, information resources, and management expertise that
larger organizations such as the Company can 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.
HEARING IMPAIRED POPULATION. The number of persons in the United States who have
hearing loss is estimated
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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 hearing centers primarily provide hearing rehabilitation
services, which 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, increasing the number of licensees under the Company's
franchise licensing program, and increasing the number of covered lives served
by the Company under managed care contracts. The Company believes that the
fragmented nature of the hearing care industry, the absence of
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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.
ACQUISITIONS. 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. 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, 2000, the Company acquired 122 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.
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.
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THE SONUS NETWORK. The Sonus Network was established in August 1998 to
complement the Company's internal growth and acquisition strategy and allow
additional national growth without incurring the added capital costs and
management resources necessary for Company-owned centers. There are currently
301 members of The Sonus Network representing 478 locations in 43 states and the
District of Columbia. The Company plans on adding 240 new franchisees in the
next fiscal year. Unlike many traditional franchise systems, the Company allows
its franchisees maximum flexibility in the day-to-day operation of their
businesses, including the extent to which the franchisees wish to adopt the
Sonus name and trademarks. The Company believes that the primary benefits of
joining the Sonus Network are reduced pricing on hearing instruments and related
products, access to quality marketing materials and national advertising
programs developed by Sonus, the ability to offer Sonus private-label products,
and exclusive protected territories for franchisees. Additional benefits include
recruiting, training, and operational consulting services and on-line ordering
of hearing instruments and related products.
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 six-week training course called the Greenhouse Program(R)
for its audiologists that focuses on clinical audiology skills as well as
private practice business management. Greenhouse participants are instructed by
some of the hearing health industry's most accomplished and experienced
professionals. The Company believes that the Greenhouse Program(R) can
significantly increase employee performance and improve customer service.
Greenhouse Program(R) graduates consistently rank among the Company's top
performers. 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.
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 the Company's centers located in the
United States 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.
PURSUE LARGE GROUP AND MANAGED CARE CONTRACTS. Although the Company intends to
continue to aggressively
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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 and franchised centers and the over 1,400 audiologists affiliated
with its Hear PO subsidiary, it is well positioned to offer hearing care
services to managed care group and corporate health care organizations 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.
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 uses four
top hearing instrument manufacturers to produce its Sonus Solution(TM) line of
private-label digital hearing instruments. Hearing instruments in the Sonus
Solution(TM) line come with a three-year warranty, a three-year supply of
batteries, and a 75-day return policy. The Sonus Solution(TM) line is available
only at Company-owned and franchised locations. In addition to hearing
instruments, the Company's centers also offer a limited selection of other
assistive listening devices and hearing instrument accessories.
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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. In July 2000, the Company launched its first-ever national consumer
advertising campaign. The Company estimates that the campaign, which is expected
to continue throughout the current fiscal year, will reach approximately 120
million people each quarter. Advertisements will appear in publications such as
READER'S DIGEST (MATURE SELECT), READER'S DIGEST LARGE EDITION FOR EASIER
READING, NEW CHOICES, PARADE MAGAZINE, RX REMEDY, SATURDAY EVENING POST,
ROTARIAN, KIWANIS, and THE LION.
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.
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 on a regional basis with other networks of
hearing care centers such as Hearx Ltd., Helix Hearing Care of America, Newport
Audiology Centers, and American Hearing Centers, as well as with Beltone and
Miracle-Ear, two large manufacturers of hearing instruments that distribute
directly to consumers through national networks of franchised centers. Beltone
and Miracle-Ear place a heavy emphasis on advertising and enjoy significant
consumer brand name recognition. 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.
The Sonus Network franchise program competes for members with buying groups
such as The Audiology Co-Op and American Hearing Aid Associates that have been
formed to provide small hearing instrument retailers with shared economies of
scale. The Sonus Network also competes for members to a lesser extent with
mature franchise systems such as Beltone and Miracle-Ear.
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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.
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
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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.
EMPLOYEES
At October 1, 2000, the Company had 290 full-time and 96 part-time
employees, of which 104 are audiologists or hearing instrument dispensers
practicing full time and 42 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. One
of the Company's directors is a resident of Canada and all or a portion of the
assets of such director 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 a director who is not a resident
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.
10
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to each director of
the Company, including their names, municipality of residence, ages, business
experience during the past five years, and year of appointment as a director.
