<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
General Form for Registration of Securities
of Small Business Issuers Under Section 12(b)
or 12(g) of the Securities Act of 1934
SONIC SYSTEMS CORPORATION
-----------------------------
(Name of Small Business Issuer in its Charter)
DELAWARE 91-1940650
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
777 108th Avenue NE, Suite 1700, Bellevue, WA 98004
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
1 800 337-6642
(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 par value
------------------------------
(Title of Class)
<PAGE>
PART I
The Company is filing this Form 10-SB on a voluntary basis to (1) provide
current, public information to the investment community, (2) to expand the
availability of secondary trading exemptions under the Blue Sky laws and thereby
expand the trading market in the Company's securities and (3) to comply with
prerequisites for listing of the Company's securities on NASDAQ. In the event
the Company's obligation to file periodic reports under the Exchange Act is
suspended, the Company reserves the right to reevaluate whether to continue
filing periodic reports on a voluntary basis.
ITEM 1 -
DESCRIPTION OF BUSINESS
FORWARD LOOKING STATEMENTS
This registration statement contains forward-looking statements. The words
anticipate, believe, expect, plan, intend, estimate, project, could, may,
foresee, and similar expressions are intended to identify forward-looking
statements. These statements include information regarding expected development
of the Company's business, lending activities, relationship with clients, and
development of the industry in which the Company will focus its marketing
efforts. Such statements reflect the Company's current views with respect to
future events and financial performance and involve risks and uncertainties,
including without limitation the risks described in Risk Factors. Should one or
more of these risks or uncertainties occur, or should underlying assumptions
prove incorrect, actual results may vary materially and adversely from those
anticipated, believed, estimated or otherwise indicated.
GENERAL
Sonic Systems Corporation ("Sonic Systems" or the "Company"), a Delaware
corporation incorporated October 1, 1998, has its head office located at 777
108th Avenue NE, Suite 1700, Bellevue, Washington. The Company's telephone
number is 1 (800) 337-6642. Sonic Systems has two operating subsidiaries: Sonic
Systems Corporation, a British Columbia, Canada corporation ("Sonic BC"),
located at 101-1520 Rand Avenue, Vancouver, BC, Canada; and, Sonic Integration
Inc., a Washington corporation ("Sonic Integration"), located at
101-1520 Rand Avenue, Vancouver, BC, Canada. The Company formed Sonic
Integration in August, 1999. There are two inactive subsidiaries: 568608 B.C.
Ltd., which owns 100% of Sonic BC and is owned 100% by the Company, and 321373
B.C. Ltd., formerly known as Tekedge Development Corporation, which is owned
100% by Sonic BC. The Company's fiscal year end is December 31.
The Company is the successor to M&M International Realty, Inc. a Florida
corporation which effected a reincorporation as a Delaware corporation by
merger, with the Company as the surviving corporation. Prior to the merger on
December 1, 1998, the Florida corporation had had no material commercial
activity. On December 11, 1998 the Company acquired all of the issued and
outstanding stock of Sonic BC in exchange for 11,089,368 shares of Company
common shares. As a result, the former shareholders of Sonic BC owned a majority
of the Company's outstanding stock. Therefore, for accounting purposes, Sonic BC
was deemed to have acquired the Company.
1
<PAGE>
Sonic Systems was founded to commercialize a new acoustic technology for
providing emergency traffic signal preemption for fire engines, ambulances and
police vehicles. The core technology is a sophisticated and patented software
algorithm running on a digital signal processor (DSP) platform, combined with
proprietary, directional phased array microphones. Sonic's emergency signal
preemption systems are installed in over 25 cities across North America.
Up to December 1, 1999, the Company has been selling only its SONEM 2000
Emergency Signal Preemption System. The Company has extended its core technology
to develop specific niche applications, many within the intelligent
transportation systems (ITS) market. The result has been a series of new
opportunities for Sonic Systems including: in-vehicle siren detection (IVSD);
desktop directional microphones; wireless intersection communication solutions;
and dedicated short range acoustic communications. The Company has undertaken
preliminary development and planning of each of these opportunities.
In view of the Company's strategic focus on wireless technologies, Sonic
Systems has decided to do business as Unity Wireless. The Company intends to
seek shareholder approval to amend its articles of incorporation to change
its name to Unity Wireless Corporation as soon as practicable. The Company is
also changing the names of Sonic Integration and Sonic BC to Unity Wireless
Integration Corporation and Unity Wireless Systems Corporation, respectively.
The transportation systems market is an example of a mature industry that can
benefit from innovation. Recent US government initiatives have provided
significant funding for ITS projects, which are intended to move more traffic
more efficiently on existing roadways. The societal benefits are enormous,
including significant efficiencies for commuters and commerce in general,
massive fuel savings with resulting environmental improvements, and increased
passenger safety. Also, significant capital savings are achieved by avoiding the
construction of new road system capacity.
The ITS market includes everything from synchronized intersection controllers
and roadside advisory signs to in-vehicle navigation systems. ITS America, the
main industry organization, projects that $209 billion will be invested in ITS
between now and 2011. The overall ITS market also includes in-vehicle technology
such as directional microphones for navigation and command systems, and
in-vehicle siren detection safety equipment.
Sonic Systems plans to grow by identifying specific opportunities, then
developing novel technological solutions and entering the market through
strategic partnerships with leading providers with an established presence in
that market. The Company has used this strategy with its preemption system and
its wireless intersection communication products.
As an innovator, Sonic Systems' products enjoy proprietary or first-to-market
advantages in their respective markets. Management expects that this position
can lead to higher profit margins and the ability to attract leading strategic
partners to extend the technology into complementary products.
To complement internally developed technology, Sonic Integration was formed to
pursue alliances, licensing agreements and marketing partnerships in the ITS and
communications markets. Sonic Integration will earn marketing revenues through
these alliances and identify and evaluate new market opportunities, new
technologies and new partners. This strategy does not require Sonic Systems to
make a substantial initial investment for such projects. Sonic Integration
recently opened a regional office in Singapore
2
<PAGE>
with a resident Regional Manager to pursue revenue and partnership opportunities
throughout Asia.
PRINCIPAL PRODUCTS & SERVICES
Sonic Systems currently has two products that are being offered commercially:
the SONEM Emergency Signal Preemption Systems and a wireless intersection
communications device that uses the Company's Multi Purpose Interface Controller
(MPIC). The Company has sold over 100 of its SONEM systems and expects to
complete its first sale and installation of the MPIC by the end of the first
quarter of 2000.
The SONEM 2000
According to ITS America, from the mid 1980's to 1994 over 6,550 fatalities and
over 182,000 accidents involving emergency vehicles resulted in hundreds of
millions of dollars paid out in settlements by cities, states and federal
agencies.
The Company has developed a novel method of detecting emergency vehicle sirens,
and has patented this technology. The SONEM 2000 detects an emergency vehicle's
siren as it approaches an intersection. Once the siren has been identified, the
SONEM system issues a preempt request to the intersection controller. The
controller then acts on this request to provide a green light for the emergency
vehicle and turns the other directions red, making the intersection much safer
for the emergency vehicle to pass through.
Management believes the SONEM 2000 has two significant advantages over its
competitors. First, it is less expensive to install, because it uses the
existing sirens on the emergency vehicles; competing products generally require
each vehicle to be outfitted with an emitter and/or control switch for the
driver. Second, the SONEM 2000 can recognize sirens from any emergency vehicle,
not just specially-equipped ones.
The SONEM 2000 has received both Federal Communications Commission (FCC) and
National Electrical Manufacturers Association (NEMA) approval, and is marketed
through a network of distributors established in North America. As the market
matures for this product in the United States and Canada, Sonic Systems will
begin to engage additional distributors outside of North America.
MPIC - Wireless Intersection Communications Card
Based on its knowledge of intersection controllers, specifically the specialized
computers that control the signal lights, Sonic Systems has developed the MPIC
(Multi-Purpose Interface Controller). This multi-purpose communications card
allows traffic engineers to send and receive information to and from remote
intersections without the expense, delay and disruption associated with
constructing a hard-wired connection.
Remote intersection controllers that lack a communications link rely on internal
systems to perform various functions, for example,
3
<PAGE>
the time clock that controls the sequence and timing of each intersection. Since
the clock can fluctuate, a series of coordinated intersections can easily become
desynchronized, leading to potential traffic problems. The wireless intersection
communications card gives traffic engineers the ability to perform the simple
task of resetting the clock to the proper time without the need for a site
visit. Remote traffic personnel can also accomplish other tasks, such as
monitoring power and maintenance conditions.
Sonic Systems' wireless MPIC device uses the "Cellular Digital Packet Data"
(CDPD) infrastructure. CDPD is a "data only" network that works within the
current cellular service spectrum of selected wireless service providers. In
essence, information (data) sent over the CDPD network is broken into small
sections (or packets) and routed through the available, unused portion of an
existing cellular voice network using technology similar to the sending of email
between computers.
Other traffic applications for the MPIC include: roadside advisories,
variable message signs, remote access and gate openers, and industrial
controls. Many other alliances are developing for this product, with related
products and market applications within and outside of the traffic industry. The
Company has received an initial purchase order for 20 units of this product and
expects to ship this order before the end of the first quarter of 2000.
Marketing Services
Sonic Integration will perform marketing services for companies that have
complementary products in the ITS and wireless communications markets but lack
the contacts or marketing resources to reach additional customers. By using the
Company's network of contacts, management expects that these client companies
will be able to reach new opportunities while Sonic Systems will earn commission
revenue with limited capital investment.
PRODUCT RESEARCH & DEVELOPMENT
Sonic Systems is currently pursuing additional product opportunities through
ongoing research and development. Many of the ongoing R&D projects extend
directly from its SONEM and MPIC products. These projects include:
In-Vehicle Siren Detection (IVSD)
Sonic Systems' patented siren detection technology is being developed for use
inside a vehicle to alert the driver to a siren long before the siren sound has
penetrated the soundproofing of the car or overridden the CD or cell phone.
Several prototype devices are being evaluated by a U.S. auto and truck
manufacturer for addition to its vehicles as a standard safety device.
Automated Gate Access
Siren detection technology also has application for emergency vehicle access to
gated communities and public areas. Many state and municipal jurisdictions are
requiring owners of gated areas where the public or employees may be present to
provide a quick and reliable method of access for emergency services.
4
<PAGE>
Current methods of access, such as cardkeys, handheld transmitters, lockboxes
and around-the-clock staffing, lack the speed or cost effectiveness of siren
operated devices.
Using the same platform as the IVSD prototype coupled to the gate control
mechanism provides an effective solution without requiring any special equipment
on the part of the emergency service provider (other than the standard siren on
their vehicles). Similar products would also allow emergency vehicles to open
"barrier gates" along divided freeways, and at airport and industrial sites.
Multi-use Phased Array Microphone
Management believes that one of the largest non-traffic opportunities for the
SONEM technology may come from adapting the highly directional microphone to
consumer applications. Similar in its basic design, this directional microphone
can be used in areas such as voice recognition in computers, automobiles and
other potentially voice activated and interactive electronic devices. The
Company believes that the new product will provide both a directional corridor
and the ability to identify a specific sound in a "noisy" environment not unlike
identifying the sound of a siren at an intersection.
MPIC Communications Platforms
Although developed for use in intersections, the MPIC product can be easily
re-configured to address a number of wireless data applications. Providing the
hardware and software platform to allow for data communications between remote
instruments will become a significant focus of Sonic Systems' R&D efforts. The
decision to move forward and commercially develop MPIC applications will depend
on the available market size of the potential application as well as the
Company's ability to attract a strong marketing partner for such application.
Sonic Systems has identified the MPIC communication platforms as the most
promising near term product opportunity, and therefore is focusing its research
and development efforts in that direction. In the first nine months of 1999, the
Company spent approximately $235,000 on MPIC product development, compared to
approximately $12,000 in total for the other three acoustic technologies
described above.
SALES & MARKETING
Sonic Systems' products are represented by several major traffic product
distributors in North America. The Company plans to continue to build strategic
alliances and partnerships to create a network of distributors and original
equipment manufacturers to extend the Company's position in the market. The
Company provides the necessary training and market support to facilitate sales,
while its partners handle the selling and service duties.
Making products that match customer needs and raising significant barriers to
entry through technology and strong partnerships are among the key strategies of
the Company. Other strategies are as follows:
KEY ELEMENT - Providing the key element in a system (such as the MPIC card in an
intersection) allows the Company to leverage its place in the market. With the
MPIC card installed, management expects that additional applications will arise
with the potential for new up-grades and follow-on sales for the Company and its
distributors and partners.
5
<PAGE>
MARKETING ALLIANCES & PARTNERSHIPS - The Company intends to create
marketing alliances with established suppliers of complementary products to
effectively expand the marketing resources of the Company. This strategic
model will be employed as future products and applications approach
commercialization. Along with Sonic's distributors, the Company intends that
such partners will be the frontline sales team, with the Company providing
support. With each new product, Sonic will attempt to partner with the
leading company selling related products in that particular market.
Management believes that these relationships will result in a very rapid
introduction to market for new products.
An example of this strategy is the marketing agreement with Safetran Traffic
Systems Corporation of Colorado Springs, CO. Safetran will exclusively market
in North America the wireless intersection communications card for Caltrans
type traffic controllers through its distributors. Safetran Traffic Systems
is a leading manufacturer of Caltrans type traffic controllers.
DISTRIBUTION - Sonic Systems' typical distributor sells a number of other
products within the ITS and traffic market to state, federal and local
municipalities and is in regular contact with the end users of the Company's
products. These distributors' products range from traffic controllers to
cabinets, poles and signal heads.
TRAINING & PRODUCT SUPPORT - Sonic Systems supplies the necessary brochures,
manuals and training tools to its partners and distributors. Sonic Systems
intends to take responsibility for training the distributors and partners to
properly represent the Company's products. These tasks will be handled by senior
management and the Company's regional sales staff, presently located in Texas,
Ohio and Singapore.
ACQUISITIONS & LICENSING - The Company is actively looking for strategic
acquisitions or licensing opportunities to increase the number of products
tailored for Sonic Systems' ITS presence. There are no material acquisitions or
licensing opportunities currently pending.
RESEARCH AND DEVELOPMENT - The Company plans to continue an aggressive R&D
regime to continue to introduce innovative products for ITS and other
applications.
INTERNATIONAL MARKETS - Sonic Integration maintains an international marketing
focus with the current emphasis upon intelligent transportation systems projects
in Asia. The potential customers include ports, transit agencies and vehicle
fleet management companies. Sonic Integration's positioning is two fold: (i) as
a co-marketing partner to established companies in North America with weak
international presence; and (ii) a marketing channel for small high tech
companies that lack marketing strength and know how. By representing its
strategic partners, Sonic Integration can present large end-users with
alternative purchasing options and take advantage of new business opportunities
that may arise.
MANUFACTURING & SUPPLIERS
The Company subcontracts its product manufacturing to qualified companies with a
history of cost control and quality assurance. This minimizes the need for
capital cost expenditures related to electronics manufacturing facilities,
minimizes staff and uses specialists in each stage of manufacturing. Alternate
contract manufacturers are available should any of its existing contract
manufacturers not continue providing services to the Company.
The principal raw materials used in the production of the Company's products are
mostly standard, electronic, plastic and hardware components. The Company has
experienced difficulties in obtaining raw materials and reduces supply risk by
using alternate suppliers.
6
<PAGE>
COMPETITION
Competition exists in the emergency signal preemption and intersection
communications markets. Sonic Systems prices its products competitively and
provides technically advantageous solutions with increased functionality for
customers. Product differentiation is based on technology, first-to-market
strategy, and strong marketing partnerships with market leaders.
SONEM 2000 COMPETITORS
While the Company expects to encounter significant competition, management
believes that the SONEM 2000 System has distinct competitive advantages over the
competitive systems listed below.
Strobe Based Preemption
Strobe based preemption is the most widely installed method of preemption,
constituting approximately 80-90% of the market. This type of system requires
that each emergency vehicle be fitted with a special strobe emitter,
requiring additional investment in order to use the preemption system. A
strobe based system also needs constant cleaning of the strobe detectors in
the intersections. Since it is an optical system, line of sight is needed and
therefore buildings, trees and rain or snow can cause the system to fail.
Sonic's SONEM 2000 system works with all siren types eliminating the need to
retrofit vehicles. Also since the preemption is signaled acoustically, line
of sight or weather conditions have little effect on performance, and
detector maintenance is minimized.
Siren Based Preemption
Another of Sonic's competitors uses a similar approach to siren detection as the
SONEM, however their system can only detect one of the three common types of
sirens, and only above ambient intersection noise. Sonic's SONEM system can
detect all sirens and do so below ambient intersection noise.
RF (Radio Frequency) Based Preemption
This type of system requires a transmitter in the emergency vehicle as well as a
receiver at the intersection and must be manually triggered by the driver of the
emergency vehicle. This installation is expensive as each emergency vehicle must
be fitted with an additional radio or transponder to activate the preemption,
plus the receiver at the intersection. Again, Sonic's system obviates the need
for vehicle upgrades as well as the physical need for the driver to preempt the
signal.
MPIC INTERSECTION COMMUNICATION CARD COMPETITORS
Presently, management believes that there are no direct competitors to Sonic's
CDPD-based MPIC products for traffic control. Indirect competitors fall in three
main categories: (i) Other wireless solutions, (ii) Wireline solutions provided
by the telephone companies, which are the most common form of intersection
communication, and (iii) Wireline solutions provided by a municipality.
7
<PAGE>
Other Wireless Solutions
There are two types of wireless solutions commonly used in traffic control.
Spread Spectrum (SS) radio has been tried by many municipalities, but it has
many challenges. To install a SS system, a municipality purchases and installs
its own base station, then puts transceivers at each remote location. This is a
relatively expensive technology, and one with which most traffic engineers are
not familiar. Spread Spectrum uses unlicensed (i.e. uncontrolled) radio
frequencies, therefore these systems require regular adjustment as radio noise
and interference change in any given environment over time.
Advanced Mobile Phone Services (AMPS) cellular uses the regular cellular
telephone voice channels for data. The dialup nature of voice lines means that
each data transmission must be preceded by the overhead of placing the call and
getting connected, and then the user is charged for the time connected
regardless of whether data is being transmitted. An advantage of CDPD is that
the data is sent through the available, unused portion of the cellular network
in small packets - an inexpensive and usually flat-rated solution.
Public Wireline Solutions
Most municipalities use at least some telephone-based wireline connections (a
modem at the source and a modem at the remote destination, connected by the
public phone network). These systems are either of the dedicated or dialup type.
Dedicated lines typically cost from $80 to $200 per month, plus the cost of the
modem at each end. Dialup lines are usually about $35 per month, and, like the
AMPS cellular approach, impose a significant overhead and connection latency for
each use.
In some cases, municipalities use fiber-optic based public networks, which can
be much more expensive to install.
Private Wireline Solutions
It is also possible for municipalities to install their own landlines. These
systems function much the same as the dedicated public phone lines, but trade
the monthly cost for a higher initial cost. Typical installation costs for
trenched lines are in the range of $8 to $40 per foot. In some terrains, it is
not practical to install wireline connections at any cost.
INTELLECTUAL PROPERTY
Sonic Systems owns the following domestic and foreign patents:
<TABLE>
<CAPTION>
- ---------------------------- ----------------------- --------------------------- ----------------------------
Country Patent No. Patent Name Issue Date
- ---------------------------- ----------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
USA 4,864,297 Siren Detector (analog) September 5, 1989
- ---------------------------- ----------------------- --------------------------- ----------------------------
Canada 1,322,586 Siren Detector (analog) September 28, 1993
- ---------------------------- ----------------------- --------------------------- ----------------------------
Europe 318,668 Siren Detector (analog) January 8, 1997
- ---------------------------- ----------------------- --------------------------- ----------------------------
France (PCT Patent) 318,668 Siren Detector (analog) January 8, 1997
- ---------------------------- ----------------------- --------------------------- ----------------------------
Germany (PCT Patent) 69411195.3 Siren Detector (analog) January 8, 1997
- ---------------------------- ----------------------- --------------------------- ----------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------- ----------------------- --------------------------- ----------------------------
Country Patent No. Patent Name Issue Date
- ---------------------------- ----------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
Italy (PCT Patent) 318,668 Siren Detector (analog) January 8, 1997
- ---------------------------- ----------------------- --------------------------- ----------------------------
Spain (PCT Patent) ES2011597T3 Siren Detector (analog) January 8, 1997
- ---------------------------- ----------------------- --------------------------- ----------------------------
United Kingdom (PCT Patent) 318,668 Siren Detector (analog) January 8, 1997
- ---------------------------- ----------------------- --------------------------- ----------------------------
Australia 681380 Siren Detector (digital) December 18, 1997
- ---------------------------- ----------------------- --------------------------- ----------------------------
USA 5,710,555 Siren Detector (digital) January 20, 1998
- ---------------------------- ----------------------- --------------------------- ----------------------------
New Zealand 262,083 Siren Detector (digital) September 8, 1998
- ---------------------------- ----------------------- --------------------------- ----------------------------
Singapore 49839 Siren Detector (digital) December 21, 1998
- ---------------------------- ----------------------- --------------------------- ----------------------------
Europe 748,494 Siren Detector (digital) June 17, 1998
- ---------------------------- ----------------------- --------------------------- ----------------------------
</TABLE>
The Company has also filed PCT Applications for its digital siren detector in
Japan, China, and Canada.