Joel Ackerman was appointed to the Board of Directors in December 1997, Haywood
D. Cochrane, Jr., was nominated for election at the 1998 annual general meeting,
and David J. Wenstrup was appointed to the Board of Directors in October 1999,
in each case at the request of Warburg, Pincus Ventures, L.P. See Item 12
"Certain Relationships and Related Transactions." There are no family
relationships among the Company's directors or officers. The Company has three
executive officers, Brandon M. Dawson, Gregory J. Frazer, and Scott E. Klein,
who are directors.
<TABLE>
Name and Director
Municipality of Residence Age Principal Occupation(*) Since
------------------------- --- -------------------- -----
<S> <C> <C>
Joel Ackerman 36 Managing Director of E. M. Warburg, 1997
New York, New York Pincus & Co., LLC, a specialized
financial services organization.
Haywood D. Cochrane, Jr. 52 Chief Executive Officer 1998
Nashville, Tennessee and a director of CHD Meridian
Healthcare, Inc., a specialized medical
management company.
Leslie H. Cross 49 President and Chief Executive Officer 2000
Del Mar, California and a director of dj Orthopedics,
LLC, a manufacturer and distributor
of orthopedic and sports-related
products.
Brandon M. Dawson 32 Chairman and Chief Executive Officer 1995
Happy Valley, Oregon of the Company.
Gregory J. Frazer, Ph.D. 48 Vice President-Business Development 1996
Glendale, California of the Company
Hugh T. Hornibrook 51 Acquisition consultant. 1996
Vancouver, British Columbia
Scott E. Klein . 43 President and Chief Operating Officer 1999
Clackamas, Oregon of the Company.
David J. Wenstrup 36 Vice President of E.M. Warburg, 1999
New York, New York Pincus & Co., LLC, a specialized
financial services organization.
-------------------------
</TABLE>
11
<PAGE>
(*) During the past five years, the principal occupation and employment of
each director has been in the capacity set forth above except as
follows:
(a) Mr. Ackerman has been employed by E. M. Warburg, Pincus & Co., LLC,
since 1993. Mr. Ackerman is a director of Phycor, Inc.
(b) Mr. Cochrane has held his present position since January 2000, when
Corporate Health Dimensions merged with Meridian Corporate Healthcare,
Inc., where he was President and Chief Executive Officer since February
1997. He was Executive Vice President, Chief Financial Officer and
Treasurer of Laboratory Corporation of America Holdings, Inc.
("LabCorp"), from April 1995 to November 1996 and a consultant to
LabCorp from November 1996 until February 1997. From June 1994 to April
1995, Mr. Cochrane was an employee of National Health Laboratories,
Inc. ("NHL"), following NHL's acquisition of Allied Clinical
Laboratories, Inc. ("Allied"). Mr. Cochrane was President and Chief
Executive Officer of Allied from its formation in 1989 until its
acquisition by NHL in June 1994. NHL was acquired by LabCorp in April
1995. Mr. Cochrane is a director of JDN Realty Corporation and TriPath
Imaging, Inc.
(c) Mr. Cross has served as President of dj Orthopedics, LLC, a
manufacturer and distributor of orthopedic and sports-related products,
since July 1995 and as Chief Executive Officer since June 1999.
(d) Mr. Dawson served as President and Chief Executive Officer of the
Company from December 1995 to June 1999. From May 1992 to December
1995, he was director of U.S. sales for Starkey Laboratories, Inc., a
multi-national manufacturer, distributor and marketer of custom
"in-the-ear" hearing instruments and related hearing and diagnostic
equipment.
(e) Mr. Frazer has served as Vice President-Business Development of the
Company since October 1996, when the Company acquired 11 audiology
based hearing centers that were among 22 clinics in Southern California
of which Mr. Frazer was part owner and operator. The Company has since
acquired nine of the remaining 11 clinics. Mr. Frazer has spent his
entire career as a hearing care professional since receiving his
doctoral degree from Wayne State School of Medicine in 1981.
(f) Mr. Hornibrook served as Vice President-Corporate Development of the
Company from April 1996 until January 1997. From July 1994 to April
1996, and since January 1997, he has been an independent business
consultant. Prior to July 1994, Mr. Hornibrook served as director of
corporate development for The Loewen Group Inc., a consolidator and
operator of funeral homes and cemeteries throughout North America.
(g) Mr. Klein has served as President and Chief Operating Officer of the
Company since June 1999 and was Executive Vice President and Chief
Operating Officer from November 1998 to June 1999. Mr. Klein was Senior
Vice President of Operations (Eastern Zone) of Hollywood Entertainment
Corporation from April 1997 to October 1998. He previously held various
senior management positions, including Senior Vice President of the
Retail Division, at NordicTrack, Inc., from August 1993 until April
1997.