Sonic Systems has been granted the trademarks "We Hear the Future Now-TM-",
"Sonic Solution-TM-", and "Sonic Systems Corporation-TM-". Sonic BC registered
these trademarks in Canada in 1997. The Company has also been using the
unregistered trademark "SONEM 2000-TM-" since 1997, which Sonic BC did not
register due to resource constraints. As a result of the current strategy of
diversification into wireless and other products, the Company does not intend to
formally register this trademark.
SERVICE & PRODUCT WARRANTY
The Company offers a standard warranty on each product it sells. The warranty
covers parts and labor for a fixed period, either 1 year, 2 years or 5 years,
depending on the product and application.
Before product is returned for warranty repairs, the customer (or distributor)
must receive a "Returned Material Authorization" (RMA) number from the Company,
and then return the goods freight prepaid, and identified with the RMA number.
After repairs, the unit will be returned by the Company freight prepaid, and the
repaired unit will be warranted for the remainder of the original warranty
period or for one year from the repair date, whichever is longer.
The Company's warranty specifically excludes any and all liabilities for
"special, incidental, direct, indirect, or consequential damages or expenses
whatsoever" arising from the functioning or use, or inability to use, the
products. The warranty is void if the product has been improperly installed,
subjected to abuse or negligence, or tampered with. State laws may limit the
Company's ability to limit its liability or exclude certain types of damages.
GOVERNMENT REGULATION
Sonic Systems may be required to obtain regulatory approvals in the US and other
countries prior to the sale or shipment of products. In certain jurisdictions,
such requirements may be more stringent than in the United States. Many
developing nations are just beginning to establish safety, environmental and
other regulatory requirements, which may vary greatly from U.S. requirements.
9
<PAGE>
In general, regulatory certifications of interest fall into three categories:
Safety, Usability and Spectrum Control.
Safety regulation standards include U/L (Underwriter Laboratories) and CSA
(Canadian Standards Association) in North America, and CE (European standard
specification) in Europe. These sets of regulations specify strict safety
requirements for products. The Company's products are currently designed to U/L
and CSA specifications.
Usability regulations include, in North America, both NEMA (National Electrical
Manufacturers Association) and CalTrans. NEMA is a functional specification,
including operating environment (temperature range, humidity, shock and
vibration, etc.) for equipment in NEMA-style traffic controller markets;
CalTrans is a hardware compatibility specification for equipment operating in
CalTrans-style traffic controller cabinets. Other usability requirements may
need to be met in jurisdictions outside North America. Sonic Systems has tested
its products to, and met, both NEMA and CalTrans equipment specifications.
Spectrum control in North America is regulated by the FCC (Federal
Communications Commission) in the US, and by the DOC (Department of
Communications) in Canada. These agencies allocate and regulate the use of
bandwidth in the electromagnetic spectrum, covering all wireless communications
equipment, as well as any electrical or electronic equipment which may radiate
electromagnetic energy which could interfere with other equipment. Other
spectrum control requirements may need to be met in jurisdictions outside North
America.
MANAGEMENT & EMPLOYEES
Sonic Systems' senior management team has proven experience in exploiting
opportunities available to development stage companies and the Company's
technical team is proficient in wireless and acoustic technologies. Employees
and management have a commitment to help create and in turn share in the
success potential of the Company. Currently each holds stock and/or options
with future vesting dates and relatively high exercise prices to encourage
continued commitment and focus for several years. As of December 1, 1999 the
Company had 15 full-time employees and 7 contract or part-time employees. The
employees are not represented by a collective bargaining agreement and the
Company considers its relationship with its employees to be good.
RISK FACTORS
Readers should carefully consider the risks described below before deciding
whether to invest in shares of the Company's common stock.
If the Company does not successfully address any of the risks described below,
there could be a material adverse effect on the Company's business, financial
condition or results of operations, and the trading price of the Company's
common stock may decline and investors may lose all or part of their investment.
10
<PAGE>
The Company cannot assure any investor that it will successfully address these
risks.
ADDITIONAL FINANCING REQUIRED
Management projects that the Company will need approximately $2.5 million in
additional capital to sustain operations through fiscal year 2000. There is no
assurance that sufficient additional financing will be available to the Company,
or that, if available, the financing will be on terms acceptable to the Company.
If additional funding is not obtained in the very near future, it may be
necessary for the Company to suspend operations.
There is no assurance that the Company's estimate of its reasonably anticipated
capital needs is accurate or that new business developments or other unforeseen
events will not occur that will result in the need to raise additional funds. In
the event that Sonic Systems cannot raise needed capital, it will have a
material adverse effect on the Company.
GOING CONCERN OPINION OF AUDITORS IN 1998 REPORT
In the audit opinion for the year ended December 31, 1998, the Company's
independent auditors opined that the Company's recurring losses from
operations raise substantial doubt about its ability to continue as a going
concern. This opinion resulted from the Company's lack of financial resources
to sustain the expected continued losses from operations throughout 1999.
Although the Company has raised sufficient financing to continue operations
to date, it expects to sustain continued losses from operations and does not
have the financial resources to continue operations for the next 12 month
period. The presence of such an opinion may make it difficult for the company
to obtain financing for its continued operations and to continue to attract
or maintain customers, suppliers, or strategic partners. If Sonic Systems
cannot attract or maintain such financing and/or such relationships, it will
have a material adverse effect on the Company.
POSSIBLE LOSS OF ENTIRE INVESTMENT
Given the Company's continued need for additional capital, the Company's stock
involves a high degree of risk, and should not be purchased by any person who
cannot afford the loss of the entire investment. A purchase of the Company's
stock is currently "unsuitable" for a person who cannot afford to lose his
entire investment.
The Company expects to incur significant operating losses and to generate
negative cash flow from operating activities during the next few years, while it
develops additional technologies and products. There is no assurance that the
Company will achieve or sustain profitability or positive cash flow from
operating activities in the future or that it will generate sufficient cash flow
to service any debt requirements.
NO PUBLIC MARKET FOR COMMON STOCK
The Company's Common Stock is quoted on the OTC electronic bulletin board.
Management's strategy is to develop a public market for its Common Stock by
soliciting brokers to become market makers of the Company's Common Stock. To
date, however, the Company has solicited only a limited number of such
securities brokers to become market makers. There can be no assurance that a
stable market for the Company's Common Stock will ever develop or, if it should
develop, be sustained. It should be assumed that the market for the Company's
Common Stock will continue to be highly illiquid, sporadic and volatile. These
securities should not be purchased by anyone who cannot afford the loss of the
entire investment.
11
<PAGE>
The Company is required to maintain status as a "reporting" issuer under the
Securities Exchange Act of 1934 (the "34 Act"), in order to be traded by
broker-dealers regulated by the National Association of Securities Dealers.
If the Company fails to continue to be a reporting issuer, management may
encounter difficulty in maintaining or expanding a trading market in the near
term, if at all, and shareholders may not be able to sell their shares in the
public market. While management currently intends to maintain status as a
"reporting" issuer under the 34 Act, there can be no assurance that the
Company can or will maintain such status.
PENNY STOCK REGULATION
The Securities and Exchange Commission (the "SEC") has adopted rules that
regulate broker-dealer practices in connection with transactions in "penny
stocks." Penny stocks generally are equity securities with a price of less than
$5.00 per share (other than securities registered on certain national securities
exchanges or quoted on the NASDAQ National Market System, provided that current
price and volume information with respect to transactions in such securities is
provided by the exchange or system). The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document prepared by the
SEC that provides information about penny stocks and the nature and level of
risks in the penny stock market. The broker-dealer also must provide the
customer with bid and offer quotations for the penny stock, the compensation of
the broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules require that prior to a transaction
in a penny stock not otherwise
12
<PAGE>
exempt from such rules, the broker-dealer must make a special written
determination that a penny stock is a suitable investment for the purchaser and
receive the purchaser's written agreement to the transaction. These disclosure
requirements often have the effect of reducing the level of trading activity in
any secondary market for a stock that becomes subject to the penny stock rules.
Sonic Systems' Common Stock is currently subject to the penny stock rules, and
accordingly, investors may find it difficult to sell their shares, if at all.
SHARES ELIGIBLE FOR FUTURE SALE
Approximately 9,600,000 shares of restricted Common Stock became eligible for
sale under Rule 144 on approximately December 11, 1999. In addition, 2,500,000
shares of restricted stock are currently held in escrow. The shares in escrow
will be released and eligible for sale under Rule 144 on the following schedule:
720,000 shares on December 11, 1999, 180,000 shares to be released quarterly
starting March 11, 2000 and ending June 11, 2001; 420,000 shares to be released
on June 11, 2000 and 70,000 shares to be released quarterly starting September
11, 2000 and ending June 11, 2001. Of all shares eligible for sale as of
December 11, 1999, 2,705,385 are held, as a group, by the Company's officers and
directors and one shareholder who owns, directly and indirectly, more than 5% of
the Company's shares. Although there is no assurance or agreement that these
holders will not sell any of their shares, management believes that they intend
to retain most if not all of their holdings for the near future. If a
substantial number of these shares were to be offered for sale or sold in the
market, the market price of the Common Stock likely would be affected adversely.
POSSIBLE ISSUANCE OF ADDITIONAL SHARES IN THE FUTURE
The Company's Articles of Incorporation authorize the issuance of 100,000,000
shares of Common Stock. The Company's Board of Directors has the power to issue
any or all of such shares that are not yet issued without stockholder approval.
The Company's Board of Directors may choose to issue some or all of such shares
to acquire one or more businesses or other types of property, or to provide
additional financing in the future. The issuance of any such shares may result
in a reduction of the book value or market price of the outstanding shares of
the Company's Common Stock. If the Company does issue any such additional
shares, such issuance also will cause a reduction in the proportionate ownership
and voting power of all other shareholders. Further, any such issuance may
result in a change of control of the Company.
ABSENCE OF DIVIDENDS; DIVIDEND POLICY
Sonic Systems has never paid dividends on its Common Stock and does not
anticipate paying any dividends on its Common Stock in the foreseeable future.
The declaration and payment of dividends by Sonic Systems are subject to the
discretion of the Company's Board of Directors. Any determination as to the
payment of dividends in the future will depend upon results of operations,
capital requirements, restrictions in loan agreements, if any, and such other
factors as the Board of Directors may deem relevant.
STOCK OPTIONS
The Company has adopted a stock option plan authorizing up to 5,000,000 options.
The Company has options for approximately 2.4 million shares of common stock
issued and outstanding as of December 1, 1999, at an exercise price of US$1.00
per share for all but 10,000 shares with a US$ 2.53 exercise price. The
existence of below market options could adversely affect the market price of the
Company's Common Stock and could impair the Company's ability to raise
additional capital through the sale of its equity securities or debt financing.
13
<PAGE>
Exercise of any such options will result in dilution to the proportional
interests of shareholders of the Company at the time of exercise, and, to the
extent that the exercise price is less than the book value of the Common Stock
at that time, to the book value per share of the Common Stock.
LACK OF PRIOR OPERATIONS AND EXPERIENCE
The Company has minimal revenues from operations and has no significant tangible
assets. Accordingly, there can be no assurance that the Company will operate at
a profitable level. Sonic Systems' business involves the development,
manufacture and marketing of novel products in the ITS and wireless
communication industries, initially in the emergency traffic preemption market.
There can be no assurance that the Company's future financial forecasts will be
met. Future development and operating results will depend on many factors,
including the completion of developed products, demand for the Company's
products, level of product and price competition, success in setting up and
expanding distribution channels, and whether the Company can develop and market
new products and control costs. In addition, the Company's future prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered in establishing a new business in the technology industry, which is
characterized by intense competition, rapid technological change, and
significant regulation.
NEED FOR EXPERIENCED MANAGEMENT AND KEY EMPLOYEES/LIMITED EXPERIENCE OF
SENIOR MANAGEMENT
Senior management brings a wide variety of experience in successfully
establishing and growing other companies. While management has limited
experience with the Company's new technologies specifically, Sonic's
technical personnel are proficient in both wireless and acoustic
technologies. Sonic Systems is a growing company dependent upon the services
of certain management and technical personnel, particularly Peter McConnell,
Tom Dodd and Mark Godsy. The loss of any one of their services, or an
inability to recruit and retain additional qualified personnel, could have a
material adverse effect on the Company. Sonic Systems has no plans at present
to obtain key person life insurance for its officers and directors.
SUBSTANTIAL COMPETITION
The communications and traffic control industry is characterized by rapidly
evolving technology and intense competition. Sonic Systems will be at a
disadvantage with other companies having larger technical staffs, established
market shares and greater financial and operational resources than the Company.
There can be no assurance that the Company will be able to successfully compete.
There can be no assurance that the Company's competitors will not succeed in
developing products or competing technologies that are more effective or more
effectively marketed than products marketed by Sonic Systems, or that render the
Company's technology obsolete. Earlier entrants into a market often obtain and
maintain significant market share relative to later entrants. The Company
believes that an increasing number of products in the market and the desire of
other companies to obtain market
14
<PAGE>
share will result in increased price competition. Price reductions by the
Company in response to competitive pressure could have a material, adverse
affect on Sonic Systems' business, financial condition, and results of
operation.
PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY
The Company's success will depend in part on its ability to maintain and obtain
patent protection for its products and processes, to preserve its trade secrets
and proprietary technology, and to operate without infringing upon the patents
or proprietary rights of third parties in both the United States and other
countries. No assurance can be given that with respect to any patents issued or
pending, the claims allowed are or will be sufficiently broad to protect the key
aspects of the Company's technology, or that the patent laws will provide
effective legal or injunctive remedies to stop any infringement of the Company's
patents. There can be no assurance that such patent protection will withstand
challenge. Furthermore, the possibility exists that the Company could be found
to infringe on patents held by others. The Company may have to go to court to
defend its patents, to prosecute infringers, or to defend itself from
infringement claims by others. Patent litigation is expensive and time
consuming, and can be used by well-funded adversaries as a strategy for
depleting the resources of a small company such as the Company. There is no
assurance that the Company will have sufficient resources to successfully
prosecute its interests in any litigation that may be brought.
Sonic BC has filed applications for patent and trademark protection of some of
its intellectual property in the United States Patent and Trademark Office
and certain patents have been granted. Although the Company is not aware of any
disputes with respect to any of its intellectual property and is not involved in
any litigation, the possibility exists that the Company or its subsidiaries
could be found to infringe on patents, service marks, trademarks or copyrights
held by others. The Company's or its subsidiaries' use of trademarks, service
marks, tradenames, slogans, phrases and other expressions in the course of its
business may be the subject of dispute and possible litigation. There can be no
assurance that the Company or its subsidiaries will be able to continue to use
their current tradename and marks. Any changes could result in confusion to
potential customers and negatively affect the Company's business.
DEPENDENCE ON SUPPLIERS AND THIRD PARTIES
The Company will rely on certain outside suppliers for certain components and/or
the assembly of the Company's products. There can be no assurance that component
parts or materials or services obtained from outside suppliers will continue to
be available in adequate quantities. The failure to obtain sufficient quantities
of such materials or parts or such services could have a material adverse affect
on the Company's business, financial condition and results of operations.
The Company is a small enterprise and has yet to establish substantial internal
management, personnel and other resources. The Company depends substantially
upon third parties for several critical elements of its business including,
among others, promotion and marketing, technology and infrastructure development
and distribution activities.
15
<PAGE>
NEED FOR COMPLEX GLOBAL MARKETING AND SALES
The successful execution of the Company's business plan entails marketing, brand
development and sales on a global basis. There is no guarantee that the Company
will be successful in managing such a complex strategy of marketing and sales to
effect a reasonable penetration of its technologies into its target markets on a
timely basis.
NEED FOR FUTURE STRATEGIC PARTNERSHIPS
The successful execution of the Company's business strategy is dependent upon
enlisting a number of Strategic Partners globally, regionally, and nationally in
order to assist in a focused marketing effort and to provide financial strength.
There is no assurance that the Company will be successful in developing such
strategic partnerships on a timely basis or in developing enough strategic
partnerships to successfully market the Company's technologies and products
globally, in spite of early indications of promise in various locations.
ACCEPTANCE OF COMPANY'S TECHNOLOGY; CREATION OF NEW MARKET
There can be no assurance that the Company`s technology will be adopted, that
its technology will be incorporated into products, or that products based on
this technology will be marketed successfully. In addition, there can be no
assurance that the Company's technology will be adopted widely as an industry
standard even if products based on its technology have been introduced
successfully to the market place.
The markets for the Company's technologies and products have only recently begun
to develop. As is typical in the case of a new and rapidly evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty and risk. Because the markets for the
Company's technologies and products are new and evolving, it is difficult to
predict the future growth rate, if any, and size of this market. There is no
assurance either that the markets for the Company's technologies and products
will emerge or become sustainable. If the markets fail to develop, develop more
slowly than expected or becomes saturated with competitors, or if the Company's
technologies and products do not achieve or sustain market acceptance, the
Company's business, results of operations and financial condition will be
materially and adversely affected.
UNCERTAINTY OF NEW PRODUCT DEVELOPMENT
The Company has not yet released commercial versions of some of its
technologies and products. Substantial additional efforts and expenditures to
enhance their capabilities are critical to commercial viability. Accordingly,
no meaningful revenues have been generated to date.
PRODUCT WARRANTY
The Company's products are relatively new to their respective markets and lack
extensive field operating experience. While the Company has tested its products
for failure in certain circumstances, there can be no assurance that the
Company's products will continue to operate satisfactorily after sustained field
use. If a substantial number of products are returned and accepted for warranty
replacement, as outlined in "Service & Product Warranty," the cost to Sonic
Systems could have a material adverse effect on the Company's business.
16
<PAGE>
PRODUCT LIABILITY
The Company sells its SONEM and MPIC devices primarily for use with traffic
control equipment located at intersections. Other products are also targeted for
use in traffic. If the Company's products fail to perform properly, significant
personal injury, property damage or death could arise from traffic accidents
resulting from such failure. Although the Company maintains product liability
insurance, there is no assurance that the amount of coverage will be sufficient
in the event of a claim, or that coverage will continue to be available to the
Company on reasonable terms and conditions or at all.
FAILURE TO MAINTAIN TECHNOLOGICAL ADVANTAGES/RISK OF OBSOLESCENCE
The Company is dependent upon what it perceives as technological advantages of
its products and its ability to maintain patent and trade secret protection for
its products. There can be no assurance that the Company will be able to obtain
or to maintain such advantages; failure to do so would have substantial adverse
consequences to the business of the Company.
Technological obsolescence of the Company's technologies and products remains a
possibility. There is no assurance that the competitors of the Company will not
succeed in developing related products using similar processes and marketing
strategies prior to the Company, or that they will not develop technologies and
products that are more effective than any which have been or are being developed
by the Company. Accordingly, the ability for the Company to compete will be
dependent on timely enhancement and development of its technologies and products
as well as the development and enhancement of future products. There is no
assurance that the Company will be able to keep pace with technological
developments or that its products will not become obsolete.
FOREIGN CURRENCY EXPOSURE
The Company is exposed to fluctuations in foreign currencies relative to the
U.S. dollar because it collects revenues in U.S. and Canadian dollars and incurs
costs in foreign currencies, primarily the Canadian dollar. As the Company
expands its operations, it may begin to collect revenues from customers in
currencies other than the U.S. or Canadian dollar. The Company does not
currently engage in any hedging activities.
17
<PAGE>
ITEM 2 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the financial statements and notes
appearing elsewhere in this registration statement.
OVERVIEW
The Company is in the business of developing and manufacturing specialized
communications and traffic control products that use the acoustic spectrum as
well as traditional wireless channels. The Company also markets products and
systems for the intelligent transportation systems industry on behalf of other
manufacturers on an agency basis. Except for a sale to a single customer in 1997
and revenue from a contribution agreement with a Canadian government agency in
1997 to 1999, the Company's traffic signal priority system has accounted for all
revenues earned in 1997, 1998, and the first nine months of 1999. Management
expects that wireless communication products will become a dominant proportion
of revenue in future years.
18
<PAGE>
The Company is the successor to M & M International Realty, Inc., a Florida
corporation, which effected a reincorporation as a Delaware corporation by a
merger with the Company on December 1, 1998. The Company acquired Sonic B.C. on
December 11, 1998, through a British Columbia subsidiary, 568608 B.C. Ltd.,
formed for the purpose of the acquisition. In July 1998, Sonic BC acquired
321373 B.C. Ltd., formerly known as Tekedge Development Corporation ("Tekedge"),
in order to consolidate a royalty agreement with Tekedge. The royalty agreement
provided that Sonic BC pay Tekedge 15% of gross revenues from the sale of any
products based on assets and intellectual property acquired from Tekedge in
1995. The royalty rate was reduced retroactively to 3.5% in June, 1998. In
August 1999, the Company formed a second subsidiary, Sonic Integration Inc., to
perform agency marketing and systems integration activities.
The Company (including Sonic BC) has incurred net losses since it became active
in July, 1995. Losses resulted from low initial sales of the Company's traffic
signal priority system combined with startup manufacturing activity and
engineering and development costs relating to product improvement and new
technologies. In 1998 and early 1999, the Company prepared for growth that was
anticipated from increased sales volume through newly developed distribution
channels. During this period expenses increased due to additional management and
marketing expenses, and costs associated with the setup of an office in Seattle.
In the first quarter of 1999 the Company also took advantage of volume pricing
to build inventory in anticipation of these increased sales.
In the first and second quarters of 1999, the Company did not achieve its
desired sales volumes. In response, the Company deferred manufacturing of
additional product, reduced expenses through elimination of telemarketing
activities and restructuring of senior management positions, and moved the
Seattle office to more economical space. The Company also refocused engineering
and development activities toward wireless communication products for traffic
control in response to indications of strong demand in that segment of the
transportation industry. Management believes that the successful demonstrations
of a traffic controller communications product and the formation of strategic
alliances for marketing and distribution with intelligent transportation systems
industry members in the second and third quarters of 1999 will have a positive
impact on future sales.
RESULTS OF OPERATIONS
(All amounts are in US dollars unless otherwise stated)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Sales increased by 22%, or $36,792, to $206,500 in the first nine months of
fiscal 1999, compared to $169,708 in the corresponding fiscal 1998 period. This
increase was due primarily to a higher level of sales of the Company's SONEM
2000 traffic signal priority system, and to a foreign exchange gain of $26,765.
19
<PAGE>
Cost of goods sold decreased by 20%, or $66,319, to $261,812 in the first nine
months of fiscal 1999, compared to $328,131 in the corresponding fiscal 1998
period. During the first quarter the Company increased production in
anticipation of higher sales of its SONEM 2000 traffic signal priority system.
However, as it became evident that these sales would not materialize at the
expected levels, production was severely reduced and then stopped altogether.
Inventory increased as the result of both the first quarter production activity,
and the ordering of parts that were expected to be needed in the second quarter.
Production department direct labor and overhead expenses were capitalized to
finished goods inventory, which led to the decrease in production expenses
charged against income.
Research and development expenses increased by 70%, or $156,531, to $380,873 in
the first nine months of fiscal 1999, compared to $224,342 in the corresponding
fiscal 1998 period. In the second and third quarters of 1999 the Company
responded to a growing market interest in wireless communication products in the
traffic industry by accelerating development of its MPIC traffic controller
communication product.
Sales and marketing expenses increased by 41%, or $105,660, to $363,713 during
the first nine months of fiscal 1999, compared to $258,053 in the corresponding
fiscal 1998 period. As part of an initiative to achieve higher sales of its
traffic signal priority product, the Company hired two additional sales managers
in October 1998 and April 1999. In addition, the Company hired a business
development executive in April of 1998 to pursue opportunities for new and
existing products in the intelligent transportation industry and in
international markets.
General and administrative expenses increased by 28%, or $166,036, to $757,552
during the first nine months of fiscal 1999, compared to $591,516 in the
corresponding fiscal 1998 period. During this period, the Company incurred
higher legal, consulting, and travel costs related primarily to the pursuit of
new financing and its status as a publicly traded entity. Travel costs rose by
$70,659, accounting and legal costs by $66,416, and consulting by $39,092.
Employment expenses decreased by $35,694 due primarily to the higher level of
management incentive awards in 1998. In addition, the Company opened an office
in Seattle in April, 1999, which was subsequently relocated to more economical
space in August, 1999.
YEARS ENDED DECEMBER 31, 1998 AND 1997
In 1998, sales increased by 17%, or $52,703, to $362,510 from $309,807 in 1997.
This increase was due primarily to a higher level of sales of the Company's
traffic signal priority system, and to an increase in receipts under a research
and development contribution agreement with the Canadian Transportation
Development Centre. A large proportion (81%) of 1997 sales resulted from the
sale of a weather warning system combined with traffic signal priority systems
to the city of Batesville, Arkansas. In 1998, 27% of sales were to a different
single customer.
In 1998, cost of goods sold increased by 84%, or $239,271, to $525,660 from
$286,389 in 1997. During 1998 the Company made a number of improvements to the
design of its traffic signal priority system, including the use of phased array
microphones and improvements to its siren detection algorithm software. The
resulting improved performance of its product led the Company to take the
20
<PAGE>
initiative to upgrade several strategically important installed locations at no
charge to the customer. In addition, the Company provided a high level of on
site support to customers and distributors, in order to optimize product
performance in specific intersection configurations and thereby to encourage
adoption of this relatively new technology. The Company also incurred increased
production expenses to develop large scale manufacturing processes, to evaluate
contract manufacturers, and to begin production at the selected contract
manufacturer. These costs, combined with the low level of sales, produced a
gross margin of ($163,150) in 1998 compared to $23,418 in 1997.
In 1998, net research and development expenses increased by 6%, or $14,965, to
$248,192 from $233,227 in 1997. The Company recorded a Canadian investment tax
credit of $93,048 in 1998 and $106,183 in 1997. Total R&D expenses therefore
increased by less than 1% to $1,830 to $341,240 in 1998 from $339,410 in 1997.
Contributions to research and development expenses from the Transportation
Development Centre in both 1998 and 1997 were recorded as revenue as stated
above.
In 1998, marketing expenses increased by 43%, or $116,937, to $386,674 from
$269,737 in 1997 as the Company expanded its marketing effort and signed up
several U.S. distributors for its traffic signal priority product. During 1998
the Company hired additional marketing executives and a sales manager. The
Company also increased its presence at trade shows, increased its telemarketing
support, and installed additional field demonstration systems.
In 1998, general and administrative expenses increased by 151%, or $553,005, to
$918,289 from $365,284 in 1997. This increase was primarily due to increases in
compensation expense ($320,392), accounting and legal expenses ($80,041),
consulting expenses ($69,735), and interest expenses ($38,469). Compensation
expense increased primarily due to the award of performance shares and stock
options to management during 1998, and by the addition of a staff executive and
other support staff in late 1997 and early 1998. Accounting and legal expenses
were higher due to the acquisition activity in 1998. Consulting expenses
increased due to increased investment relations and recruitment costs, and
interest expenses were incurred primarily as the result of a credit facility
established by Sonic BC (see Liquidity and Capital Resources).
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has been dependent on investment capital as its
primary source of liquidity. Sales of the Company's current and earlier versions
of its SONEM 2000 traffic signal priority product have provided insufficient
cash flow to sustain operations. The Company had an accumulated deficit at
September 30, 1999 of $4,945,991.
As of December 1, 1999, the Company's accounts payable were in excess of its
available cash and accounts receivable. The Company anticipates an increased
level of sales for the fiscal 2000 year, particularly in its wireless products,
however management expects that these sales will be insufficient to fund
operations during the year. Financing will also be needed for increased working
capital primarily to fund increased accounts receivable caused by the higher
level of sales compared to the previous year. Also, the Company will require
capital for continued product research and development. The Company estimates it
will need approximately $2,500,000 in additional capital to sustain operations
through fiscal 2000. The Company is seeking to complete a private placement or
placements of additional shares of stock in the immediate future in order to
raise at least an additional $2,500,000 of capital. No assurance can be given
that the Company will be successful in raising the required amount of capital
either in a lump sum, or on a timely basis so that cash is available when needed
for operations.
21
<PAGE>
The Company's cash position at December 31, 1998 was $256,524, an increase of
$65,509 from $191,015 at December 31, 1997. During the twelve months ended
December 31, 1998 net cash used in operating activities was $1,719,716 primarily
due to the net loss of $1,716,305.
Net cash from financing activities of $858,883 was derived principally as the
result of a private placement by Sonic BC in the second quarter of 1998.
Additionally, $198,496 was received from loans payable, primarily from a
credit facility at the Company's bank.
In the fourth quarter of 1998 the Company received gross proceeds of $975,000
from a private placement of common shares. On December 11, 1998 the Company
acquired Sonic BC, which was accounted for as a reverse acquisition. The gross
proceeds of the fourth quarter financing became available for operations, and
appears as an investing activity. The Company acquired property and equipment
for $23,661, and increased its investment in intellectual property by $35,878.
During the first nine months of fiscal 1999, the Company's cash position
decreased by $221,226 to $35,298 on September 30 from $256,524 on December
31, 1998. Net cash used in operating activities was comprised basically of a
loss of $1,557,450 during the period. In addition, inventories increased by
$422,890 as the result of higher production activity in the first quarter
that was not met by an expected sales increase in the first and second
quarters of 1999. The September 30, 1999 inventory level of $623,741 is
composed of $140,831 in raw materials and $482,910 in finished goods. The
finished goods category includes $240,230 in field demonstration units or
field located inventory that was shipped to distributors in anticipation of
future sales. Also, an estimated $93,809 of raw materials and $33,994 in
finished goods was held at a contract manufacturer's facilities pending
settlement of amounts owed to the manufacturer. During the fourth quarter of
1999 the Company shipped the field inventory, other than installed
demonstration units, back to Sonic BC storage facilities. Also, a settlement
with the contract manufacturer released the held inventory which the Company
also shipped to its facilities. A yearend review of the inventory now located
at the Company's facilities is in progress to identify any obsolete items or
any items with limited resale potential.
Also during this period, accounts payable increased by $368,727 as a source of
financing for the inventory increase. When sales of the Company's traffic signal
priority product did not materialize at the expected level in the third quarter
of 1999, the Company requested and achieved reductions and postponements in
amounts due from trade creditors in October and November of the current year. In
the second and third quarters of 1999, the Company also reduced operating
expenses by postponing further manufacturing activity, through reductions of 6
full time staff at the executive, marketing and operations levels, and by
relocating the Seattle office to more cost effective space.
The agreement leading to the acquisition of Sonic BC provided for a share for
share exchange plus issuance of an additional 2,500,000 shares which were
distributed among the former Sonic BC shareholders, employees and directors
as determined by the former board of directors of Sonic BC. As a result of
the exchange, the former Sonic BC shareholders held approximately 56% of the
then issued and outstanding stock of the Company. The share exchange
agreement also included a provision that the Company would use best efforts
to raise gross proceeds of $1,500,000 in equity financing in 1999. This
undertaking was secured by a pledge of 5,000,000 shares of common stock by
certain shareholders of the Company, which were forfeitable on a pro-rata
basis to the extent such proceeds were not raised. As a result, the Company
received gross proceeds of $1,020,000 from a placement of 340,000 common
shares in July of 1999 and $480,000 from a placement of 160,000 common shares
in October of 1999. Net proceeds from these placements were $1,350,000. These
net proceeds were used to repay loans of approximately $918,000 in the third
quarter and $432,000 in the fourth quarter. All material terms and conditions
of the share exchange have been completed or fulfilled.
In November, 1999 the Company issued 350,000 shares in consideration of
$175,000. In December, 1999 the Company issued 142,857 shares in
consideration of $100,000.
Sonic BC had a credit facility comprised of three segments: a demand
operating loan of $Cdn 100,000 ($US 65,220) at an interest rate of prime plus
2%, a demand reducing loan available under the Canadian Western Economic
Diversification IT&T Program of $Cdn 500,000 ($US 326,100) at an interest rate
of prime plus 3%, and a tax credit financing facility of $Cdn 100,000 ($US
65,220) at an interest rate of prime plus 2%. At September 30, Sonic BC had an
outstanding balance of $138,704 ($Cdn 203,985) on its demand reducing segment,
and no balance on the other two segments. The bank has reviewed the Company's
financial position and in October 1999 offered an amended loan agreement
continuing the demand reducing loan at an interest rate of prime plus 6%, and
discontinuing
22
<PAGE>
the other two segments. In July, 1999 the Company commenced principal repayments
of the demand reducing loan at the rate of $3,490 ($Cdn 5,200) per month. These
payments will continue under the proposed amended loan agreement.
The Company made further investments of $49,263, primarily in intellectual
property, during the first nine months of 1999.
INFLATION
The Company does not believe that inflation has had a significant impact on its
consolidated results of operations or financial condition. However, the Company
has recently experienced some significant price increases for certain components
that are used in the wireless industry.
YEAR 2000 READINESS
Computers, software and other equipment utilizing microprocessors that use only
two digits to identify a year in a date field may be unable to accurately
process certain date-based information at or after the year 2000. This is
commonly referred to as the "Year 2000 issue." The Company has analyzed the Year
2000 readiness issues related to its computer systems and determined that all
systems critical to managing the business are Year 2000 compliant and its
customer service systems are also Year 2000 compliant.
The Company has identified its critical component and service providers, has
contacted each such vendor to assess that vendor's Year 2000 readiness, and has
completed a review of those vendors that have responded. Because the Company is
relying on information provided to it by third parties to assess the year 2000
readiness of such vendors, the Company cannot provide assurances that all of its
critical vendors are or will be Year 2000 ready. Therefore, the Company cannot
provide assurances that the Company will not be adversely affected by the Year
2000 change.
The Company has analyzed the Year 2000 readiness status of the products it
manufactures. The Company's product offerings meet Year 2000 readiness
standards. The Company's Year 2000 readiness program applies only to the
hardware manufactured by the Company. Although the Company has attempted to
ascertain the year 2000 status of third party software or components loaded on
or distributed with the Company's products, it does not and cannot guarantee the
Year 2000 status of any software or components provided by third parties.
The Company expects that the total costs of its Year 2000 readiness program will
not be material to its financial condition or results of operation. All costs
are charged to expense as incurred and do not include potential costs related to
any customers or other claims or the cost of internal software and hardware
replaced in the normal course of business.
The Company believes that the most likely worst case scenarios would involve the
interruption of crucial suppliers as a result of infrastructure failures or
third party vendor failures. As a result, the Company has developed contingency
plans that will address each of the most likely worst case
23
<PAGE>
scenarios. These plans consist in part of identifying alternative sources of
critical components.
The Company believes that it is taking appropriate steps to assess and address
its Year 2000 issues and currently does not expect that its business will be
adversely affected by Year 2000 issues in any material respect. Nevertheless,
achieving Year 2000 readiness is dependent on many factors, some of which are
not completely within its control. Should either the Company's internal systems
and devices or the internal systems and devices of one or more critical vendors
fail to achieve Year 2000 readiness, the Company's business and its results of
operations could be adversely affected. There can be no assurance that the
Company or its business will not be adversely impacted by any year 2000 problems
that may be experienced by its customers, suppliers, dealers, distributors,
regulators or others.
ITEM 3 -
DESCRIPTION OF PROPERTY
The Company currently leases 3,040 square feet of office, research and
development, and production space at Suite 101 - 1520 Rand Avenue, Vancouver,
British Columbia, Canada. The lease for the premises expires on March 31, 2000
and currently provides for annual net lease payments of Cdn$ 9.32 per square
foot. The Company intends to renew this lease upon expiry and has commenced
discussions with the landlord in that regard. Should the Company and the
landlord not agree on renewal terms, management believes that alternative space
is readily available in the Greater Vancouver area.
For its head office, the Company shares space with a compatible business located
at 777 - 108th Avenue NE, Suite 1700 Bellevue, Washington 98004.
The Company rents warehouse space as needed on a month to month basis. It is
currently spending Cdn$ 300 per month on such space, located in Richmond,
British Columbia.
The Company does not currently maintain any investments in real estate, real
estate mortgages or persons primarily engaged in real estate activities, nor
does it expect to do so in the foreseeable future.
ITEM 4 -
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the common shares of the Company as of February 25, 2000 by (i)
each person who is known by the Company to beneficially own more than 5% of
the issued and outstanding common shares of the Company; (ii) each of the
Company's executive officers and directors; and (iii) all of the Company's
executive officers and directors as a group. Unless otherwise indicated, the
persons named below have sole voting and investment power with respect to all
shares beneficially owned by them subject to community property law where
applicable. As of February 25, 2000 there were 20,588,725 common shares of the
Company issued and outstanding. Each common share entitles the holder thereof to
one vote in respect of any matters that may properly come before the
shareholders of the Company. To the best of the knowledge of the Company,
24
<PAGE>
there exist no arrangements that could cause a change in voting control of the
Company.
<TABLE>
<CAPTION>
NAME AND ADDRESS RELATIONSHIP SHARES BENEFICIALLY
TITLE OF CLASS OF OWNER TO COMPANY OWNED(1) PERCENT
- -------------- -------- ---------- ------- -------
<S> <C> <C> <C> <C>
COMMON STOCK MARK A. GODSY Director 2,558,984 12.3%
9000 N.E. 14th Street and 5% shareholder
Bellevue, WA 98004
COMMON STOCK TOM DODD Director 125,000 0.6%
808 SEYMOUR BLVD.
NORTH VANCOUVER, B.C.
CANADA V7J 2J6
COMMON STOCK SIAVASH VOJDANI Director 233,333 1.1%
4790 MEADFIELD ROAD
WEST VANCOUVER, B.C.
CANADA V7W 2Y3
COMMON STOCK KEN MADDISON Director 50,000 0.2%
2591 LUND AVENUE
COQUITLAM, B.C.
CANADA V3K 6J8
COMMON STOCK NORM ELLIOT Director 50,000 0.2%
505 - 8840 210 STREET,
SUITE 394
LANGLEY, B.C. CANADA V1M 2Y2
COMMON STOCK R. LEWIS SABOUNGHI Director 175,000 0.8%
1608 PROULX DRIVE
ORLEANS, ONTARIO,
CANADA K4A 1T5
COMMON STOCK DR. FRANZ HEINRICH SCHAIN Director 100,000 0.5%
D- 30169 HANNOVER,
BRUHLSTRASSE 19
GERMANY
COMMON STOCK H. WILLIAM BROGDON CEO during 1998 550,000 2.7%
18 WILLIAMS WAY
DURHAM, NH 03824
COMMON STOCK ROBERT SCRAGG CEO during 1998 295,000 1.4%
STE 103 - 1700 W. 75th AVE
VANCOUVER, B.C.
CANADA V6P 6G2
DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP:
COMMON STOCK All Executive Officers 4,726,900 22.0%
and Directors as a
group (11 individuals) (2)
</TABLE>
(1) Includes the following numbers of shares of common stock that may be
acquired by the exercise of stock options that are now exercisable or will
25
<PAGE>
become exercisable within the next 60 days:
Mark Godsy - 287,500 shares; Tom Dodd - 125,000 shares; Siavash Vojdani -
83,333; Ken Maddison - 50,000 shares; Norm Elliot - 50,000 shares; Lewis
Sabounghi - 50,000 shares; Franz Schain - 100,000 shares; all Executive Officers
and Directors as a group (11 individuals) - 935,416 shares.
(2) Includes two individuals who are not directors of the Company but who hold
key positions in general management and engineering, and Messrs. Brogdon and
Scragg.
ITEM 5 -
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
The directors, executive officers, and significant employees of the Company and
significant employees of its subsidiaries are as follows:
<TABLE>
<CAPTION>
NAME POSITION
<S> <C>
Mark Godsy Chairman, Board of Directors
and Chief Executive Officer;
Chairman, Sonic BC Board of Directors
Chairman, Sonic Integration Board of Directors
Thomas Dodd Director, President and Chief Operating Officer;
President, Chief Executive Officer
and Director, Sonic BC
Siavash Vojdani Director and Vice President, Corporate Development;
Director, President and Secretary, Sonic
Integration;
Vice President, Sales and Marketing, Sonic BC
Ken Maddison Director
Norman S. Elliot Director
R. Lewis Sabounghi Director;
Director and Senior Vice President, Strategic
Business Development, Sonic BC
Franz H. Schain Director
Bryan Wilson Secretary;
Director, Chief Financial Officer and Secretary,
Sonic BC
Peter McConnell Principal Engineer, Sonic BC
</TABLE>
26
<PAGE>
Mark Godsy - Age _44. Mr. Godsy is the CEO and a director and Chairman of the
Company, and a director and the Chairman of Sonic BC and Sonic Integration. He
previously served as a director and Chairman of Sonic BC from May, 1993 to
November, 1998,and as the secretary of Sonic BC from May, 1993 to July, 1995,
and from May, 1997 to November, 1998. Mr. Godsy is an experienced entrepreneur
working in the areas of corporate development and venture capital. He practiced
law for approximately five years before entering business and co-founding two
successful companies, ID Biomedical Corporation and Angiotech Pharmaceuticals
Ltd., both leading Canadian biotechnology firms. Mr. Godsy's responsibilities
included building executive management teams, coordinating corporate finance
activities and strategic positioning. Mr. Godsy is a graduate of the University
of British Columbia and received his law degree from McGill University. He is
currently a member of the Law Society of British Columbia.