(h) Mr. Wenstrup has been employed by E.M. Warburg, Pincus & Co., LLC,
since 1997. From August 1991 to May 1997, Mr. Wenstrup served in
various positions at The Boston Consulting Group, Inc., a strategic
management consulting company.
12
<PAGE>
OTHER EXECUTIVE OFFICERS
Paul C. Campbell, age 45, has served as Senior Vice President and Chief
Financial Officer of the Company since February 2000. Mr. Campbell was Chief
Financial Officer of Famous Dave's of America, Inc., an operator and franchisor
of full-service and counter-style restaurants located in Minneapolis, Minnesota,
from October 1999 to February 2000. From July 1995 to October 1999, Mr. Campbell
was Senior Vice President and Chief Financial Officer of Cucina! Cucina!, Inc.,
a restaurant chain headquartered in Seattle, Washington. He served as Vice
President, Financial Planning, Administration, Investor Relations, & Accounting
of Checkers Drive-In Restaurants, Inc., located in Clearwater, Florida, from
January 1993 until July 1995 and as Vice President and Chief Financial Officer
from March 1990 to January 1993.
Randall E. Drullinger, age 37, has served as Vice President of Operations of
the Company since January 2000 and was Director of Operations from November 1998
to January 2000. From April 1996 to November 1998, Mr. Drullinger was Vice
President of Marketing of the Company. From August 1990 to April 1996, he was
director of financial management services at Starkey Laboratories, Inc.,
Minneapolis, Minnesota.
Daniel W. Quall, age 44, has served as Vice President of Network of the
Company since April 2000 and was Vice President of Education and Professional
Development from January 2000 to April 2000. He was Director of Education from
April 1998 to January 2000. Mr. Quall has also served since 1980 as President of
Western Hearing Aid Co., Inc., doing business as Earcare, an audiology clinic in
Longview, Washington.
Nancy E. Sayles, age 50, has served as Vice President of Human Resources of
the Company since April 2000 and was Director of Human Resources from February
2000 to March 2000 and from March 1997 to April 1999. From April 1999 to
December 1999, she was Senior Manager of Human Resources at Concentrix, Inc.
located in Portland, Oregon, and was Director of Human Resources at Lewis &
Clark College in Portland, Oregon from May 1990 until March 1997.
Jeffry S. Weiss, age 43, has served as Vice President and Chief Technology
Officer of the Company since January 2000 and was Director of Information
Technology since March 1999. Prior to joining the Company, Mr. Weiss was
Director of Technology for Platt Electric Supply located in Portland, Oregon,
from March 1997 to March 1999 and also served as Director of Technology for
Rodda Paint & Decor in Portland, Oregon, from February 1989 to March 1997.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 ("Section 16(a)")
requires that reports of beneficial ownership of Common Shares and changes in
such ownership be filed with the Securities and Exchange Commission by
"reporting persons," including directors, executive officers, and certain
holders of more than 10% of the outstanding Common Shares. To the Company's
knowledge, all Section 16(a) reporting requirements applicable to known
reporting persons were complied with for transactions and stock holdings during
the fiscal year ended July 31, 2000.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth for the years indicated the compensation
awarded or paid to, or earned by, the Company's chief executive officer and the
Company's other executive officers whose salary level and bonus for the fiscal
year ended July 31, 2000, exceeded $100,000.
13
<PAGE>
<TABLE>
Long-Term
Compensation
Awards
-----------------------
Annual Compensation Number of Shares All Other
-------------------
Name and Principal Position Year(1) Salary Bonus Underlying Options Compensation (2)
--------------------------- ------- ------ ----- ------------------ ----------------
<S> <C> <C> <C>
Brandon M. Dawson 2000 $195,000 --- --- $20,000
Chairman and Chief 1999 195,000 --- --- 20,000
Executive Officer 1998 167,917 --- 530,000 ---
Scott E. Klein 2000 175,000 $21,875 --- ---
President and Chief 1999 127,885 65,625 375,000 ---
Operating Officer
Jeffry S. Weiss 2000 91,459 10,000 100,000 (3) ---
Vice President and 1999 31,058 --- 50,000 (3) ---
Chief Technology Officer
--------------------
</TABLE>
(1) Mr. Klein joined the Company in November 1998 and Mr. Weiss joined the
Company in March 1999.
(2) Represents the premiums paid by the Company for a split-dollar life
insurance policy for Mr. Dawson. See "Employment and Consulting
Agreements."