Thomas Dodd - Age 48. Mr. Dodd has held the contract position of General
Manager of Sonic BC since July, 1999, and was appointed a Director, President
and Chief Operating Officer of the Company and President, Chief Executive
Officer, and a Director of Sonic BC on February 22, 2000. Mr. Dodd is a
senior marketer/manager with over 25 years experience as an end user, OEM,
consultant, and manufacturer, in roles ranging from field technical support
to executive management. He has held senior executive positions with Dynapro
Systems Inc. and Campbell Technologies with primary responsibilities in sales
and marketing. Currently, Mr. Dodd serves on the Board of Directors of
FutureFund (VCC) Capital Corp. and Kelsan Technologies Inc.
Siavash Vojdani - Age 57. Dr. Vojdani has held the position of President and
Secretary of Sonic Integration since July 1999. He has also served as Vice
President of Sales and Marketing of Sonic BC since January, 1998, and was
appointed as a director and Vice President of Corporate Development of the
Company on February 22, 2000. Dr. Vojdani has over 25 years in sales and
marketing as well as senior management experience in the high tech industry in
North America, Europe and Asia. He has held senior executive positions with
Offshore Systems, AEG, and most recently Dynapro Systems Inc. where he
was responsible for setting up and managing sales distribution channels on a
global scale. Dr. Vojdani has a Ph.D. in Electrical Engineering from Imperial
College of Science and Technology, London University.
Ken Maddison - Age 60. Mr. Maddison was appointed a Director of the Company
in December 1998. Mr. Maddison, a Chartered Accountant since 1966 and
elected a Fellow of the Institute of Chartered Accountants of BC in 1975,
recently retired after a lengthy career as a senior partner with the
accounting firm KPMG. In public practice over the past 32 years, Mr. Maddison
provided auditing, accounting and business advisory services to a wide range
of clients in the hospitality, real estate, construction, non-profit and
insurance industries. Mr. Maddison currently serves on the board of
International Wayside Gold Mines Ltd. of Vancouver, B.C. Canada.
Norman S. Elliot - Age 60. Mr. Elliot was appointed a Director of Sonic
Systems in December 1998. Mr. Elliot has operated as a residential and
commercial mortgage broker responsible for preparing and underwriting
mortgages, construction financing, land loans and term loans for
multi-residential and commercial real estate developments. Currently, he is
President of Apel Financial Limited, and is also Manager of Finance for
Integrated Equity Growth Mortgage Investment Corporation, a Vancouver B.C.
mortgage company.
R. Lewis Sabounghi - Age 53. Dr. Sabounghi has held the position of director
of the Company since December, 1998. He has served as Senior Vice President,
Strategic Business Development, of Sonic BC since April, 1998 and a director of
that company since June, 1998. Dr. Sabounghi has over 25 years' experience in
transportation, including the surface transportation research and development
project of the Transportation Development Center - Canadian Federal Department
of Transport. He has developed ITS applications including "Weigh In Motion" and
"Automatic Vehicle Identification." Dr. Sabounghi has presented numerous
technical papers and consulted on ITS to governments worldwide. He holds a
degree in Aerospace Engineering, an MBA from McGill University, and a Ph.D. in
Intelligent Transportation Systems Engineering from the University of Manitoba.
Dr. Franz Heinrich Schain - Age 50. Dr. Schain was appointed a Director
of Sonic Systems in December, 1998. Dr. Schain is a vascular and arthroscopic
surgeon and owner of a private clinic and ambulatory care center in Hanover,
Germany. Dr. Schain has been responsible for the medical welfare of the
national soccer teams of Bulgaria, Zimbabwe and Nepal since 1992. He is also
a member of the American Association of Arthroscopy and a Board Member and
instructor for the AGA (Ass. Germ. Land., Arthroscopy). Dr. Schain is also
president of Arthos Medical Development Corporation, located in Delaware and
owns his own investment consulting business. He is also a director of Nova
Med Inc. of Minneapolis, MN.
27
<PAGE>
Bryan Wilson - Age 54. Mr. Wilson served as a director of the Company from
December, 1998 to February 22, 2000, and was appointed Secretary of the
Company in November, 1998. He has also served as Secretary and Chief
Financial Officer of Sonic BC since August, 1997 and a director of that
company since June, 1998. Prior to joining the Company, Mr. Wilson held
the position of VP, Finance and Planning for a Canadian pharmaceutical
company and was a key member of the management team with responsibilities
including corporate development and raising financing. Mr. Wilson operated a
management consulting firm specializing in technology commercialization,
corporate strategies, management structures, business planning and market
assessments. He has also served as VP, Marketing and Client Services at a
provincial crown corporation with revenues of Cdn$ 250 million. Mr. Wilson
holds an M.B.A. from the University of Toronto and a B.A.Sc. in Electrical
Engineering from the University of British Columbia.
Peter McConnell - Age 49. Mr. McConnell was appointed to the position of
Principal Engineer of Sonic BC in July, 1995. Previously, as Principal Engineer
for Mobile Data International and Sierra Wireless, and Project Engineer with
MacDonald Dettwiler & Associates and MPR Teltech, Mr. McConnell has been
responsible for delivering innovative products. He was a key designer of the
packet switched data communication system (CDPD) that is now operated throughout
the world on existing cellular radio networks. Mr. McConnell holds seven
patents, has published numerous technical papers, has a Masters Degree (Nuclear
Physics) from the University of B.C., and is a senior member of the Institute of
Electrical & Electronic Engineers.
Directors of the Company are elected at the annual meeting of the shareholders
and serve until their successors are elected and qualified. Officers are elected
by the Board of Directors and serve at the discretion of the Board of Directors
or until their earlier resignation or removal. There are no family relationships
between any director or executive officer of the Company.
ITEM 6 -
EXECUTIVE COMPENSATION
The following table sets forth all compensation earned during the fiscal year
ended December 31, 1998 by H. William Brogdon, the President and Chief Executive
Officer of the Company and Robert Scragg, who served as President and CEO of
Sonic BC from July 28, 1995 to February 1, 1998 (the "Named Executive
Officers"). No other officer of the Company or its subsidiaries earned greater
than US$100,000 in total salary and bonus during the most recently completed
fiscal year of the Company. See "Executive Compensation Employee Agreements".
28
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual
Compensation Long Term Compensation
------------ ----------------------
Restricted Stock Securities
Name and Position Year Salary Bonus Awards Underlying Options
----------------- ---- ------ ----- ------------- -----------------
<S> <C> <C> <C> <C> <C>
($) (#)
H. William Brogdon 1998 $64,167 $0 $61,480 (1) 200,000
Robert Scragg 1998 $16,944(2) $0 $ 0 -0-
1997 $88,847 $0 $ 0 -0-
1996 $87,857 $0 $ 0 -0-
</TABLE>
NOTES:
(1) At the end of 1998 Mr. Brogdon held a total of 750,000 restricted common
shares. The stock of the Company had not traded publicly prior to December 31,
1998 and the December 11, 1998 valuation of $0.1537 per share is used, for an
aggregate value of $115,275 for these holdings (including restricted stock
awarded in 1998). Dividends have not been declared on any restricted stock nor
are any dividends planned for restricted stock.
(2) Includes one month severance.
Combined Incentive and Nonqualified Stock Option Plan
In fiscal 1998, the Company adopted the 1998 Combined Incentive and Nonqualified
Stock Option Plan (the "98 Plan"), pursuant to which options to purchase up to
3,000,000 shares of common stock may be granted to employees and consultants of
the Company. As this plan did not receive shareholder approval within the 12
months required for certain options to qualify as Incentive Stock Options, the
Company adopted the 1999 Stock Option Plan (the "99 Plan") in December, 1999
pursuant to which options to purchase up to 5,000,000 shares of common stock may
be granted, and the 98 Plan was terminated.
Options for 2,384,500 shares awarded under the 98 Plan which had not expired
were re-granted under the 99 Plan in the same quantity as originally awarded to
each recipient, subject to the recipient agreeing to the cancellation of the
options granted under the 98 Plan. The exercise price of each option remained at
$1.00 per share, except for 10,000 options exercisable at $2.53, and the vesting
schedule and expiration dates remained unchanged. Of these options, 1,802,417
will be vested and become exercisable as of March 31, 2000. For all of the
2,384,500 options awarded, except for 725,000 options which vested immediately
upon award, the vesting schedule provided that one twelfth of the award would be
earned by the recipient after each full calendar quarter of service. 1,884,500
options expire five years after award, or such sooner expiry dates as determined
by the 99 Plan under circumstances of termination or death of the option holder,
unless specifically extended by the Board of Directors of the Company. 500,000
options expire ten years after award.
29
<PAGE>
The 99 Plan carries very similar terms to the 98 Plan, and the Company
intends to administer the 99 Plan in a similar way to the 98 Plan. As of
February 25, 2000, the Company has awarded 1,745,000 new options under the 99
Plan. With the 2,384,500 options from the 98 Plan "carried over" to the 99
Plan, and less the 247,500 options expiring since December 31, 1999, the
total number of options awarded under the 99 Plan as of February 25, 2000 is
3,882,000. Of the 1,745,000 new options awarded, 60,000 were awarded at
$1.00, and the remainder at $2.06, and 250,000 vest immediately with the
remainder vesting on the same 12 quarter schedule as the 98 Plan. All new
options expire 5 years from the award date. All of the 247,500 expiring
options were exercisable at $1.00 per share.
Of all unexpired options awarded to date, 2,127,000 will vest by March 31,
2000. Also, 2,100,000 were awarded (935,417 vested March 31, 2000) to
directors and officers as listed in "Directors and Executive Officers,
Promoters, and Control Persons."
The 99 Plan provides for the granting of stock options, including Incentive
Stock Options ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and Non-Qualified Stock Options
("NQSOs").
The 99 Plan is administered by the Board. The Board has the right to grant
awards to eligible recipients and to determine the terms and conditions of Award
Agreements ("Agreements"), including, but not limited to, the vesting schedule
and exercise price of such awards, and to make all other determinations deemed
necessary or advisable for the administration of the 99 Plan. The persons who
are eligible to receive awards pursuant to the 99 Plan are such directors,
officers, consultants and other employees of the Company as the Board selects
("Participants").
The maximum number of shares of the Company's common stock reserved for issuance
under the 99 Plan is 5,000,000 shares (subject to adjustment as provided
therein). Such shares may be authorized but unissued common stock or authorized
and issued common stock held in the Company's treasury. The Board has the
authority to make any and all equitable changes or adjustments it deems
necessary or appropriate in the event any dividend or other distribution
(whether in the form of cash, common stock, or other property),
recapitalization, common stock split, reverse common stock split,
reorganization, merger, consolidation, spin-off, combination, repurchase, or
share exchange, or other similar corporate transaction or event, affects the
common stock such that an adjustment is appropriate in order to prevent dilution
or enlargement of the rights of Participants under the 99 Plan.
The Board determines the expiration date of each option, provided, however, that
no ISO can be exercisable more than 10 years after the date of grant. The
exercisability of options may be based on a predetermined vesting schedule or
may be subject to the attainment by the Company of performance goals
pre-established by the Board. The option exercise price per share is determined
by the Board, provided, however, that in the case of an ISO, the option exercise
price in no event can be less than the fair market value of the common stock on
the date the ISO is granted.
The Board may suspend, terminate or amend the 99 Plan at any time, provided,
however, that shareholder approval is required if and to the extent the Board
determines that such approval is appropriate for purposes of satisfying Section
422 of the Code or Rule 16b-3 promulgated under the Securities Exchange Act of
1934, as amended ("Exchange Act").
For the complete text of the 99 Plan, see the Company's 1999 Stock Option Plan,
a copy of which has been filed as an exhibit to this Form 10-SB and is hereby
incorporated by reference.
30
<PAGE>
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
Percent of total
Number of securities options granted to
underlying options employees in fiscal Exercise or base
Name granted (#) year price ($/Sh) Expiration date(3)(4)
---- ------------------- ---------------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
H. William Brogdon 150,000 (1) 24% $1.00 January 31, 2003
50,000 (2) 8% $1.00 December 31, 2003
</TABLE>
(1) The award of 150,000 options vests over a three year period at the rate of
12,500 options per quarter, commencing March 31, 1998 and ending December
31, 2000.
(2) The award of 50,000 options vests over a three year period at the rate of
4,166.67 options per quarter, commencing March 31, 1999 and ending December
31, 2001.
(3) Mr. Brogdon has not exercised any vested options as of December 1, 1999.
(4) The number of securities underlying unexercised options at December 31,
1998 owned by Mr. Brogdon was 200,000 common shares. Of these options,
50,000 were vested as of December 31, 1998. No options were in-the-money as
of that date. 116,667 options were vested as of December 31, 1999.
Compensation of Directors
The directors of the Company do not receive salaries or fees for serving as
directors of the Company, nor do they receive any compensation for attending
meetings of the Board of Directors or serving on committees of the Board of
Directors. The Company may, however, determine to compensate its directors in
the future. Directors are entitled to reimbursement of expenses incurred in
attending meetings. In addition, the directors of the Company are entitled to
participate in the Company's stock option plan. See above description of the
stock option plan in this section.
As part of the share exchange on December 11, 1998 with the former Sonic BC
shareholders (accounted for as a reverse acquisition), 2,500,000 shares were
issued by the Company to be distributed in the discretion of the Sonic BC
Board of Directors. Management, directors, and the founder received 1,283,908
shares, and accordingly the Company recorded a compensation expense. The
balance of 1,216,092 was distributed to all shareholders that had subscribed
for shares for other than a nominal amount, on the basis of one share for
every four held. The Company treated this distribution as a stock dividend in
the 1998 financial statements.
Employment Agreements
There are no employment agreements between the Company or any of its
subsidiaries with any of the named executive officers.
31
<PAGE>
ITEM 7 -
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999, the Company borrowed approximately $1,350,000 from Integrated
Global Financial Corporation (IGF). IGF is affiliated with Integrated Equity
Management (IEM). IEM has a contract for services with Apel Financial, a
company owned by Norm Elliot, a director of the Company. The loan from IGF
was on terms favorable to the Company and has been repaid in full. See
Liquidity and Capital Resources.
There are no other material related transactions or related contracts with a
value of over $60,000.
ITEM 8
DESCRIPTION OF CAPITAL STOCK
Set forth below is a summary of the material provisions of the Company's
capital stock. This summary does not purport to be complete. For a more detailed
description, see the Company's amended and restated certificate of incorporation
and by-laws, copies of which have been filed as exhibits to this Form 10-SB and
are hereby incorporated by reference, and the applicable provisions of Delaware
law.
32
<PAGE>
COMMON STOCK
General
All outstanding shares of common stock are duly authorized, validly issued,
fully paid and nonassessable. Upon liquidation, dissolution or winding up of the
Company, the holders of common stock are entitled to share ratably in all net
assets available for distribution to stockholders after payment to creditors.
The common stock is not convertible or redeemable and has no preemptive,
subscription or conversion rights.
Voting Rights
Each outstanding share of common stock is entitled to one vote on all matters
submitted to a vote of shareholders. There are no cumulative voting rights.
Dividends
The holders of outstanding shares of common stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Board may from time to time determine. Holders of common stock
will share equally on a per share basis in any dividend declared by the Board of
Directors. The Company has not paid any dividends on its common stock and does
not anticipate paying any cash dividends on such stock in the foreseeable
future.
Merger or Consolidation
In the event of a merger or consolidation, the holders of common stock will be
entitled to receive the same per share consideration.
PREFERRED STOCK
The Company's Certificate of Incorporation does not authorize the issuance of
preferred stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS
The Company's Certificate of Incorporation and the Bylaws contain certain
provisions that may be deemed to have an anti-takeover effect and may delay,
deter or prevent a tender offer or takeover attempt that a shareholder might
consider in its best interest, including those attempts that might result in a
premium over the market price for the shares held by shareholders.
The Bylaws establish an advance notice procedure for the nomination, other than
by or at the direction of the Board, of candidates for election as directors as
well as for other shareholder proposals to be considered at annual meetings of
shareholders.
The foregoing summary is qualified in its entirety by the provisions of the
Company's Certificate of Incorporation, as amended, and Bylaws.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Approximately 79.4 million common stock shares are authorized but unissued as of
December 31, 1999. All of such authorized but unissued shares will be available
for future issuance by the Board of Directors without additional shareholder
approval. These additional shares may be used for a variety of purposes,
including future offerings to raise additional capital or to facilitate
acquisitions.
33
<PAGE>
One of the effects of the existence of unissued and unreserved common stock may
be to enable the Board of Directors to issue shares to persons friendly to
current management, which could render more difficult or discourage an attempt
to obtain control of the Company by means of a merger, tender offer, proxy
contest or otherwise, and thereby protect the continuity of management. Such
additional shares also could be used to dilute the stock ownership of persons
seeking to obtain control of the Company.
PART II
ITEM 1
MARKET FOR THE COMPANY'S COMMON STOCK
The Company's common stock is traded on the Over-the-Counter or "Bulletin Board"
market under the symbol "ZSON". Prior to February 6, 1999, the common stock had
traded under the symbol "MMIM". The following comprises the high and low bid and
asked price for the Company's common stock as of the end of each quarter since
March 31, 1999 (the stock was not "publicly traded" prior to December 31, 1998):
<TABLE>
<CAPTION>
High Low
- ----------------------------- ------------------- ----------------------- ----------------------- -----------------------
Quarter Ending, Bid Asked Bid Asked
- ----------------------------- ------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
March 31, 1999 3.3125 3.5625 0.0000 0.0000
- ----------------------------- ------------------- ----------------------- ----------------------- -----------------------
June 30, 1999 3.0000 3.5000 0.8750 1.0000
- ----------------------------- ------------------- ----------------------- ----------------------- -----------------------
September 30, 1999 1.0625 1.2100 0.4375 0.5625
- ----------------------------- ------------------- ----------------------- ----------------------- -----------------------
December 31, 1999 1.1875 1.2812 0.3750 0.4062
- ----------------------------- ------------------- ----------------------- ----------------------- -----------------------
</TABLE>
Source: Nasdaq Trading & Marketing Services
These quotations reflect inter-dealer prices without retail mark-up, mark down
or commission, and may not represent actual transactions.
As of December 1, 1999 there were approximately 120 holders of record of the
Company's common stock
ITEM 2 -
LEGAL PROCEEDINGS
The Company is not currently a party to any material pending or threatened legal
proceedings.
ITEM 3 -
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
34
<PAGE>
ITEM 4 -
RECENT SALES OF UNREGISTERED SECURITIES
On approximately December 4, 1998, the Company completed a private offering to
accredited investors under Rule 504. The Company issued 7,500,000 common shares
in consideration of gross proceeds of $975,000. No underwriting discounts were
given or commissions paid.
On December 11, 1998, in connection with the acquisition of Sonic BC, the
Company issued a total of 11,089,368 common shares to the shareholders of Sonic
BC, who were non-U.S. persons, residing outside of the U.S., or accredited
investors. The acquisition transaction occurred outside of the U.S. The
consideration received by the Company was all of the issued stock of Sonic BC.
No underwriting discounts were given or commissions paid.
In the period July to October 1999, the Company completed an offering under
Regulation S, as contemplated by the acquisition agreement with Sonic BC. The
sale was to a non-U.S. person, residing outside of the U.S., and took place
outside of the U.S. The Company issued 500,000 shares in consideration of gross
proceeds of $1,500,000. The Company paid $150,000 in commission.
In November, 1999, the Company completed a private offering under Regulation S
to a non-U.S. person, residing outside of the U.S. The Company issued 350,000
common shares in consideration of gross proceeds of $175,000. No underwriting
discounts were given or commissions paid.
In December, 1999, the Company completed a private offering under Regulation S
to a non-U.S. person, residing outside of the U.S. The Company issued 142,857
common shares in consideration of gross proceeds of $100,000. No underwriting
discounts were given or commissions paid.
ITEM 5 -
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's by-laws provide that directors and officers shall be indemnified
by the Company to the fullest extent authorized by the Delaware Business
Corporation Act ("DBCA"), against all expenses and liabilities reasonably
incurred in connection with services for or on behalf of the Company. The
by-laws also authorize the board of directors to indemnify any other person
which the Company has the power to indemnify under the DBCA, including for
indemnification greater or different from that provided in the by-laws. To the
extent that indemnification for liabilities arising under the Securities Act may
be permitted for directors, officers and controlling persons of the Company, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
35
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
SONIC SYSTEMS CORPORATION
DECEMBER 31, 1998 AND 1997
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
SONIC SYSTEMS CORPORATION
We have audited the accompanying consolidated balance sheets of SONIC SYSTEMS
CORPORATION as at December 31, 1998 and 1997 and the related consolidated
statements of loss, stockholders' equity and cash flows for each of the two
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sonic
Systems Corporation at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations raise substantial doubt about its ability to continue as
a going concern. The 1998 financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Vancouver, Canada,
March 19, 1999. Chartered Accountants
37
<PAGE>
SONIC SYSTEMS CORPORATION
Incorporated under the laws of Delaware
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
[See Nature of Business and Liquidity - Note 1]
As at December 31
(expressed in U.S. dollars)
1998 1997
$ $
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS [NOTE 10]
CURRENT
Cash and cash equivalents 256,524 191,015
Accounts receivable, less allowance of $nil in 1998 and 1997 251,554 25,465
Investment tax credit receivable 209,972 171,307
Inventory [NOTE 5] 200,851 78,312
Prepaid expenses 14,385 16,877
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 933,286 482,976
- ------------------------------------------------------------------------------------------------------------------
Property and equipment (net) [NOTE 6] 57,332 48,577
Patents (net) [NOTE 7] 500,080 172,857
- ------------------------------------------------------------------------------------------------------------------
1,490,698 704,410
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities [NOTE 9] 276,999 131,130
Loans payable [NOTE 10] 226,877 --
Product warranty 23,706 --
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 527,582 131,130
- ------------------------------------------------------------------------------------------------------------------
Loans payable [NOTE 10] 40,762 13,963
Product warranty 8,904 --
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 577,248 145,093
- ------------------------------------------------------------------------------------------------------------------
Commitments [NOTES 10 AND 13]
STOCKHOLDERS' EQUITY
Share stock [NOTE 12]
Common stock, $0.001 par value 1,000,000,000
authorized, 19,589,368 issued and outstanding 19,589 6,638
Additional paid in capital 4,274,104 2,197,691
Other accumulated comprehensive income 8,298 27,224
Accumulated deficit (3,388,541) (1,672,236)
- ------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 913,450 559,317
- ------------------------------------------------------------------------------------------------------------------
1,490,698 704,410
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
On behalf of the Board:
Director Director
38
<PAGE>
SONIC SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
Years ended December 31
<TABLE>
<CAPTION>
(expressed in U.S. dollars)
1998 1997
$ $
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Sales and other 318,768 293,614
Government Grant [NOTE 14] 43,742 16,193
- -------------------------------------------------------------------------------------------------
362,510 309,807
Cost of goods sold 525,660 286,389
- ------------------------------------------------------------------------------------------------------------------
(163,150) 23,418
- ------------------------------------------------------------------------------------------------------------------
EXPENSES
Research and development [NOTE 11] 248,192 233,227
Marketing 386,674 269,737
General and administrative [NOTE 16] 918,289 365,284
- ------------------------------------------------------------------------------------------------------------------
1,553,155 868,248
- ------------------------------------------------------------------------------------------------------------------
LOSS FOR THE YEAR (1,716,305) (844,830)
COMPREHENSIVE LOSS
Net loss for the year (1,716,305) (844,830)
Foreign currency translation (18,926) 27,224
- ------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS (1,735,231) (817,606)
- ------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per common share [NOTE 12 [d]] (0.15) (0.08)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
39
<PAGE>
SONIC SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Other
accumulated Additional Common Total
Common Accumulated comprehensive paid-in stock issued stockholders'
stock deficit income capital and outstanding equity
# $ $ $ $ $
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEEMED OUTSTANDING AS OF
DECEMBER 31, 1996 4,567,501 (827,406) -- 803,809 4,568 (19,029)
Deemed issued for cash pursuant
to private placements, net of
share issue costs of ($55,612) 2,013,500 -- -- 1,352,581 2,014 1,354,595
Deemed issued for services rendered
[NOTE 12[c]] 69,400 -- -- 50,039 69 50,108
Deemed shares repurchased for cash (12,500) -- -- (8,738) (13) (8,751)
Net loss for the year -- (844,830) -- -- -- (844,830)
Foreign currency translation -- -- 27,224 -- -- 27,224
- -----------------------------------------------------------------------------------------------------------------------------------
DEEMED OUTSTANDING AS OF
DECEMBER 31, 1997 6,637,901 (1,672,236) 27,224 2,197,691 6,638 559,317
Deemed issued for cash pursuant to
private placement, net of share
issue costs of $50,844 1,293,467 -- -- 662,213 1,293 663,506
Deemed issued pursuant to options
exercised [NOTE 12[e]] 225,000 -- -- 81,319 225 81,544
Deemed issued for services rendered
[NOTE 12[c]] 33,000 -- -- 22,980 33 23,013
Deemed issued for the acquisition of
Tekedge [NOTE 3] 400,000 -- -- 271,968 400 272,368
Deemed stock dividend [NOTE 12[a]] 1,216,092 -- -- (1,216) 1,216 --
Deemed shares issued to employees
for past service [note 12[a]] 1,283,908 -- -- 136,116 1,284 137,400
Shares deemed issued on acquisition
of Sonic Delaware [NOTE 1] 1,000,000 -- -- -- 1,000 1,000
Issued pursuant to an offering
memorandum, net of share issue
costs [NOTE 1] 7,500,000 -- -- 903,033 7,500 910,533
Net loss for the year -- (1,716,305) -- -- -- (1,716,305)
Foreign currency translation -- -- (18,926) -- -- (18,926)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 19,589,368 (3,388,541) 8,298 4,274,104 19,589 913,450
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
40
<PAGE>
SONIC SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
<TABLE>
<CAPTION>
(expressed in U.S. dollars)
1998 1997
$ $
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Loss for the year (1,716,305) (844,830)
Adjustments to reconcile loss to net cash used in
operating activities
Amortization [NOTE 7] 27,199 --
Depreciation [NOTE 6] 11,304 13,690
Shares issued for services [NOTE 12] 23,013 50,108
Stock based compensation [NOTE 16] 217,400 --
Changes in operating assets and liabilities
Accounts receivable (226,089) 58,387
Investment tax credit receivable (38,665) (81,033)
Inventory (122,539) (44,768)
Prepaid expenses 2,492 (2,545)
Accounts payable and accrued liabilities 69,864 17,990
Product warranty 32,610 --
- ------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,719,716) (833,001)
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Advances from (repayments to) shareholders -- (271,067)
Repayment of loan payable (4,663) --
Proceeds from loan payable 198,496 13,963
Proceeds on issue of common shares, net [NOTE 12] 665,050 1,345,844
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 858,883 1,088,740
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of property and equipment (23,661) (50,609)
Increase in patents (35,878) (47,225)
Cash acquired on acquisition of subsidiary [NOTE 1] 975,000 --
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 915,461 (97,834)
- ------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash
and cash equivalents 10,881 32,075
NET CHANGE IN CASH AND CASH EQUIVALENTS DURING YEAR 65,509 189,980
Cash and cash equivalents at beginning of year 191,015 1,035
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAr 256,524 191,015
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
41
<PAGE>
SONIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (expressed in U.S. dollars)
1. NATURE OF BUSINESS AND LIQUIDITY
Sonic Systems Corporation ("Sonic Delaware") develops, markets and sells
products incorporating sound spectrum technologies in Canada and the United
States. The Corporation's consolidated financial statements for the year ended
December 31, 1998 have been prepared on a going concern basis which contemplates
the realization of assets and the settlement of liabilities and commitments in
the normal course of business. The Corporation incurred a loss of $1,716,305 for
the year ended December 31, 1998. The ability of the Corporation to continue as
a going concern is dependent upon its ability to achieve profitable operations
and to obtain additional capital. The outcome of these matters cannot be
predicted at this time. No assurances can be given that the Corporation will be
successful in raising sufficient additional capital. Further, there can be no
assurance, assuming the Corporation successfully raises additional funds or
enters into a business alliance, that the Corporation will achieve positive cash
flow. If the Corporation is unable to obtain adequate additional financing or
enter into such business alliance, management will be required to sharply
curtail the Corporation's operating expenses. These financial statements do not
include any adjustments to the specific amounts and classifications of assets
and liabilities which might be necessary should the Corporation be unable to
continue in business.
Sonic Delaware was incorporated in Delaware on October 1, 1998. On December 11,
1998, Sonic Delaware acquired all of the issued and outstanding share capital of
Sonic Systems Corporation (British Columbia) ("Sonic B.C.") for consideration of
11,089,368 common shares. In anticipation of this transaction, the Company
issued 7,500,000 common shares for net proceeds of $910,533. Prior to these
transactions, Sonic Delaware was an inactive company with cash assets of $1,000.
As a result of this acquisition, the original shareholders of Sonic B.C., as a
group, owned more than 50% of the issued and outstanding voting shares of Sonic
Delaware. This transaction represents a recapitalization of Sonic B.C.
Consequently, this business combination has been accounted for as a reverse
acquisition whereby Sonic B.C. is deemed to have acquired Sonic Delaware. These
consolidated financial statements are a continuation of the financial statements
of the accounting acquirer, Sonic B.C. and reflect the accounts of Sonic B.C. at
their historic net book value and the accounts of Sonic Delaware at their
estimated fair value at the time of the transaction. For purposes of the
acquisition, the fair value of the net assets of Sonic Delaware of $1,000 is
ascribed to the 1,000,000 previously outstanding common shares of Sonic Delaware
deemed to be issued in the acquisition.
The combined issued and outstanding and additional paid-in-capital common stock
of the continuing consolidated entity as of December 11, 1998 is computed as
follows:
<TABLE>
<CAPTION>
$
- ---------------------------------------------------------------------------------------------------
<S> <C>
Existing share capital of Sonic B.C. as of December 11, 1998 prior to the acquisition 1,737,148
Deemed value of the acquired common shares of Sonic Delaware 1,000
Private placement, net of share issue costs 910,533
- ---------------------------------------------------------------------------------------------------
SHARE CAPITAL OF SONIC DELAWARE AS OF DECEMBER 11, 1998 2,648,681
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
The number of outstanding shares of Sonic Delaware as of December 11, 1998 is
computed as follows:
- ---------------------------------------------------------------------------------------------------
Deemed share capital of Sonic B.C. as of December 11, 1998 prior to the acquisition 11,089,368
Shares deemed issued on acquisition of Sonic Delaware 1,000,000
Shares issued in private placement 7,500,000
- ---------------------------------------------------------------------------------------------------
SHARES OF SONIC DELAWARE AS OF DECEMBER 11, 1998 19,589,368
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
SONIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (expressed in U.S. dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Sonic Delaware and
its wholly-owned subsidiaries, 568608 B.C. Ltd. (British Columbia, Canada),
Sonic B.C. (British Columbia, Canada), and 321373 B.C. Ltd. (British Columbia,
Canada). 568608 B.C. Ltd. is an inactive company.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
FINANCIAL INSTRUMENTS
Amounts reported for cash and cash equivalents, accounts receivable, investment
tax credit receivable, accounts payable and accrued liabilities, and loans
payable are considered to approximate fair value primarily due to their short
maturities and current interest rates.
43
<PAGE>
SONIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (expressed in U.S. dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory is carried at the lower of cost, determined on an average basis, and
market. Market is considered to be replacement cost for raw materials and net
realizable value for work in progress and finished goods. The cost of work in
process and finished goods includes the cost of raw materials, direct labour,
and an appropriate allocation of related overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are being depreciated over their
estimated useful lives on the declining balance basis at the following rates:
<TABLE>
<CAPTION>
<S> <C>
Computer equipment 30%
Furniture and fixtures 20%
Production equipment 20%
</TABLE>
In the year of acquisition only one-half of the depreciation is claimed.
PATENTS
Legal costs incurred for the registration of patents have been capitalized.
Patent costs are being amortized on a straight-line basis over their legal life
of 10 years. Patent costs are written off if, based on estimated future cash
flows, the cost is not expected to be recovered from future revenues.
INCOME TAXES
The Corporation uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to reverse. Recognition of deferred tax
assets is limited to amounts considered by management to be more likely than not
of realization in future periods.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
44
<PAGE>
SONIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (expressed in U.S. dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
Investments in long-lived assets are recorded at the lesser of historical cost
or net recoverable amount. The Corporation continually evaluates whether events
and circumstances have occurred indicating the remaining estimated useful life
of long-lived assets may warrant revision, or long-lived asset balances may not
be recoverable. If factors indicate long-lived assets have been impaired, the
Corporation uses an estimate, based on future cash flows, of the remaining value
of the long-lived assets in measuring recoverability. Unrecoverable amounts are
charged to operations in the applicable period.
FOREIGN EXCHANGE
The functional currency of the Corporation is the Canadian dollar, while the
reporting currency in the consolidated financial statements is the U.S. dollar.
Asset and liability accounts are translated into United States dollars at the
exchange rate in effect at the balance sheet date. Revenue and expense amounts
are translated at the average exchange rate for the year. Gains or losses
resulting from this process are recorded in stockholders' equity as an
adjustment to other accumulated comprehensive income.
REVENUE RECOGNITION
Revenue from the sale of products is recognized at the time goods are shipped to
customers. The products sold do not have a significant software component.
PRODUCT WARRANTIES
A liability for estimated warranty expense is established by a charge against
cost of goods sold at the time products are sold. The subsequent costs incurred
for warranty claims serve to reduce the product warranty liability. The actual
warranty costs the Corporation will ultimately pay could differ materially from
this estimate.
INVESTMENT TAX CREDITS
Prior to the acquisition of Sonic B.C. by the Corporation on December 11, 1998,
Sonic B.C. was a Canadian Controlled Private Corporation, as defined in the
Income Tax Act (Canada), and accordingly was entitled to receive a refund on a
portion of its investment tax credits earned on eligible expenditures. These
refundable investment tax credits were recorded in the year the qualifying
expenditure was made and applied to reduce the carrying costs of expenditures
for capital assets and research and development. The investment tax credit
balance relates to the pre-acquisition operations of Sonic B.C. As a result of
the acquisition, Sonic B.C. now earns investment tax credits which are no longer
refundable. The unrecognized investment tax credits are available in future
years to reduce income taxes payable.
RECENT PRONOUNCEMENT
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 will be effective for the Company's June 30,
2000 year end. The Company has not determined the impact, if any, of these
pronouncements on its consolidated financial statements.
45
<PAGE>
SONIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (expressed in U.S. dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Corporation considers all highly liquid financial instruments purchased with
an original maturity of three months or less to be cash equivalents. Cash
equivalents comprise mainly term deposits with an average interest rate of 3.50%
[1997 - nil].
STOCK-BASED COMPENSATION
The Corporation accounts for stock-based compensation based on the provision of
Accounting Principles Board Opinion #25 whereby the intrinsic value of options
granted is recorded at the measurement date. The Corporation has elected to only
disclose the effects of the fair value method of accounting for stock options
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 123.
COMPUTATION OF LOSS PER COMMON SHARE
Basic loss per share is computed by dividing the net loss attributable to common
stockholders by the weighted average number of common shares outstanding for
that period. Diluted loss per share is computed giving effect to all dilutive
potential common shares that were outstanding during the period. As at December
31, 1998 and 1997, the diluted loss per share will be equivalent to the basic
loss per share since the Corporation is in a loss position.
3. BUSINESS ACQUISITION
On July 3, 1998 the Corporation acquired 100% of the issued and outstanding
share stock of 321373 B.C. Ltd. (formerly Tekedge Development Corp. ("Tekedge"))
an inactive company. The acquisition was accounted for by the purchase
accounting method, in which the results of operations are included in the
Corporation's accounts from the date of acquisition. Details of this acquisition
are as follows:
<TABLE>
<CAPTION>
# OF SHARES $
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Purchase price 272,368
- ------------------------------------------------------------------------------------------------------------------
Consideration given:
Common shares issued July 3, 1998 400,000 272,368
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
SONIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (expressed in U.S. dollars)
3. BUSINESS ACQUISITIONS (CONTINUED)
The purchase price has been allocated according to the estimated fair values of
the assets and liabilities of Tekedge as follows:
<TABLE>
<CAPTION>
$
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Patents [NOTE 7] 344,749
Accounts payable (12,538)
Loan payable (59,843)
- ------------------------------------------------------------------------------------------------------------------
272,368
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
4. CONCENTRATION OF CREDIT RISK
The Corporation sells to several customers. The majority of sales for the year
ended December 31, 1998 were derived from one customer representing 27% of
consolidated sales. Sales for the year ended December 31, 1997 were derived from
1 customer, representing 81% of consolidated sales. As at December 31, 1998 the
aggregate accounts receivable balances relating to this customer was $82,408
($Cdn. 126,331) [1997 - $nil].
5. INVENTORY
<TABLE>
<CAPTION>
1998 1997
$ $
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials 44,709 48,000
Work in progress -- 30,312
Finished goods 156,142 --
- ------------------------------------------------------------------------------------------------------------------
200,851 78,312
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
SONIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (expressed in U.S. dollars)
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ---------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
$ $ $ $
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Computer equipment 49,508 19,866 46,260 14,513
Furniture and fixtures 24,990 7,815 21,481 4,641
Production equipment 11,671 1,156 -- --
- -------------------------------------------------------------------------------------------------------------------
86,169 28,837 67,741 19,154
- -------------------------------------------------------------------------------------------------------------------
Net book value 57,332 48,577
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
7. PATENTS
<TABLE>
<CAPTION>
1998 1997
---------------------------- ---------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
$ $ $ $
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Patents 526,389 26,309 172,857 --
- -------------------------------------------------------------------------------------------------------------------
Net book value 500,080 172,857
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
8. RELATED PARTY TRANSACTIONS
[a] Consulting fees of $50,323 ($Cdn. 78,000) [1997 - $96,070 ($Cdn. 133,000)]
were paid to directors of the Corporation during the year.
[b] Included in accounts receivable at December 31, 1998 is $31,170 ($Cdn.
47,783) due from a senior officer of the Corporation. The amount was repaid
subsequent to the year end.
48
<PAGE>
SONIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (expressed in U.S. dollars)
9. ACCOUNTS PAYABLE
<TABLE>
<CAPTION>
1998 1997
$ $
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trade accounts 169,977 35,540
Employee compensation 60,847 18,015
Accrued liabilities 46,175 77,575
- ------------------------------------------------------------------------------------------------------------------
276,999 131,130
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
10. LOANS PAYABLE
<TABLE>
<CAPTION>
1998 1997
$ $
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
British Columbia Advanced Systems Foundation 64,361 13,963
Royal Bank of Canada - credit facility, interest at prime + 3% 143,214 --
Government of Canada - Ministry of Western Economic
Diversification - interest at prime + 3% 60,064 --
- -------------------------------------------------------------------------------------------------------------------
267,639 13,963
Less: current portion 226,877 --
- ------------------------------------------------------------------------------------------------------------------
40,762 13,963
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest paid during the year ended December 31, 1998 amounted to $14,382
($Cdn. 22,052) [1997 - nil].
Canadian bank prime rate at December 31, 1998 was 6.75%.
GOVERNMENT OF BRITISH COLUMBIA
BRITISH COLUMBIA ADVANCED SYSTEMS FOUNDATION ("ASI")
The Corporation has agreed to perform certain specified research and development
work and ASI has agreed to assist in the funding of this work up to $65,220
($Cdn. 100,000).
49
<PAGE>
SONIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (expressed in U.S. dollars)
10. LOANS PAYABLE (CONTINUED)
One month after completion of the work, the Corporation must commence making
payments to ASI on a monthly basis for a period of up to 84 months, equal to the
greater of:
- - $777 ($Cdn. 1,191); or
- - Royalty payments equal to 10% of gross revenues on all products
incorporating the technology developed under this project.
The Corporation has the option to make a lump-sum payment to discharge the
obligation by making a minimum payment based upon a pre-determined formula. The
maximum obligation under the formula is 2.5 times the amount advanced.
GOVERNMENT OF CANADA
MINISTRY OF WESTERN ECONOMIC DIVERSIFICATION
The Corporation has entered into a loan agreement with the Federal Ministry of
Western Economic Diversification, whereby the Ministry agreed to make financial
contributions to assist in the development of certain research and development
projects. Under the terms of the original agreement, the total loan was to be
repaid in five equal semi-annual instalments commencing October 30, 1993. As of
December 31, 1998 the remaining balance to be repaid was $60,064 ($Cdn. 92,096)
and accordingly has been classified as a current liability. Until the loan is
fully repaid the Corporation has agreed to comply with certain contractual
responsibilities, including the following:
[a] to maintain adequate insurance coverage for the projects; and
[b] to not issue dividends, repay shareholder advances or make significant
changes in ownership or financing without the approval of the Ministry.
50
<PAGE>
SONIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (expressed in U.S. dollars)
10. LOANS PAYABLE (CONTINUED)
CREDIT FACILITY
The Corporation has a credit facility available with the Royal Bank of Canada.
This credit facility arrangement is in three segments as follows:
Segment 1 $Cdn. 100,000 ($US 65,220) demand operating loan for working capital
purposes with interest at the bank's prime rate plus 2% per annum. As at
December 31, 1998 and 1997, this facility was not utilized.
Segment 2 $Cdn. 500,000 ($US 326,100) demand reducing loan available under the
Western Economic Diversification IT&T Program with interest at the bank's prime
rate plus 3% per annum. Scheduled principal repayment terms have been arranged
over 5 years commencing July 1999. As at December 31, 1998, the unused portion
of this facility was $Cdn. 280,410 [1997 - $500,000].