(3) In July 2000, the Company granted Mr. Weiss an option to purchase
50,000 Common Shares at $4.00 per share and 50,000 Common Shares at
$5.00 per share. The grant of the option was conditioned upon the
cancellation of an option to purchase 50,000 Common Shares at $5.88 per
share that was granted to Mr. Weiss in March 1999.
OPTION GRANTS
During the fiscal year ended July 31, 2000, the Company granted stock
options to employees and directors under its Second Amended and Restated Stock
Award Plan (the "Stock Award Plan"). Options are granted at the discretion of
the Board of Directors. The options are not transferable or assignable.
The following table sets forth certain information concerning grants of
options to purchase Common Shares to individuals who were directors or executive
officers of the Company during the fiscal year ended July 31, 2000:
14
<PAGE>
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
-------------------------------------------------------------------------------------------------------
Percentage
of Total
Number of Options
Shares Granted to
Underlying Employees in Exercise
Options Fiscal Price Price Range Expiration
Name Granted Year ($/share) of Shares (6) Date
---- ------------ -------------- ---------- ------------- ----
<S> <C> <C> <C> <C> <C> <C>
Joel Ackerman............... -- -- -- -- --
Paul C. Campbell............ 200,000(1) 26.0% $4.00 $4.50-3.25 02/11/10
Haywood D. Cochrane, Jr..... -- -- -- -- --
Leslie H. Cross............. 50,000(2) 6.5% 4.00 3.75-3.625 01/01/10
Brandon M. Dawson........... -- -- -- -- --
Randall E. Drullinger....... -- -- -- -- --
Gregory J. Frazer, Ph.D..... -- -- -- -- --
Hugh T. Hornibrook.......... -- -- -- -- --
Edwin J. Kawasaki........... -- -- -- -- --
Scott E. Klein.............. -- -- -- -- --
Larry J. Myers.............. -- -- -- -- --
Daniel W. Quall............. 5,000(3) 0.7% 5.88 4.375-4.063 08/01/09
40,000(3) 5.2% 5.88 3.75-3.625 01/01/10
5,000(4) 0.7% 5.88 3.25-2.75 07/11/10
Nancy E. Sayles............. 30,000(3) 3.9% 5.88 4.50-3.375 02/21/10
20,000(3) 2.6% 5.88 5.50-4.00 04/04/10
Jeffry S. Weiss............. 50,000(5) 6.5% 5.00 3.25-2.75 07/11/10
50,000(5) 6.5% 4.00 3.25-2.75 07/11/10
David J. Wenstrup........... -- -- -- -- --
-----------------
</TABLE>
(1) Exercisable as to 50,000 Common Shares immediately following grant and an
additional 50,000 Common Shares on each anniversary of the date of grant.
The options will become exercisable in full in the event that, following a
change in control of the Company, Mr. Campbell's employment is terminated by
the Company without cause, or he experiences a material demotion in status
or position or a material change in his duties that is inconsistent with his
position at the Company, his base salary is reduced, or his participation in
the Company's compensation plans is not continued on a level comparable with
other key executives. A change in control of the Company will be deemed to
occur if (i) a person acquires beneficial ownership of 50% or more of the
combined voting power of the Company, with certain exceptions, (ii) the
incumbent directors (or nominees approved by a majority of the incumbent
directors, including subsequently approved directors) cease to constitute at
least a majority of the directors of the Company, or (iii) a reorganization,
merger, or consolidation or sale of all or substantially all the assets of
the Company, with certain exceptions, is consummated.
(2) Vests in three equal annual installments beginning one year following the
date of grant.
(3) Vests in five equal annual installments beginning one year following the
date of grant.
(4) Exercisable in full.
15
<PAGE>
(5) Exercisable as to 10,000 Common Shares immediately following grant and an
additional 10,000 Common Shares annually beginning March 10, 2001.