Segment 3 $Cdn. 100,000 ($US 65,220) demand operating loan for investment tax
credit financing with interest at the bank's prime rate plus 2% per annum. As at
December 31, 1998 and 1997, this facility was not utilized.
The loans are collaterized by a general security agreement representing a first
charge on all of the Corporation's assets. There are also various covenants,
financial reporting requirements, margin requirements and conditions precedent
associated with the above credit facility arrangements.
11. RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
1998 1997
$ $
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Expenses 341,240 339,410
Less investment tax credit (93,048) (106,183)
- ------------------------------------------------------------------------------------------------------------------
Net expense 248,192 233,227
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
SONIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (expressed in U.S. dollars)
12. SHARE STOCK
[a] STOCK DIVIDEND AND STOCK ISSUED TO EMPLOYEES
Concurrent with the acquisition of Sonic B.C., the Corporation issued one
escrowed common share of Sonic Delaware to shareholders of Sonic B.C. for
every four shares of common stock of Sonic B.C. In addition certain
employees of Sonic B.C. were awarded a total of 1,283,908 escrowed common
stock of Sonic Delaware. The shares issued to employees have been recorded
as compensation expense based on the fair market value of the Corporation's
shares at the date of award.
These escrowed shares will be released from Escrow subject only to the
following terms:
[i] 700,000 escrowed shares ("Indemnity Shares") are held in
Escrow pursuant to the terms of the Escrow Agreement until the
11th day of June, 2000, at which time 420,000 Indemnity Shares
may be released from the terms of this Escrow Agreement and
thereafter an additional 70,000 Indemnity Shares may be released
from the terms of this Escrow Agreement on and after each of the
11th day of September, 2000, December, 2000, March, 2001 and
June, 2001;
[ii] 1,800,000 escrowed shares are held in escrow pursuant to the
terms of the Escrow Agreement until December 11, 1999, at which
time 720,000 escrowed shares may be released from the terms of
this Escrow Agreement and thereafter an additional 180,000
escrowed shares may be released from the terms of this Escrow
Agreement on and after each of the 11th day of March, 2000, June,
2000, September, 2000, December, 2000, March, 2001 and June,
2001.
[b] PERFORMANCE SHARES
In connection with the acquisition [see note 1] the Corporation agreed to
raise, on or before May 31, 1999, a minimum of $1,500,000 of gross proceeds
pursuant to a private offering of up to 500,000 common shares of the
Corporation. As collateral for performance of this obligation, 5,000,000
common shares were placed in escrow. If the above gross proceeds are not
raised, a percentage of the performance shares equal to the percentage of
the shortfall in gross proceeds are to be released and governed by a
general escrow agreement.
[c] SHARES ISSUED FOR SERVICES
During 1998 the Corporation issued 33,000 [1997 - 69,400] shares of the
Corporation to a third party for professional services provided. This
share transaction was valued at $23,013 ($Cdn. 33,000) [1997 - $50,108
($Cdn. 69,400)] which represented the fair market value of the services
received.
[d] LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss
per share:
<TABLE>
<CAPTION>
1998 1997
$ $
- ---------------------------------------------------------------------------------------
<S> <C> <C>
NUMERATOR
Loss for the year (1,716,305) (844,830)
DENOMINATOR
Weighted average number of common shares outstanding
less weighted average contingently issued shares 7,960,520 5,340,534
Escrowed shares 136,986 --
Performance shares 273,973 --
Basic and diluted loss per common share (0.23) (0.16)
- ---------------------------------------------------------------------------------------
</TABLE>
For the year ended December 31, 1998 all of the Company's common shares issuable
upon the exercise of stock options were excluded from the determination of
diluted loss per share as their effect would be anti-dilutive.
[e] STOCK OPTION PLAN
During the year ended December 31, 1998 the Corporation established a stock
option plan pursuant to which 3,000,000 common shares have been reserved
for issuance. The exercise price of certain of the employee stock options
granted during 1998 was less than the market price of the underlying stock
on the date of grant. Compensation expense of $80,000 related to the
options and the shares has been reflected in 1998.
52
<PAGE>
SONIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (expressed in U.S. dollars)
12. SHARE STOCK (continued)
Stock option transactions for the respective periods and the number of stock
options outstanding are summarized as follows:
<TABLE>
<CAPTION>
No. of common
shares issuable
- ------------------------------------------------------------------------------------
<S> <C>
Balance, December 31, 1997 and 1996 --
Options granted 2,612,000
Options exercised (225,000)
- ------------------------------------------------------------------------------------
Balance, December 31, 1998 2,387,000
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, the following options were outstanding:
<TABLE>
<CAPTION>
No. of common Exercise price
shares issuable $ Date of expiry
- ---------------------------------------------------------------------------------------
<S> <C> <C>
674,500 1.00 December 31, 2002
100,000 1.00 January 18, 2003
450,000 1.00 January 31, 2003
37,500 1.00 March 8, 2003
37,500 1.00 March 15, 2003
75,000 1.00 March 31, 2003
50,000 1.00 May 15, 2003
40,000 1.00 June 30, 2003
10,000 1.00 September 20, 2003
50,000 1.00 September 30, 2003
10,000 1.00 October 31, 2003
37,500 1.00 November 15, 2003
315,000 1.00 December 31, 2003
500,000 1.00 September 30, 2008
- ---------------------------------------------------------------------------------------
2,387,000
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
Stock options become exercisable at dates determined by the Board of Directors
at the time of granting the option. At December 31, 1998, 1,285,708 options were
exercisable.
Had compensation cost been determined based on the fair value at the grant dates
for those options issued to employees and consultants, consistent with the
method described in SFAS No. 123, the Corporation's loss and loss per common
share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
$ $
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss As reported (1,716,305) (844,830)
Pro forma (1,828,305) --
Basic and diluted loss per common share As reported (0.23) (0.16)
Pro forma (0.24) (0.16)
- ------------------------------------------------------------------------------------
</TABLE>
The fair value of each option granted in 1998 was estimated on the date of the
grant using the Minimum Value option-pricing model with the following
assumptions: no dividend yield; no volatility as the Corporation's stock was not
trading at the grant date; risk-free interest rate of 5% and an expected life of
four and one-half years.
The weighted-average fair value of options granted during the year was $0.13.
13. COMMITMENTS
The Corporation has the following future minimum lease commitments for premises
and equipment:
<TABLE>
<CAPTION>
$
- -------------------------------------------------------------------------------
<S> <C>
1999 26,088
2000 8,681
- -------------------------------------------------------------------------------
34,769
- -------------------------------------------------------------------------------
</TABLE>
In 1998, rent expense was $30,624 [1997 - $18,948].
14. GRANTS
During the year ended December 31, 1997 the Corporation entered into a
contribution agreement with the Transportation Development Centre whereby the
Corporation is entitled to receive approximately $118,720 ($Cdn. 182,000) or
50% of eligible expenditures, as defined in the agreement.
53
<PAGE>
SONIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997 (expressed in U.S. dollars)
15. INCOME TAXES
At December 31, 1998, the Corporation has a U.S. tax net operating loss
approximating $1,100,000, which will begin to expire in 2018 if not utilized.
The Corporation may have incurred "ownership changes" pursuant to applicable
Regulations in effect under Section 382 Internal Revenue Code of 1986, as
amended. Therefore, the Corporation's use of losses incurred through the date of
these ownership changes may be limited during the carryforward period.
The Corporation has Canadian tax net operating losses of approximately
$2,234,000, which expire as follows:
<TABLE>
<CAPTION>
$
- ----------------------------------------------------------------------------------------------------
<S> <C>
2000 18,000
2001 106,000
2002 346,000
2003 572,000
2004 1,192,000
- ----------------------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The Corporation has recognized a
valuation allowance equal to the deferred tax assets due to the uncertainty of
realizing the benefits of the assets. Significant components of the
Corporation's deferred tax assets and liabilities as of December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997
$ $
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards 1,019,000 344,000
Depreciation/amortization 209,000 22,000
Other 333,000 197,000
- ----------------------------------------------------------------------------------------------------
Total deferred tax assets 1,561,000 563,000
Total deferred tax liabilities -- --
- ----------------------------------------------------------------------------------------------------
Net deferred tax assets 1,561,000 563,000
Valuation allowance (1,561,000) (563,000)
- ----------------------------------------------------------------------------------------------------
Net deferred taxes -- --
- ----------------------------------------------------------------------------------------------------
</TABLE>
16. SEGMENTED INFORMATION
The Corporation principal business activity is engineering design and
manufacturing of sound spectrum technologies for the emergency preemption
market.
Sales to customers in the United States and Canada during the year ended
December 31, 1998 were $235,248 and $72,521 respectively [1997 - $228,833 and
$53,997].
17. COMPARATIVE FIGURES
Certain comparative figures have been restated to conform with the presentation
adopted in the current year.
54
<PAGE>
SONIC SYSTEMS CORPORATION
FINANCIAL STATEMENTS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
BALANCE SHEET
(Expressed in US dollars)
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30 31
1999 1998
(UNAUDITED) (AUDITED)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS $ $
CURRENT
Cash and cash equivalents 35,298 256,524
Accounts receivable 114,258 251,554
Investment tax credit receivable 118,180 209,972
Inventory 623,741 200,851
Prepaid expenses 29,318 14,385
- --------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 920,795 933,286
- --------------------------------------------------------------------------------------------------
Property and equipment (net) 51,584 57,332
Patents (net) 534,780 500,080
- --------------------------------------------------------------------------------------------------
1,507,159 1,490,698
- --------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable 554,948 169,990
Accrued liabilities 90,778 107,009
Loans payable 230,843 226,877
Product warranty 5,658 23,706
- --------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 882,227 527,582
- --------------------------------------------------------------------------------------------------
LONG-TERM
Loans payable 291,326 40,672
Product warranty 28,904 8,904
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,202,457 577,248
- --------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value 19,936 19,589
Additional paid in capital 5,203,761 4,274,104
Other accumulated comprehensive income 26,996 8,298
Accumulated deficit (4,945,991) (3,388,541)
- --------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 304,702 913,450
- --------------------------------------------------------------------------------------------------
1,507,159 1,490,698
- --------------------------------------------------------------------------------------------------
Number of common shares outstanding 19,935,868 19,589,368
</TABLE>
SEE ACCOMPANYING NOTES
55
<PAGE>
SONIC SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
(Expressed in US dollars)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
1999 1998
$ $
<S> <C> <C>
Sales and other 179,735 168,377
Cost of goods sold 261,812 328,131
- ----------------------------------------------------------------------------------------
Gross profit (82,077) (159,754)
- ----------------------------------------------------------------------------------------
EXPENSES
Research & Development 380,873 224,342
Sales & Marketing 363,713 258,053
General & Administrative 757,552 591,516
- ----------------------------------------------------------------------------------------
1,502,138 1,073,911
- ----------------------------------------------------------------------------------------
Other income (loss) 26,765 1,332
LOSS FOR THE PERIOD (1,557,450) (1,232,333)
Deficit, beginning of period (3,388,541) (1,672,236)
DEFICIT, END OF PERIOD (4,945,991) (2,904,569)
COMPREHENSIVE LOSS
Net loss for the period (1,557,450) (1,232,333)
Foreign currency translation 18,698 64,037
- ---------------------------------------------------------------------------------------
COMPREHENSIVE LOSS (1,538,752) (1,168,296)
- ---------------------------------------------------------------------------------------
Basic and diluted loss per share (0.08) (0.17)
Weighted average shares outstanding 19,667,090 6,927,890
</TABLE>
SEE ACCOMPANYING NOTES
56
<PAGE>
SONIC SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Expressed in US dollars)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1999 1998
$ $
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Loss for the period (1,557,450) (1,232,333)
Adjustments to reconcile loss to net cash
used in operating activities
Amortization 9,706 15,921
Depreciation 10,605 10,367
Shares issued for service 13,000 23,013
Stock based compensation - 32,618
Changes in operating assets and liabilities
Accounts receivable 137,296 (51,169)
Investment tax credit receivable 91,792 (16,234)
Inventory (422,890) (33,061)
Prepaid expenses (14,933) (7,966)
Accounts payable and accrued liabilities 368,727 39,652
Product warranty 1,952 14,640
- --------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,362,195) (1,204,552)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of loan payable (928,533) (4,686)
Proceeds from loan payable 1,183,064 530,169
Net proceeds from issuance of common shares 917,004 807,671
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,171,535 1,333,154
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Fixtures and equipment (4,857) (18,210)
Cost of intellectual property (44,406) (343,782)
- --------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (49,263) (361,992)
- --------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes
on cash and cash equivalents 18,697 64,035
NET CHANGE IN CASH AND CASH EQUIVALENTS
FOR PERIOD (221,226) (169,355)
Cash and cash equivalents, beginning of period 256,524 191,015
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 35,298 21,660
- --------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
57
<PAGE>
SONIC SYSTEMS CORPORATION
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The consolidated condensed interim financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures are adequate to
make information presented not misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that
these consolidated condensed financial statements be read in conjunction
with the financial statements and notes thereto, at December 31, 1998 and
for the two years then ended included in the Company's report on Form
10-SB. The Company follows the same accounting policies in preparation of
interim reports.
Results of operations for the interim periods are not necessarily
indicative of annual results.
The Company's consolidated financial statements for the nine months ended
September 30, 1999 have been prepared on a going concern basis which
contemplates the realization of assets and settlement of liabilities and
commitments in the normal course of business. The Company incurred a loss
of $1,557,450 for the nine months ended September 30, 1999. The ability of
the Company to continue as a going concern is dependent upon its ability
to achieve profitable operations and to obtain additional capital. The
outcome of these matters cannot be predicted at this time. No assurances
can be given that the Company will be successful in raising sufficient
additional capital. Further, there can be no assurance, assuming the
Company successfully raises additional funds or enters into a business
alliance, that the Company will achieve positive cash flow. If the Company
is unable to obtain adequate additional financing or enter into such
business alliance, management will be required to sharply curtail the
Company's operating expenses. These financial statements do not include
any adjustments to the specific amounts and classifications of assets and
liabilities which might be necessary should the Company be unable to
continue its business.
58
<PAGE>
(2) Equity Offering
During the nine months ending September 30, 1999 the Company received net
proceeds of approximately $918,000 from the sale of 340,000 common shares under
Regulation S. Gross proceeds were $1,020,000 and costs of issue were $102,000.
(3) Inventory
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
$ $
<S> <C> <C>
Raw Materials 140,831 44,709
Work in progress -- --
Finished Goods 482,910 156,142
- ------------------------------------------------------------------------------------------
623,741 200,851
- ------------------------------------------------------------------------------------------
</TABLE>
(4) Related party transactions
During the first nine months of 1999, the Company borrowed $1,183,064, of
which approximately $1,158,459 was borrowed from Integrated Global Financial
Corporation (IGF). Total borrowings from IGF during 1999 equaled $1,350,000.
IGF is affiliated with Integrated Equity Management, which has a contractual
relationship for services with Apel Financial, which is owned by one of the
directors of the Company. The loan was on terms favorable to the Company. The
Company repaid $918,000 prior to September 30, 1999 and repaid the remaining
$432,000 in October, 1999.
(5) Subsequent events
The Company issued common shares under Regulation S to persons residing outside
the United States as follows:
<TABLE>
<CAPTION>
Date of issue No. shares Consideration
<S> <C> <C> <C>
October 19, 1999 160,000 $480,000
November 15, 1999 200,000 $100,000
November 22, 1999 150,000 $75,000
December 15, 1999 142,857 $100,000
</TABLE>
The total number of common shares issued and outstanding as of December 31, 1999
was 20,588,725.
(6) Other income
Other income consists of a gain on foreign exchange. In the nine months ended
September 30, 1999, Sonic BC, which conducts its operations in Canadian
currency, purchased materials and services in U.S. currency. During the nine
month reporting period, the Canadian dollar appreciated against the U.S.
dollar, with the result that the U.S. denominated liabilities became
repayable using fewer Canadian dollars.
59
<PAGE>
Part III
INDEX TO EXHIBITS
2.1 Amended and Restated Certificate of Incorporation dated October 29, 1998,
accepted for filing on October 30, 1998 and in effect as of December 1,
1999.
2.2 By-Laws of the Company adopted October 30, 1998 and in effect as of
December 1, 1999.
3.1 Stock Escrow Agreement dated as of December 11, 1998.
6.1 1999 Stock Option Plan adopted by the Board of Directors on December 6,
1999 and amended February 22, 2000.
27 Financial Data Schedule
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
SONIC SYSTEM CORPORATION
------------------------
(Registrant)
Date March 4, 2000 By Bryan R. Wilson
------------------------
(Signature)
Bryan R. Wilson, Secretary
60
<PAGE>
EXHIBIT 2.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
M&M INTERNATIONAL REALTY, INC.
M&M International Realty, Inc., a corporation duly organized and
existing under the laws of the State of Delaware and whose initial Certificate
of Incorporation was filed with the Delaware Secretary of State on October 1,
1998 states that this Amended and Restated Certificate of Incorporation has been
duly adopted by the Incorporator pursuant to Section 245 and Section 241 of the
Delaware Corporations Law and no payment has been received for any stock and
hereby further states as follows:
FIRST: The name of this corporation shall be SONIC SYSTEMS
CORPORATION.
SECOND: Its registered office in the state of Delaware is to be located
at 9 East Lockerman Street, Dover, DE 19901 and its registered agent at such
address is National Registered Agents, Inc., the County of Kent.
THIRD: The purpose or purposes of the corporation shall be: To engage
in any lawful act or activity for which corporations may be organized under the
General Corporation Law of Delaware.
FOURTH: The total number of shares of stock which this corporation is
authorized to issue is: 100,000,000 shares of common stock, $0.001 par value.
FIFTH: Except as may otherwise be provided by the Board of Directors,
no holder of any shares of this corporation shall have any preemptive rights to
purchase, subscribe for or otherwise acquire any securities of this corporation
or any class of kind now or hereafter authorized.
SIXTH: There shall be no cumulative voting of shares of this
corporation.
SEVENTH: The number of directors of the corporation shall be no less
than one and no more than seven. Until their successors are elected and
qualified, or until their resignation or removal from office, or until the first
annual meeting of the shareholders of the corporation takes place, the initial
directors of this corporation shall be as follows:
Ken Maddison Norm Elliot
Dr. F. H. Schain
EIGHTH: Any "Extraordinary Corporate Action" shall require approval
<PAGE>
by a two-thirds vote of the corporation. Extraordinary Corporate Actions
requiring the two-thirds vote shall include the following:
(a) Any increase or decrease in the aggregate number of authorized
shares;
(b) Any action that would effect an exchange, cancellation or
reclassification of all or part of the shares of any one class of
shares into shares of another class;
(c) Any change in the designation, rights, preferences or limitations
of all or part of the shares of any one class;
(d) The creation of a new class of shares having rights or
preferences with respect to distributions or to dissolution that
are prior, superior or substantially equal to the shares of any
one existing class;
(e) Any cancellation, denial or change that would affect rights to
distribution or dividends that have accumulated but not yet been
declared on all of part of the shares of any one class;
(f) Any share merger or share exchange with another corporation;
(g) Any sale or transfer or other disposition of all or substantially
all of the corporation's assets, other than in the regular course
of business;
(h) Any proposed dissolution of the corporation;
(i) Any amendment to the Certificate of Incorporation, except for the
following, which may be done by the Board of Directors without
shareholder approval:
(1) If the corporation has only one class of shares outstanding,
to provide, change or eliminate any provision with respect
to the par value of any class of shares;
(2) To delete the names and addresses of the initial directors;
(3) To delete the name and address of the initial registered
agent or registered office, if a statement of change is on
file with the secretary of state; and/or
(4) If the corporation has only one class of shares outstanding,
solely to change the number of authorized shares to
effectuate a split of, or stock dividend in the
corporation's own shares, or solely to do so and to change
the number of authorized shares in proportion thereto.
NINTH: The name and mailing address of the incorporator is as follows:
Columbia Corporate Services, Inc.
701 Fifth Avenue, Suite 5701
Seattle, Washington 98104-7003
TENTH: The Board of Directors shall have the power to adopt, amend or
repeal the bylaws of the corporation.
IN WITNESS WHEREOF, the undersigned, being the incorporator
hereinbefore named, has executed, signed and acknowledged this amended and
restated certificate of incorporation this 29th day of October, 1998.
Columbia Corporate Services, Inc.
By:
-------------------------------------------
Ken Zeringer, President
Incorporator
<PAGE>
EXHIBIT 2.2
BYLAWS OF
SONIC SYSTEMS CORPORATION
ARTICLE I
OFFICES
The principal office of the corporation shall be located at its
principal place of business or such other place as the Board of Directors (the
"Board") may designate. The corporation may have such other offices, either
within or without the State of Delaware, as the Board may designate or as the
business of the corporation may require from time to time.