(6) Represents the high and low per share sale prices of the Common Shares on
the American Stock Exchange ("AMEX") during the 30-day period preceding the
date of the option grant.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth certain information regarding option
exercises during the fiscal year ended July 31, 2000, and the fiscal year-end
value of unexercised options held by individuals who were directors or executive
officers of the Company during the 2000 fiscal year:
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options at
Acquired Options at July 31, 2000 July 31, 2000(1)
on Value ---------------------------- --------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C>
Joel Ackerman.............. --- --- --- --- --- ---
Paul C. Campbell........... --- --- 50,000 150,000 --- ---
Haywood D. Cochrane Jr..... --- --- 16,666 33,334 --- ---
Leslie H. Cross............ --- --- --- 50,000 --- ---
Brandon M. Dawson.......... --- --- 287,500 227,500 $118,200 ---
William DeJong............. --- --- 40,000 --- --- ---
Randall E. Drullinger...... --- --- 80,000 40,000 --- ---
Gregory J. Frazer, Ph.D.... --- --- 80,000 --- --- ---
Hugh T. Hornibrook......... --- --- 65,000 --- --- ---
Edwin J. Kawasaki.......... --- --- --- --- --- ---
Scott E. Klein............. --- --- 176,787 198,213 --- ---
Larry J. Myers............. --- --- 140,000 --- --- ---
Daniel W. Quall............ --- --- 5,000 45,000 --- ---
Nancy E. Sayles............ --- --- --- 50,000 --- ---
Jeffry S. Weiss............ --- --- 20,000 80,000 --- ---
David J. Wenstrup.......... --- --- --- --- --- ---
----------------
</TABLE>
(1) The value shown was calculated based on the excess of the closing sale
price of the Common Shares reported on AMEX on July 31, 2000, over the
per share exercise price of the unexercised in-the-money options.
16
<PAGE>
OPTION REPRICING
The following table sets forth certain information regarding repricing of
stock options held by any executive officer of the Company during the last 10
fiscal years.
<TABLE>
10-YEAR OPTION REPRICINGS
Number of
Securities Market Price Exercise
Underlying of Stock at Price at Length of Original
Options Time of Time of New Term Remaining at
Repriced or Repricing or Repricing or Exercise Date of Repricing
Name Date Amended Amendment Amendment Price or Amendment
---- ---- ------- --------- --------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hugh T. Hornibrook (1).... 6-26-98 40,000 $7.25 $9.25 $7.25 2.75 years
Daniel W. Quall (2)....... 7-11-00 5,000 $3.00 $7.25 $5.88 8 years
Jeffry S. Weiss (3)....... 7-11-00 50,000 $3.00 $5.88 $5.00 9 years
----------------
(1) Mr. Hornibrook served as Vice President-Corporate Development of the Company
from April 1996 until January 1997.
(2) Mr. Quall is Vice President of Network of the Company.
(3) Mr. Weiss is Vice President and Chief Technology Officer of the Company.
EMPLOYMENT AND CONSULTING AGREEMENTS
In late 1997, the Company entered into an employment agreement with Brandon
M. Dawson, its Chairman and Chief Executive Officer. The term of the agreement
expires on December 24, 2001, subject to automatic one-year extensions annually
unless either party gives six months' prior written notice of non-extension. The
agreement establishes an annual base salary of $195,000, subject to such
increases (but not decreases) as are determined from time to time by the Board
of Directors or a compensation committee designated by the Board of Directors.
The agreement provides for an annual incentive bonus in an amount to be
determined by the Board of Directors up to 100% of Mr. Dawson's base salary.
Under the agreement, Mr. Dawson is entitled to participate in all of the
Company's compensation plans covering key executive and managerial employees, as
well as reimbursement for the lease of an automobile up to $12,000 per year. The
Company has also provided Mr. Dawson with an equity split-dollar life insurance
policy with a face amount of $2,000,000, provided that the premiums paid by the
Company per year will not exceed $20,000, to be recovered from the death
benefits, surrender value or loan proceeds payable on the policy.
The employment agreement includes an agreement on the part of Mr. Dawson not
to compete with the Company for a period of three years after his employment
with the Company is terminated. If Mr. Dawson's employment is terminated by
reason of death, the Company will pay to his personal representative his base
salary through the date of death, together with any accrued benefits (including
death benefits) to which he is entitled under the terms of the Company's
compensation plans. In the event of Mr. Dawson's termination due to disability,
he will be entitled to receive his base salary reduced by any benefits paid
under the Company's group long-term disability insurance plan for the remaining
term of the agreement and the portion of his annual bonus relating to the period
before his disability. If Mr. Dawson's employment is terminated by the Company
for "cause" or he terminates his employment voluntarily without "good reason,"
the Company will pay his base salary through the effective date of
17
<PAGE>
termination, together with any accrued benefits to which he is entitled under
the terms of the Company's compensation plans. Cause includes a material act of
fraud, dishonesty or moral turpitude, gross negligence or intentional
misconduct. Good reason includes a material demotion in Mr. Dawson's status or
position, a material change in his duties that is inconsistent with his
position, a reduction in his base salary, or a failure to continue his
participation in the Company's compensation plans on terms comparable to other
key executives. If Mr. Dawson's employment is terminated by the Company without
cause or by Mr. Dawson with good reason, the Company will pay his base salary
through the termination date, plus an amount of severance pay equal to two times
the sum of his base salary and his average annual bonus for the prior two fiscal
years payable in 24 monthly installments. In addition, upon such termination
without cause or with good reason, the Company will afford continued
participation in the Company's compensation plans (or, if not permitted under
the general provisions of any such plan, will provide a substantially equivalent
benefit) for two additional years.
Effective November 1, 1998, the Company entered into a four-year employment
agreement with Scott E. Klein, its President and Chief Operating Officer. The
agreement establishes an annual base salary of $175,000, subject to such
increases (but not decreases) as are determined from time to time by the Board
of Directors or a compensation committee designated by the Board of Directors.
The agreement provides for an initial bonus of $87,500 for services performed in
the fiscal year ended July 31, 1999, and an annual incentive bonus thereafter in
an amount to be determined by the Board of Directors up to 50% of Mr. Klein's
base salary. Under the agreement, Mr. Klein is entitled to participate in all of
the Company's compensation plans covering key executive and managerial
employees.
The employment agreement includes an agreement on the part of Mr. Klein not
to compete with the Company for a period of one year after his employment with
the Company is terminated. If Mr. Klein's employment is terminated by reason of
death, the Company will pay to his personal representative his base salary
through the date of death, together with any accrued benefits (including death
benefits) to which he is entitled under the terms of the Company's compensation
plans. In the event of Mr. Klein's termination due to disability, he will be
entitled to receive his base salary reduced by any benefits paid under the
Company's group long-term disability insurance plan for the remaining term of
the agreement. If Mr. Klein's employment is terminated by the Company for cause
or he terminates his employment voluntarily without good reason, the Company
will pay his base salary through the effective date of termination, together
with any accrued benefits to which he is entitled under the terms of the
Company's compensation plans. Cause includes a material act of fraud, dishonesty
or moral turpitude, gross negligence or intentional misconduct. Good reason
includes a material demotion in Mr. Klein's status or position, a material
change in his duties that is inconsistent with his position, a reduction in his
base salary, or a failure to continue his participation in the Company's
compensation plans on terms comparable to other key executives. If Mr. Klein's
employment is terminated by the Company without cause or by Mr. Klein with good
reason, the Company will pay his base salary through the termination date, plus
an amount of severance pay equal to his base salary.
Effective January 1, 1997, the Company entered into a five-year consulting
agreement with Hugh T. Hornibrook, a director of the Company, under which the
Company pays Mr. Hornibrook a retainer of $65.34 per month and $81.67 per hour
for consulting services on an as-needed basis. The total amount paid to Mr.
Hornibrook in fiscal 2000 was $784.06.
COMPENSATION OF DIRECTORS
The non-employee directors of the Company receive a fee of $1,000 for each
board or committee meeting attended and are reimbursed for out-of-pocket and
travel expenses incurred in attending board and committee meetings. The Company
has no other standard arrangement pursuant to which directors are compensated by
the Company for their services in their capacity as directors. The Company may
from time to time, as it has in the past, grant stock options to directors in
accordance with the policies of AMEX, the Securities and Exchange Commission,
and the securities laws and regulations of the jurisdictions where the directors
reside. Options granted during the 2000 fiscal year are included in the table
under "Option Grants" above.
18
<PAGE>
DIRECTORS AND OFFICERS LIABILITY INSURANCE COVERAGE
The Company maintains insurance for the protection of its directors and
officers against liabilities incurred in such capacity with a coverage limit of
$2,000,000, subject to a deductible of $50,000 per claim. The premium paid by
the Company for the annual policy period ended October 31, 2000, was $45,000 for
the directors and officers as a group.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP TABLE
The following table gives information regarding the beneficial ownership of
Common Shares as of October 31, 2000, by each of the Company's directors, by
certain of the Company's executive officers, and by the Company's present
directors and executive officers as a group. In addition, it gives information,
including addresses, regarding each person or group known to the Company to own
beneficially more than 5% of the outstanding Common Shares, Series A Shares or
Series B Shares. Information as to beneficial stock ownership is based on data
furnished by the persons concerning whom such information is given. Unless
otherwise indicated, all shares listed as beneficially owned are held with sole
voting and investment power. The numbers in the table include Common Shares as
to which a person has the right to acquire beneficial ownership through the
exercise or conversion of options, purchase warrants or convertible securities
within 60 days after October 31, 2000.