ARTICLE II
SHAREHOLDERS
2.1 ANNUAL MEETING. The annual meeting of the shareholders shall be
held on the third Tuesday in October of each year at 10:00 am, for the purpose
of electing directors and officers and transacting such business as may properly
come before the meeting. If the day fixed for the annual meeting is a legal
holiday at the place of the meeting, the meeting shall be held on the next
succeeding business day. If the annual meeting is not held on the date
designated therefor, the Board shall cause the meeting to be held as soon
thereafter as may be convenient.
2.2 SPECIAL MEETINGS. The President, the Board, or the holders of not
less than one-fifth of all the outstanding shares of the corporation entitled to
vote at the meeting may call special meetings of the shareholders for any
purpose.
2.3 MEETINGS BY TELEPHONE. Shareholders may participate in a meeting of
the shareholders by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other at the same time. Participation by such means shall constitute
presence in person at a meeting.
2.4. PLACE OF MEETING. All meetings shall be held at the principal
office of the corporation or at such other place within or without the State of
Delaware designated by the Board, by any persons entitled to call a meeting or
by a waiver of notice signed by all of the shareholders entitled to vote at the
meeting.
2.5 NOTICE OF MEETING. The President, the Secretary, the Board, or
shareholders calling an annual or special meeting of shareholders as provided
for herein, shall cause to be delivered to each shareholder entitled to notice
of or to vote at the meeting either personally or by mail or facsimile
transmission, not less than ten (10) nor more than fifty (50) days before the
meeting, written notice stating the place, day and hour of the meeting and, in
the case of a special meeting, the purpose or purposes for which the meeting is
called. At any time, upon written request of the holders of not less than
one-fifth of all of the outstanding shares of the corporation entitled to vote
at the meeting, it shall be the duty of the Secretary to give notice of a
special meeting of shareholders to be held on such date and at such place and
time as the Secretary may fix, not less than ten (10) nor more than thirty-five
(35) days after receipt of said request, and if the Secretary shall neglect or
refuse to issue such notice, the person making the request may do so and may fix
the date for such meeting. If such notice is mailed, it shall be deemed
delivered when deposited in the official government mail properly addressed to
the shareholder at his or her address as it appears on the stock transfer books
of the corporation with postage prepaid. If the notice is telegraphed, it shall
be deemed delivered when the telegram is delivered to the telegraph company. If
the notice is transmitted by facsimile, it shall be deemed delivered when
received.
2.6 WAIVER OF NOTICE. Whenever any notice is required to be given to
any shareholder under the provisions of these Bylaws, the Articles of
Incorporation or the Delaware Business Corporation Act, a
<PAGE>
waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice.
2.7 FIXING OF RECORD DATE FOR DETERMINING SHAREHOLDERS. For the purpose
of determining shareholders entitled to notice of, or to vote at, any meeting of
shareholders or any adjournment thereof, or shareholders entitled to receive
payment of any dividend, or in order to make a determination of shareholders for
any other purpose, the Board may fix in advance a date as the record date for
any such determination. Such record date shall be not more than fifty (50) days,
and in case of a meeting of shareholders, not less than ten (10) days prior to
the date on which the particular action requiring such determination is to be
taken. If no record date is fixed for the determination of shareholders entitled
to vote at a meeting or to receive payment of a dividend, the date and hour on
which the notice of meeting is mailed or on which the resolution of the Board
declaring such dividend is adopted, as the case may be, shall be the record date
and time for such determination. Such a determination shall apply to any
adjournment of the meeting.
2.8 VOTING RECORD. At least ten (10) days before each meeting of
shareholders, a complete record of the shareholders entitled to vote at such
meeting, or any adjournment thereof, shall be made, arranged in alphabetical
order, with the address of and number of shares held by each shareholder. This
record shall be kept on file at the registered office of the corporation for ten
(10) days prior to such meeting and shall be kept open at such meeting for the
inspection of any shareholder.
2.9 QUORUM. A majority of the outstanding shares of the corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of the shareholders. If less than one hundred percent of the
outstanding shares entitled to vote are represented at a meeting, a majority of
the shares so represented may adjourn the meeting from time to time without
further notice. If a quorum is present or represented at a reconvened meeting
following such an adjournment, any business may be transacted that might have
been transacted at the meeting as originally called.
2.10 MANNER OF ACTING. If a quorum is present, the affirmative vote of
a majority of the shares represented at the meeting and entitled to vote on the
subject matter shall be the act of the shareholders, unless the vote of a
greater number is required by these Bylaws, the Articles of Incorporation or the
Delaware Business Corporation Act.
2.11 PROXIES. A shareholder may vote by proxy executed in writing by
the shareholder or by his or her attorney-in-fact. Such proxy shall be filed
with the Secretary of the corporation before or at the time of the meeting. A
proxy shall become invalid eleven months after the date of its execution, unless
otherwise provided in the proxy. A proxy with respect to a specified meeting
shall entitle the holder thereof to vote at any reconvened meeting following
adjournment of such meeting but shall not be valid after the final adjournment
thereof.
2.12 VOTING OF SHARES. Each outstanding share entitled to vote with
respect to the subject matter of an issue submitted to a meeting of shareholders
shall be entitled to one vote upon each such issue.
2.13 VOTING FOR DIRECTORS. Each shareholder entitled to vote at an
election of directors may vote, in person or by proxy, the number of shares
owned by such shareholder for as many persons as there are directors to be
elected and for whose election such shareholder has a right to vote, or, unless
otherwise provided in the Articles of Incorporation, each such shareholder may
cumulate his or her votes by distributing among one or more candidates as many
votes as are equal to the number of such directors multiplied by the number of
his or her shares.
2.14 ACTION BY SHAREHOLDERS WITHOUT A MEETING. Any action which could
be taken at a meeting of the shareholders may be taken without a meeting if a
written consent setting forth the action so taken is signed by all shareholders
entitled to vote with respect to the subject matter thereof. Any such consent
shall be inserted in the minute book as if it were the minutes of a meeting of
the shareholders.
<PAGE>
ARTICLE III
BOARD OF DIRECTORS
3.1 GENERAL POWERS. All corporate powers shall be exercised by or under
the authority of, and the business and affairs of the corporation shall be
managed under the direction of, the Board, except as may be otherwise provided
in these Bylaws, the Articles of Incorporation or the Delaware Business
Corporation Act.
3.2 NUMBER AND TENURE. The Board shall be composed of no less than one
(1) director and no more than seven (7) directors. The directors named in the
Amended and Restated Articles of Incorporation of the Company shall be empowered
to name an initial Board of seven directors. The number of directors may be
changed from time to time by action of the shareholders, but no decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director. Unless a director dies, resigns, or is removed, he or she
shall hold office until the next annual meeting of shareholders or until his or
her successor is elected, whichever is later. Directors need not be shareholders
of the corporation or residents of the State of Delaware.
3.3 ANNUAL AND REGULAR MEETINGS. An annual Board meeting shall be held
without notice immediately after and at the same place as the annual meeting of
shareholders. A resolution of the Board, or any committee thereof, may specify
the time and place either within or without the State of Delaware for holding
regular meetings thereof without other notice than such resolution.
3.4 SPECIAL MEETINGS. Special meetings of the Board or any committee
appointed by the Board may be called by or at the request of the Chairman of the
Board, the President, the Secretary or any one director. The person or persons
authorized to call special meetings may fix any place either within or without
the State of Delaware as the place for holding any special Board meeting called
by them.
3.5 MEETINGS BY TELEPHONE. Members of the Board or any committee
designated by the Board may participate in a meeting of such Board or committee
by means of a conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other at the
same time. Participation by such means shall constitute presence in person at a
meeting.
3.6 NOTICE OF SPECIAL MEETINGS. Written notice of a special Board or
committee meeting stating the place, day and hour of the meeting shall be given
to a director at his or her address shown on the records of the corporation.
Neither the business to be transacted at, nor the purpose of, any special
meeting need be specified in the notice of such meeting.
3.6.1 PERSONAL DELIVERY. If delivery is by personal service,
the notice shall be effective if delivered at such address at least two (2) days
before the meeting.
3.6.2 DELIVERY BY MAIL. If notice is delivered by mail, the
notice shall be deemed effective if deposited in the official government mail
properly addressed with postage pre-paid at least five (5) days before the
meeting.
3.6.3 DELIVERY BY TELEX OR FACSIMILE. If notice is delivered
by telex or facsimile, the notice shall be deemed effective if sent and
evidenced by transmission receipt or report at least three (3) days before the
meeting.
3.7 WAIVER OF NOTICE.
3.7.1 IN WRITING. Whenever any notice is required to be given
to any director under the provisions of these Bylaws, the Articles of
Incorporation or the Delaware Business Corporation Act, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board need be specified in the waiver of
notice of such meeting.
<PAGE>
3.7.2 BY ATTENDANCE. The attendance of a director at a Board
or committee meeting shall constitute a waiver of notice of such meeting, except
where a director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened.
3.8 QUORUM. A majority of the directors shall constitute a quorum for
the transaction of business at any Board meeting. A majority of the directors
present may adjourn the meeting from time to time without further notice.
3.9 MANNER OF ACTING. The act of the majority of the directors present
at a Board or committee meeting at which there is a quorum shall be the act of
the Board or of such committee, unless the vote of a greater number is required
by these Bylaws, the Articles of Incorporation, or the Delaware Business
Corporation Act.
3.10 PRESUMPTION OF ASSENT. A director of the corporation present at a
Board or committee meeting at which action on any corporate matter is taken
shall be presumed to have assented to the action taken unless his or her dissent
is entered in the minutes of the meeting, or unless such director files a
written dissent to such action with the person acting as the secretary of the
meeting before the adjournment thereof, or forwards such dissent by registered
mail to the Secretary of the corporation immediately after the adjournment of
the meeting. A director who voted in favor of such action may not dissent.
3.11 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING. Any action which
could be taken at a meeting of the Board or of any committee appointed by the
Board may be taken without a meeting if a written consent setting forth the
action so taken is signed by each of the directors or by each committee member.
Any such written consent shall be inserted in the minute book as if it were the
minutes of a Board or a committee meeting.
3.12 RESIGNATION. Any director may resign at any time by delivering
written notice to the Chairman of the Board, the President, the Secretary or the
Board, or to the registered office of the corporation, or by giving oral notice
at any meeting of the directors or shareholders. Any such resignation shall take
effect at the time specified therein, or if the time is not specified, upon
delivery thereof and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
3.13 REMOVAL. At a meeting of shareholders called expressly for that
purpose, one or more members of the Board (including the entire Board) may be
removed, with or without cause, by a vote of the holders of a majority of the
shares then entitled to vote on the election of directors. If the Articles of
Incorporation permit cumulative voting in the election of directors, and if less
than the entire Board is to be removed, no one of the directors may be removed
if the votes cast against his or her removal would be sufficient to elect such
director if then cumulatively voted at an election of the entire Board.
3.14 VACANCIES. Any vacancy occurring on the Board may be filled by the
affirmative vote of all of the remaining directors though less than a quorum of
the Board. A director elected to fill a vacancy shall be elected for the
unexpired term of his or her predecessor in office. Any directorship to be
filled by reason of an increase in the number of directors may be filled by the
Board for a term of office continuing only until the next election of directors
by the shareholders.
3.15 COMPENSATION. By Board resolution, directors may be paid their
expenses, if any, of attendance at each Board meeting, or a fixed sum for
attendance at each Board meeting, or a stated salary as a director, or a
combination of the foregoing. No such payment shall preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor.
<PAGE>
ARTICLE IV
OFFICERS
4.1 NUMBER. The officers of the corporation shall be a President and a
Secretary, each of whom shall be elected by the Board. The Board may also elect
a Vice President and a Treasurer, as well as other officers and assistant
officers, including a Chairman of the Board as may be elected or appointed by
the Board, such officers and assistant officers to hold office for such period,
have such authority and perform such duties as are provided in these Bylaws or
as may be provided by resolution of the Board. Any officer may be assigned by
the Board any additional title that the Board deems appropriate. The Board may
delegate to any officer or agent the power to appoint any such subordinate
officers or agents and to prescribe their respective terms of office, authority
and duties. Any two or more offices may be held by the same person.
4.2 ELECTION AND TERM OF OFFICE. The officers of the corporation shall
be elected annually by the Board at the Board meeting held after the annual
meeting of the shareholders. If the election of officers is not held at such
meeting, such election shall be held as soon thereafter as a Board meeting
conveniently may be held. Unless an officer dies, resigns, or is removed from
office, he or she shall hold office until the next annual meeting of the Board
or until his or her successor is elected.
4.3 RESIGNATION. Any officer may resign at any time by delivering
written notice to the President, the Secretary, the Board, or, if elected or
appointed, the Chairman of the Board or a Vice President, or by giving oral
notice at any meeting of the Board. Any such resignation shall take effect at
the time specified therein, or if the time is not specified, upon delivery
thereof and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
4.4 REMOVAL. Any officer or agent elected or appointed by the Board may
be removed by the Board whenever in its judgment the best interests of the
corporation would be served thereby, but such removal shall be without prejudice
to the contract rights, if any, of the person so removed.
4.5 VACANCIES. A vacancy in any office created by the death,
resignation, removal, disqualification, creation of a new office or any other
cause may be filled by the Board for the unexpired portion of the term or for a
new term established by the Board.
4.6 PRESIDENT. The President shall preside over meetings of the Board
and shareholders and, subject to the Board's control, shall supervise and
control all of the assets, business and affairs of the corporation. The
President may sign certificates for shares of the corporation, deeds, mortgages,
bonds, contracts, or other instruments, except when the signing and execution
thereof have been expressly delegated by the Board or by these Bylaws to some
other officer or agent of the corporation or are required by law to be otherwise
signed or executed by some other officer or in some other manner. In general,
the President shall perform all duties incident to the office of President, and
such other duties as are prescribed by the Board from time to time.
4.7 VICE PRESIDENT. Except as otherwise provided herein, in the absence
of the President or his inability to act, the senior Vice President shall act in
his place and stead and shall have all the powers and authority of the
President, except as limited by resolution of the Board of Directors.
4.8 SECRETARY. The Secretary shall: (a) keep the minutes of meetings of
the shareholders and the Board in one or more books provided for that purpose;
(b) see that all notices are duly given in accordance with the provisions of
these Bylaws or as required by law; (c) be custodian of the corporate records of
the corporation; (d) keep registers of the post office address of each
shareholder and Director; (e) sign certificates for shares of the corporation;
(f) have general charge of the stock transfer books of the corporation; (g)
sign, with the President, or other officer authorized by the President or the
Board, deeds, mortgages, bonds, contracts, or other instruments; and (h) in
general perform all duties incident to the office of Secretary and such other
duties as from time to time may be assigned to him or her by the President or by
the Board. In the absence of the Secretary, an Assistant Secretary may perform
the duties of the Secretary.
<PAGE>
4.9 TREASURER. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate account of receipts and
disbursements in books belonging to the corporation. He shall deposit all monies
and other valuables in the name and to the credit of the corporation in such
depositories as may be designated by the Board of Directors. The Treasurer shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, the Chairman of the board (if there is one), or the President, taking
proper vouchers for such disbursements. He shall render to the Chairman of the
board (if there is one), the President and the Board of Directors at the regular
meetings of the Board of Directors, or whenever they may request it, and to the
shareholders at the annual meeting of the shareholders, an account of all his
transactions as treasurer and of the financial condition of the corporation. If
required by the Board of Directors he shall give the corporation a bond for the
faithful discharge of his duties in such amount and with such surety as the
board shall prescribe. The Treasurer shall also perform such other duties as may
be assigned to him by the Chairman of the board (if there is one), the President
or the Board of Directors.
ARTICLE V
CONTRACTS, LOANS, CHECKS AND DEPOSITS
5.1 CONTRACTS. The Board may authorize any officer or officers, or
agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the corporation. Such authority may
be general or confined to specific instances.
5.2 LOANS. No loans shall be contracted on behalf of the corporation
and no evidences of indebtedness shall be issued in its name unless authorized
by a resolution of the Board. Such authority may be general or confined to
specific instances. No loans shall be made by the corporation secured by its
shares.
5.3 LOANS TO OFFICERS AND DIRECTORS. No loans shall be made by the
corporation to its officers or directors, unless first approved by the holders
of at least two-thirds of the outstanding shares.
5.4 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation shall be signed by such officer or officers, or agent or agents,
of the corporation and in such manner as is from time to time determined by
resolution of the Board.
5.5 DEPOSITS. All funds of the corporation not otherwise employed shall
be deposited from time to time to the credit of the corporation in such banks,
trust companies or other depositories as the Board may select.
ARTICLE VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 ISSUANCE OF SHARES. No shares of the corporation shall be issued
unless authorized by the Board, which authorization shall include the maximum
number of shares to be issued and the consideration to be received for each
share.
6.2 CERTIFICATES FOR SHARES. Certificates representing shares of the
corporation shall be signed by the President and the Secretary and shall include
on their face written notice of any restrictions which may be imposed on the
transferability of such shares. All certificates shall be consecutively numbered
or otherwise identified.
6.3 STOCK RECORDS. The stock transfer books shall be kept at the
registered office or principal place of business of the corporation or at the
office of the corporation's transfer agent or registrar. The name and address of
the person to whom the shares represented thereby are issued, together with the
class, number of shares and date of issue, shall be entered on the stock
transfer books of the corporation. The
<PAGE>
person in whose name shares stand on the books of the corporation shall be
deemed by the corporation to be the owner thereof for all purposes.
6.4 RESTRICTIONS ON TRANSFER. Except to the extent that the corporation
has obtained an opinion of counsel acceptable to the corporation that transfer
restrictions are not required under applicable securities laws, all certificates
representing shares of the corporation shall bear the following legend on the
face of the certificate or on the reverse of the certificate if the reference to
the legend is contained on the face:
The securities evidenced by this Certificate have not been registered
under the Securities Act of 1933 or any applicable state law, and no
interest therein may be sold, distributed, assigned, offered, pledged
or otherwise transferred unless (a) there is an effective registration
statement under such Act and applicable state securities laws covering
any such transaction involving said securities or (b) this corporation
receives an opinion of legal counsel for the holder of these securities
(concurred in by legal counsel for this corporation) stating that such
transaction is exempt from registration or (c) this corporation
otherwise satisfies itself that such transaction is exempt from
registration.
6.5 TRANSFER OF SHARES. The transfer of shares of the corporation shall
be made only on the stock transfer books of the corporation pursuant to
authorization or document of transfer made by the holder of record thereof or by
his or her legal representative, who shall furnish proper evidence of authority
to transfer, or by his or her attorney-in-fact authorized by power of attorney
duly executed and filed with the Secretary of the corporation. All certificates
surrendered to the corporation for transfer shall be canceled and no new
certificate shall be issued until the former certificates for a like number of
shares shall have been surrendered and canceled.
6.6 LOST OR DESTROYED CERTIFICATES. In the case of a lost, destroyed or
mutilated certificate, a new certificate may be issued therefor upon such terms
and indemnity to the corporation as the Board may prescribe.
ARTICLE VII
BOOKS AND RECORDS
The corporation shall keep correct and complete books and records of
account, stock transfer books, minutes of the proceedings of its shareholders
and Board and such other records as may be necessary or advisable.
ARTICLE VIII
ACCOUNTING YEAR
The accounting year of the corporation shall be the calendar year,
provided that if a different accounting year is at any time selected for
purposes of federal income taxes, the accounting year shall be the year so
selected.
ARTICLE IX
SEAL
The seal of the corporation shall consist of the name of the
corporation, the state of its incorporation and the year of its incorporation.
ARTICLE X
INDEMNIFICATION
To the full extent permitted by the Delaware Business Corporation Act,
the corporation shall indemnify any person made or threatened to be made a party
to any proceeding (whether brought by or in the right of the corporation or
otherwise) by reason of the fact that he or she is or was a director or officer
<PAGE>
of the corporation, or is or was serving at the request of the corporation as a
director or officer of another corporation, against judgments, penalties, fines,
settlements and reasonable expenses (including attorneys' fees), actually
incurred by him or her in connection with such proceeding; and the Board may, at
any time, approve indemnification of any other person which the corporation has
the power to indemnify under the Delaware Business Corporation Act. The
indemnification provided by this Article shall not be deemed exclusive of any
other rights to which a person may be entitled as a matter of law or by contract
or by vote of the Board or its shareholders. The corporation may purchase and
maintain indemnification insurance for any person to the extent provided by
applicable law. Any indemnification of a Director pursuant to this article,
including any payment or reimbursement of expenses, shall be reported to the
shareholders with the notice of the next meeting of shareholders or prior
thereto in a written report containing a brief description of the proceedings
involving the director being indemnified and the nature and extent of such
indemnification.
ARTICLE XI
AMENDMENTS
These Bylaws may be altered, amended or repealed and new Bylaws may be
adopted by the Board. The shareholders may also alter, amend and repeal these
Bylaws or adopt new Bylaws. All Bylaws made by the Board may be amended,
repealed, altered or modified by the shareholders.
The foregoing Bylaws were adopted by the Board of Directors on October
30, 1998.