19
<PAGE>
Class or Amount and Nature % of
Name and Address Series of of "Beneficial Common % of Series of
of Beneficial Owner Shares Ownership" Shares(1)(2) Preferred Shares
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Joel Ackerman (5)...................... --- --- --- ---
Haywood D. Cochrane, Jr................ --- 16,666 * ---
Leslie H. Cross........................ Common 84,598 1.4% ---
Brandon M. Dawson...................... Common 1,152,500 18.1% ---
111 S.W. Fifth Ave., Ste. 1620
Portland, Oregon 97204
Gregory J. Frazer, Ph.D................ Common 380,631(3) 6.1% ---
18531 Roscoe Blvd., Ste. 201
Northridge, California 91324
Hugh T. Hornibrook..................... Common 65,000 1.0% ---
Scott E. Klein......................... Common 198,811 3.2% ---
RS Investment Management Co. (4)....... Common 1,107,800(4) 18.2% ---
388 Market Street, Ste. 200
San Francisco, California 94111
Warburg, Pincus & Co. (5).............. Common 8,389,041(5) 57.9% ---
466 Lexington Avenue Series A 2,666,666(5) --- 100%
New York, New York 10017 Series B 2,500,000(5) --- 100%
Jeffry S. Weiss........................ Common 20,000 * ---
David J. Wenstrup...................... --- --- --- ---
All present directors and executive.... Common 2,054,206(3) 29.7% ---
officers as a group (13 persons)
</TABLE>
---------------
* Less than 1% of the outstanding Common Shares.
(1) "Beneficial ownership" is calculated in accordance with Rule 13d-3(d)(1)
under the Securities Exchange Act of 1934, pursuant to which Common Shares as to
which a person has the right to acquire beneficial ownership through the
exercise or conversion of options, purchase warrants or convertible securities
within 60 days after October 31, 2000, have been included in shares deemed to be
outstanding for purposes of computing percentage ownership by such person.
(2) "Beneficial ownership" includes Common Shares that the person has the
right to acquire through the exercise or conversion of options, purchase
warrants or convertible securities within 60 days after October 31, 2000, as
follows: Haywood D. Cochrane, Jr., 16,666 shares; Brandon M. Dawson, 287,500
shares; Gregory J. Frazer, Ph.D., 80,000 shares; Hugh T. Hornibrook, 65,000
shares; Scott E. Klein, 198,811 shares; Warburg, Pincus & Co., 8,389,041 shares;
Jeffry S. Weiss, 20,000 shares; and all directors and executive officers as a
group, 823,977 shares.
20
<PAGE>
(3) Includes 40,058 Common Shares and options to acquire 20,000 Common
Shares exercisable within 60 days after October 31, 2000, held by Carissa
Bennett, Gregory J. Frazer's wife.
(4) Included in reliance on information contained in Schedule 13G dated
February 8, 2000, jointly filed by RS Investment Management Co. LLC, RS
Investment Management, L.P., RS Value Group LLC, The RS Orphan Fund, L.P., and
the RS Orphan Offshore Fund, L.P. RS Investment Management Co. LLC is the
general partner of RS Investment Management, L.P. and RS Value Group LLC is the
general partner of The RS Orphan Fund, L.P. As to the indicated number of
shares, RS Investment Management Co. LLC. and RS Value Group LLC each reported
shared voting and dispositive power. The RS Orphan Fund, L.P., reported shared
voting and dispositive power as to 787,280 shares, or 12.9% of the outstanding
Common Shares, and the RS Orphan Offshore Fund, L.P. reported shared voting and
dispositive power as to 320,520 shares, or 5.3 percent of the outstanding Common
Shares. RS Investment Management, L.P. reported no Common Shares as to which it
had sole or shared voting or dispositive power.
(5) Warburg, Pincus & Co. is the general partner of Warburg, Pincus
Ventures, L.P. ("Warburg"), the record owner of 2,666,666 Series A Shares,
2,500,000 Series B Shares and warrants to purchase 2,000,000 Common Shares.
Warburg is managed by E.M. Warburg, Pincus & Co., LLC. Joel Ackerman, a general
partner of Warburg, Pincus & Co., and David J. Wenstrup, a vice president of
E.M. Warburg, Pincus & Co., LLC, each disclaim beneficial ownership of the
Shares beneficially owned by Warburg except to the extent of an indirect
pecuniary interest in an indeterminate number of such Shares. Each Preferred
Share is entitled to one vote. The Preferred Shares vote together with the
Common Shares as a single class unless otherwise required by law or if the Board
of Directors otherwise determines. The Preferred Shares held by Warburg
represent approximately 51% of the combined voting power of outstanding voting
securities. Of the 8,389,041 Common Shares shown as beneficially owned by
Warburg, 2,666,666 shares represent the Common Shares issuable upon conversion
of 2,666,666 Series A Shares and 3,722,375 shares represent the Common Shares
issuable upon conversion of 2,500,000 Series B Shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Gregory J. Frazer, Ph.D., Vice President-Business Development and a director
of the Company, and his wife, Carissa Bennett, have the right, until September
30, 2001, to require the Company to redeem an aggregate of 1,680 of their Common
Shares as of the last day of each calendar quarter at a price of $8.35 per
share. The redemption rights are noncumulative and expire if not exercised as of
the end of any calendar quarter as to such quarter. Pursuant to such redemption
rights, the Company redeemed during the fiscal years ended July 31, 2000 and
1999, a total of 5,040 and 6,720 Common Shares, respectively, from Ms. Bennett
and Mr. Frazer for consideration of $42,084 and $56,112, respectively.
During 1998, the Company acquired three hearing care centers in California
in which Mr. Frazer and Ms. Bennett were part-owners. Mr. Frazer and Ms. Bennett
received $242,179 of the total purchase price of $542,268. They also received
$80,520 in payment for covenants not to compete. In January 1999, the Company
issued a three-year promissory note to Mr. Frazer in the principal amount of
$102,000 and payable in equal quarterly installments in connection with purchase
price adjustments for hearing care centers that were previously acquired from
Mr. Frazer. The Company also entered into expanded non-compete agreements with
Mr. Frazer and Ms. Bennett that pay Mr. Frazer and Ms. Bennett $6,303 and $4,455
per month, respectively, until September 2001.
On December 26, 1997, the Company loaned Brandon M. Dawson, Chairman and
Chief Executive Officer and a director of the Company, $29,942 in order to allow
Mr. Dawson to repay an advance in connection with the exercise by Mr. Dawson of
options to purchase 20,000 Common Shares on April 1, 1996. Mr. Dawson repaid the
loan 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 $33,107 in order to pay
taxes incurred as a result of Mr. Dawson's April 1996 option exercise. The loan
bears interest at 7.75% per annum and is due on December 31, 2000.
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On May 8, 1997, Mr. Dawson exercised options for 50,000 Common Shares at
$1.35 per share in order to allow options for Common Shares to be granted to
other employees. In connection with such exercise, the Company loaned Mr. Dawson
$67,500 to pay the aggregate exercise price of the options. The loan was repaid
on July 6, 1999, along with interest at 10% per annum in the amount of $7,730.
On April 24, 1998, the Company loaned Mr. Dawson an additional $91,000 in order
to pay taxes incurred as a result of Mr. Dawson's May 1997 option exercise. The
loan was repaid on July 6, 1999, along with interest at 7.75% in the amount of
$8,347.
On December 8, 1998, the Company loaned Scott E. Klein, President and Chief
Operating Officer and a director 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 was repaid on December 10, 1999,
along with interest at 12% in the amount of $23,342.
On October 1, 1999, the Company consummated the sale of 2,500,000 Series B
Shares to Warburg for $10,000,000 in cash. Under the terms of the purchase
agreement for the Series B Shares, Warburg is entitled to designate three
nominees for election as directors. 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 Company has met specified quarterly earnings
targets. If the Company 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.
The Series B Shares were initially convertible on a one-for-one basis into
2,500,000 Common Shares at a conversion price of $4.00 per share. Because the
Company's receivables as of July 31, 1999, that were collected by July 31, 2000,
totaled less than $4,736,000 and the Company has not yet attained specified
quarterly earnings targets, the conversion rate was adjusted such that the
Series B Shares are convertible into 3,722,375 Common Shares as of the fiscal
quarter ended October 31, 2000. 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.
In connection with the sale, the Company agreed to reduce the exercise price
of outstanding warrants entitling Warburg to purchase 2,000,000 Common Shares
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.
In April 1999, Mr. Dawson purchased from an unrelated party a convertible
note in the principal amount of $492,693 that had been issued by the Company in
October 1996. The note was repaid on December 10, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits are listed in the Exhibit Index on page 36 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, 2000.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this Amendment No. 1 to its report on Form
10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 28, 2000 SONUS CORP.
By
/s/ Brandon M. Dawson
------------------------------------
Brandon M. Dawson
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
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