------------------------------------------
Ken Maddison, Secretary
<PAGE>
EXHIBIT 3.1
BONUS SHARES ESCROW AND PLEDGE AGREEMENT
THIS AGREEMENT dated the ____ day of December, 1998.
AMONG:
SONIC SYSTEMS CORPORATION, a Delaware corporation (the
"Depositor ")
AND:
SONIC SYSTEMS CORPORATION Suite 101-1520 Rand Avenue
Vancouver, B.C.
V6P 3G2 (the "Company ")
AND:
THE SHAREHOLDERS OF THE COMPANY
more particularly described in Section 2.01 (b) below
(the "Shareholders")
WHEREAS:
A. The Depositor issued 2,500,000 shares of common stock (the "Escrowed
Shares") pursuant to the terms of a stock exchange agreement (the
"Stock Exchange Agreement") dated November 18, 1998 between the
Depositor and the Company;
B. The Escrowed Shares are deposited under this Escrow Agreement for the
benefit of the Company and the Shareholders pursuant to the terms of
this Escrow Agreement; and
C. A total of 700,000 Escrowed Shares shall be pledged to the Depositor as
security for representations, warranties, and covenants of the Company
set out in the Stock Exchange Agreement;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the premises and
of the respective covenants and agreements hereinafter contained and good and
other valuable consideration (the receipt and sufficiency whereof is hereby
acknowledged by the parties hereto), the parties hereto covenant and agree each
with the other as follows:
<PAGE>
1.01 DEPOSIT AND TRANSFER OF BONUS SHARES
The Depositor hereby transfers to the Company all right, title, and interest in
and to the Escrowed Shares and deposits with Monahan & Biagi, P.L.L.C., Columbia
Center, 701 Fifth Avenue, Suite 5701, Seattle, Washington, 98104-7003 (the
"Escrow Agent") certificates representing the Escrowed Shares, duly registered
in the name of the Company.
2.01 RELEASE FROM ESCROW
The Company shall have complete authority with respect to determining when the
Escrowed Shares are to be released from the terms of this Escrow Agreement, to
whom the Escrowed Shares are to be released from the terms of this Escrow
Agreement, and in what quantities the Escrowed Shares are to be released from
the terms of this Escrow Agreement, subject only to the following terms:
(a) 700,000 Escrowed Shares ("Indemnity Shares") shall be held in escrow
pursuant to the terms of this Escrow Agreement until the ________ day
of June, 2000, at which time and thereafter 420,000 Indemnity Shares
may be released from the terms of this Escrow Agreement and thereafter
an additional 70,000 Indemnity Shares may be released from the terms of
this Escrow Agreement on and after each of the _____ day of September,
2000, December, 2000, March, 2001,and June, 2001;
(b) 1,800,000 Escrowed Shares shall be held in escrow pursuant to the terms
of this Escrow Agreement until the ________ day of December, 1999, at
which time and thereafter 720,000 Escrowed Shares may be released from
the terms of this Escrow Agreement and thereafter an additional 180,000
Escrowed Shares may be released from the terms of this Escrow Agreement
on and after each of the _____ day of March, 2000, June, 2000,
September, 2000, December, 2000, March, 2001,and June, 2001; and
(c) One Escrowed Share which is not an Indemnity Share shall be issued
(subject to the terms of this Escrow Agreement) to those shareholders
of the Company (the "Shareholders") for every four (no fractional
shares will be issued) shares of common stock of the Depositor issued
to the Shareholders pursuant to the Offer (as defined in the Stock
Exchange Agreement), other than with respect to (i) the shares of
common stock issued pursuant to the tendering of securities of the
Company issued at a cost of $0.01, and (ii) the shares of common stock
issued for securities of the Company pursuant to a compulsory
acquisition procedure or subsequent acquisition transaction.
3.01 PLEDGE
The Company hereby assigns, mortgages, charges, hypothecates and pledges to and
in favour of the Depositor, all of the Indemnity Shares subject to the terms of
this Escrow Agreement as security for Losses (as defined in the Stock Exchange
Agreement) incurred as a result of a Cause Event (as defined in the Stock
Exchange Agreement).
4.01 REORGANIZATION
In the event of any reorganization (whether affecting the share capital or
corporate reorganization or otherwise) of the Depositor, the term "Indemnity
Shares" shall be deemed to refer to the Indemnity Shares described in Section
2.01 (a) hereof, as affected by such reorganization.
5.01 COVENANT OF COMPANY AND SHAREHOLDERS
Each of the Company and the Shareholders hereby covenants with the Depositor
that during the term of this Escrow Agreement neither the Company nor the
Shareholders will, without the written consent of the Depositor, sell, assign,
transfer, dispose of, pledge or encumber in any way the Escrowed Shares or
Indemnity Shares that have not been released pursuant to the terms of this
Escrow Agreement.
<PAGE>
6.01 ENFORCEMENT BY DEPOSITOR
If any Losses (as defined in the Stock Exchange Agreement) are incurred by the
Depositor after the Closing Date (as defined in the Stock Exchange Agreement)
from a Cause Event (as defined in the Stock Exchange Agreement), then that
number of Indemnity Shares equal in value to the Losses (based on the price per
share as of the date of occurrence of facts or circumstances giving rise to the
Cause Event), which are security under this Escrow Agreement (and have not been
previously released pursuant to the terms of this Escrow Agreement), shall
become immediately enforceable by the Depositor, and in such event that number
of Indemnity Shares shall be released from this Escrow Agreement and all right s
thereto, including certificates therefor, shall be immediately transferred and
delivered to the Depositor.
7.01 RIGHTS OF DEPOSITOR
At any time after all or a portion of the security constituted by this Escrow
Agreement shall become enforceable as provided herein, the Depositor shall be
entitled to:
(a) exercise any and all corporate rights and exercise any and all rights
of conversion, exchange, subscription or other rights, privileges or
options pertaining to the Indemnity Shares subject to enforcement
rights under this Escrow Agreement as the absolute owner thereof; and
(b) exercise any and all rights and remedies provided by applicable law.
8.01 TERMINATION OF PLEDGE
On ______ day of June, 2001 any security created and granted under this Escrow
Agreement shall terminate and any Indemnity Shares not subject to enforcement
rights under this Escrow Agreement shall become and be free and clear of the
mortgage, pledge and charge hereof. In that event the Company shall be entitled
to the delivery of all certificates, powers of attorneys, instruments and other
documents for the Indemnity Shares not subject to enforcement rights under this
Escrow Agreement.
9.01 RIGHTS OF PLEDGORS
Until the security constituted by this Escrow Agreement shall have become
enforceable as provided in Section 6.01 hereof, the Company shall be entitled to
exercise all rights and privileges (including voting the Indemnity Shares at any
meeting of, and with respect to any action taken by, the Company as holders of
the Indemnity Shares) and to receive all benefits to which the Company are
entitled by virtue of being the owners and registered owners of the Indemnity
Shares.
10.01 COSTS AND EXPENSES
All costs and charges incurred by or on behalf of the Depositor with reference
to the Indemnity Shares or the realization thereof (including, without
limitation, all legal fees and court costs and all expenses of realizing upon
the security including without limitation, costs and charges in connection with
realizing, collecting, selling, transferring, or delivering the Indemnity Shares
or exercising or enforcing its rights thereunder) shall be added to and form a
part of the obligations of the Company and shall be a first charge upon the
proceeds of any such realization, collection, sale, transfer or delivery, or
exercise.
11.01 EXCLUSIVE REMEDY
The Depositor shall have no other recourse against the Shareholders or the
Company other than any rights in and to the Indemnity Shares which the Depositor
holds under this Pledge Agreement.
<PAGE>
12.01 NO MERGER
The security hereby constituted shall not operate by way of merger of any of the
Stock Exchange Agreement and no judgment recovered by the Depositor shall
operate by way of merger of or in any way affect the security of the Indemnity
Shares which is in addition to and not in substitution for any other security
now or hereafter held by the Depositor.
13.01 APPOINTMENT OF ATTORNEY FOR ENFORCEMENT
The Depositor is hereby irrevocably appointed attorney of the Company with full
powers of substitution after the security constituted by this Escrow Agreement
has become enforceable, at any time and from time to time thereafter to endorse
and/or transfer the Indemnity Shares or any of them, and the Depositor, its
nominees or transferees are hereby empowered to exercise all rights and powers
and to perform all acts of ownership with respect to the Indemnity Shares to the
same extent as the Company might do.
14.01 ATTACHMENT
The Company and the Depositor acknowledge that it is their intention that the
security interests herein created shall attach on the execution hereof by the
Company and that value has been given.
15.01 TERMINATION OF ESCROW AGREEMENT
On ______ day of June, 2001 this Escrow Agreement shall terminate and any
security created under this Escrow Agreement shall become and be free and clear
of the mortgage, pledge and charge hereof.
16.01 SUCCESSORS AND ASSIGNS
The provisions hereof shall be binding upon and enure to the benefit of the
Depositor and the Company and their respective successors and assigns.
17.01 GOVERNING LAW
This Escrow Agreement shall be governed by and construed in accordance with the
laws of the State of Washington, without regard to such jurisdiction's conflicts
of laws principles, and shall be treated in all respects as a Washington
contract.
18.01 FURTHER ASSURANCES
The Depositor shall from time to time do all such acts and things and execute
and deliver all such deeds, transfers, assignments and instruments as the
Company may reasonably require for perfecting the security constituted hereby
and for facilitating the sale of the Escrowed Shares in connection with any
realization thereof and for exercising all powers, authorities and discretion
hereby conferred upon the Company.
19.01 TERMINATION
On the _____ day of June, 2001 this Escrow Agreement shall terminate and be of
no further force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement on
the day and year first above written.
SONIC SYSTEMS CORPORATION,
A DELAWARE CORPORATION
<PAGE>
BY:________________________
ITS:_______________________
SONIC SYSTEMS CORPORATION,
A BRITISH COLUMBIA CORPORATION
BY:________________________
ITS:_______________________
BRYAN WILSON, AS TRUSTEE
FOR THE SHAREHOLDERS
- ---------------------------
<PAGE>
EXHIBIT 6.1
SONIC SYSTEMS CORPORATION
(A DELAWARE CORPORATION)
1999 STOCK OPTION PLAN
1. PURPOSE. The purpose of the 1999 Stock Option Plan (the "Plan") is to provide
a means by which SONIC SYSTEMS CORPORATION, a Delaware corporation, (the
"Company") may attract, reward, and retain services or advice of current or
future employees, officers, directors, and agents of the Company and to provide
added incentives to them by encouraging stock ownership in the Company.
2. ADMINISTRATION. This Plan shall be administered by the Board of Directors of
the Company (the "Board") or, if the Board shall authorize a committee to
administer this Plan, by such committee to the extent so authorized; provided,
however, that only the Board of Directors may suspend, amend or terminate this
Plan as provided in Section 13, and provided further that a committee that
includes officers of the Company shall not be permitted to grant options to
persons who are officers of the company. The administrator of this Plan is
referred to as the "Plan Administrator."
2.1 PROCEDURES. The Board of Directors shall designate one member of
the Plan Administrator as chairman. The Plan Administrator may hold meetings at
such times and places as it shall determine. The acts of a majority of the
members of the Plan Administrator present at meetings at which a quorum exists,
or acts approved in writing by all Plan Administrator members, shall constitute
valid acts of the Plan Administrator.
2.2 POWERS. Subject to the specific provisions of this Plan, the Plan
Administrator shall have the authority, in its discretion: (a) to grant the
stock options described in Section 5, including Incentive Stock Options and
Non-Qualified Stock Options, and to designate each option granted as an
Incentive Stock Option or a Non-Qualified Stock Option; (b) to determine, in
accordance with Section 5.1(f) of this Plan, the fair market value of the shares
of Common Stock subject to options; (c) to determine the exercise price per
share of options; (d) to determine the Optionees to whom, and the time or times
at which, options shall be granted and the number of shares of common stock to
be represented by each option; (e) to interpret this Plan; (f) to prescribe,
amend and rescind rules and regulations relating to this Plan; (g) to determine
the terms and provisions of each option granted (which need not be identical)
and, with the consent of the Optionee, modify or amend each option; (h) to
reduce the exercise price per share of outstanding and unexercised options; (i)
to defer, with the consent of the Optionee, or to accelerate the exercise date
of any option; (j) to waive or modify any term or provisions contained in any
option applicable to the underlying shares of Common Stock; (k) to authorize any
person to execute on behalf of the Company any instrument required to effectuate
the grant of an option previously granted by the Plan Administrator; and (l) to
make all other determinations deemed necessary or advisable for the
administration of this Plan. The interpretation and construction by the Plan
Administrator of any terms or provisions of this Plan, any option issued
hereunder or of any rule or regulation promulgated in connection herewith and
all actions taken by the Plan Administrator shall be conclusive and binding on
all interested parties. The Plan Administrator may delegate administrative
functions to individuals who are officers or employees of the Company.
2.3 LIMITED LIABILITY. No member of the Board of Directors or the Plan
Administrator or officer of the Company shall be liable for any action or
inaction of the entity or body, or another person or, except in circumstances
involving bad faith, of himself or herself. Subject only to compliance with the
explicit provisions hereof, the Board of Directors and Plan Administrator may
act in their absolute discretion in all matters related to the Plan.
<PAGE>
2.4 SECURITIES EXCHANGE ACT OF 1934. At any time that the Company has a
class of securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), this Plan shall be administered in
accordance with Rule 16b-3 adopted under the Exchange Act and Section 162(m) of
the Internal Revenue Code of 1986, as amended, and the regulations, proposed and
final, thereunder, as all may be amended from time to time, and each member of
the Plan Administrator shall be a "disinterested director" and an "outside
director" with the meaning of such Rule 16b-3 and Section 162(m), respectively.
3. STOCK SUBJECT TO THIS PLAN. Subject to adjustment as provided below and in
Section 11 hereof, the stock subject to this Plan shall be the Company's common
stock (the "Common Stock"), and the total number of shares of Common Stock to be
delivered on the exercise of all options granted under this Plan shall not
exceed 5,000,000 shares as such Common Stock was constituted on the Effective
Date of this Plan (as defined in Section 15 hereof). If any option granted under
this Plan expires, is surrendered, exchanged for another option, canceled or
terminated for any reason without having been exercised in full, the unpurchased
shares subject thereto shall again be available for purposes of this Plan,
including for replacement options that may be granted in exchange for such
surrendered, canceled or terminated options. Shares issued on exercise of
options granted under this Plan may be subject to restrictions on transfer,
repurchase rights or other restrictions as determined by the Plan Administrator.
4. ELIGIBILITY.
4.1 OPTIONEES. The Plan Administrator may award options to any current
or future employee, officer, agent, consultant or director of the Company or its
subsidiaries. Any party to whom an option is granted under this Plan is referred
to as an "Optionee."
4.2 SUBSIDIARIES. As used in this Plan, the term "subsidiary" of a
company shall include any corporation in which such company owns, directly or
indirectly, at the time of the grant of an option hereunder, stock having 50% or
more of the total combined voting power of all classes of stock thereof.
5. AWARDS. The Plan Administrator, from time to time, may take the following
actions, separately or in combination, under this Plan: (a) grant Incentive
Stock Options, as defined in Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), to any employee of the Company or its subsidiaries, as
provided in Section 5.1 of this Plan; (b) grant options other than Incentive
Stock Options ("Non-Qualified Stock Options"), as provided in Section 5.2 of
this Plan; (c) grant options to officers, employees and others in foreign
jurisdictions, as provided in Section 7 of this Plan; and (d) grant options in
certain acquisition transactions, as provided in Section 8 of this Plan.
5.1 INCENTIVE STOCK OPTIONS. Incentive Stock Options shall be subject
to the following terms and conditions:
(a) Incentive Stock Options may be granted under this Plan
only to employees of the company or its subsidiaries, including employees who
are directors.
(b) No employee may be granted Incentive Stock Options under
this Plan to the extent that the aggregate fair market value, on the date of
grant, of the Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by that employee during any calendar year, under
this Plan and under any other incentive stock option plan (within the meaning of
Section 422 of the Code) of the Company or any subsidiary, exceeds $100,000. To
the extent that any option designated as an Incentive Stock Option exceeds the
$100,000 limit, such option shall be treated as a Non-Qualified Stock Option. In
making this determination, options shall be taken into account in the order in
which they were granted, and the fair market value of the shares of Common Stock
shall be determined as of the time that the option with respect to such shares
was granted.
(c) An Incentive Stock Option may be granted under this Plan
to an employee possessing more than 10% of the total combined voting power of
all classes of stock of the Company (as
<PAGE>
determined pursuant to the attribution rules contained in Section 424(d) of the
Code) only if the exercise price is at least 110% of the fair market value of
the Common Stock subject to the option on the date the option is granted, as
described in Section 5.1(f) of this Plan, and only if the option by its terms is
not exercisable after the expiration of five years from the date it is granted.
(d) Except as provided in Section 5.5 of this Plan, no
Incentive Stock Option granted under this Plan may be exercised unless at the
time of such exercise the Optionee is employed by the Company or any subsidiary
of the company and the Optionee has been so employed continuously since the date
such option was granted.
(e) Subject to Sections 5.1.(c) and 5.1.(d) of this Plan,
Incentive Stock Options granted under this Plan shall continue in effect for the
period fixed by the Plan Administrator, except that no Incentive Stock Option
shall be exercisable after ten years from the date it is granted.
(f) The exercise price shall not be less than 100% of the fair
market value of the shares of Common Stock covered by the Incentive Stock Option
at the date the option is granted. The fair market value of shares shall be the
closing price per share of the Common Stock on the last day on which the shares
traded before the date of grant, as reported on a securities quotation system or
stock exchange. If such shares are not so reported or listed, the Plan
Administrator shall determine the fair market value of the shares of Common
Stock in its discretion.
(g) The provisions of clauses (b) and (c) of this Section
shall not apply if either the applicable sections of the Code or the regulations
thereunder are amended so as to change or eliminate such limitations or to
permit appropriate modifications of those requirements by the Plan
Administrator.
5.2 NON-QUALIFIED STOCK OPTIONS. Non-Qualified Stock Options shall be
subject to the following terms and conditions:
(a) The exercise price may be more or less than or equal to
the fair market value of the shares of Common Stock covered by the Non-Qualified
Stock Option on the date the option is granted, and the exercise price may
fluctuate based on criteria determined by the Plan Administrator. The fair
market value of shares of Common Stock covered by a Non-Qualified Stock Option
shall be determined by the Plan Administrator, as described in Section 5.1(f).
(b) Unless otherwise established by the Plan Administrator,
any Non-Qualified Stock Option shall terminate ten years after the date it is
granted.
5.3 VESTING. To ensure that the Company will achieve the purposes of
and receive the benefits contemplated in this Plan, any option granted to any
Optionee hereunder shall be exercisable according to a vesting schedule or no
vesting schedule as established or determined by the Plan Administrator.
5.4 NONTRANSFERABILITY. Options granted under this Plan and the rights
and privileges conferred hereby may not be transferred, assigned,
pledged or hypothecated in any manner (whether by operation of law
or otherwise) other than by will or by the applicable laws of
descent and distribution, shall not be subject to execution,
attachment or similar process, and shall be exercisable during the
Optionee's lifetime only by the Optionee. Any purported transfer
or assignment in violation of this provision shall be void.
5.5 TERMINATION OF OPTIONS.
(a) GENERALLY. Unless otherwise determined by the Plan
Administrator or specified in the Optionee's Option Agreement, if the Optionee's
employment or service with the Company Terminates for any reason other than for
cause, resignation, retirement, disability or death, and unless by its terms the
option sooner terminates or expires, then the Optionee may exercise, for a
three-month period, that portion of the Optionee's option that was exercisable
at the time of such termination of employment or
<PAGE>
service (provided the conditions of Section 6.4 and any other conditions
specified in the Option Agreement shall have been met by the date of exercise of
such option).
(b) FOR CAUSE; RESIGNATION.
(i) If an Optionee is terminated for cause or
resigns in lieu of dismissal, any option granted hereunder shall be deemed to
have terminated as of the time of the first act that led or would have led to
the termination for cause or resignation in lieu of dismissal and such Optionee
shall thereupon have no right to purchase any shares of Common Stock pursuant to
the exercise of such option, and any such exercise shall be null and void.
Termination for "cause" shall include (i) the violation by the Optionee of any
reasonable rule or policy of the Board of Directors or the Optionee's superiors
or the chief executive officer or the chief operating officer of the Company
that results in damage to the Company or which, after notice to do so, the
Optionee fails to correct within a reasonable time; (ii) any willful misconduct
or gross negligence by the Optionee in the responsibilities assigned to him or
her: (iii) any willful failure to perform his or her job as required to meet the
objectives of the Company; (iv) any wrongful conduct of an Optionee that has an
adverse impact on the Company or that constitutes a misappropriation of the
assets of the Company; (v) unauthorized disclosure of confidential information;
or (vi) the Optionee's performing services for any other company or person that
competes with the Company while he or she is employed by or provides services to
the Company, without the written approval of the chief executive officer of the
Company. "Resignation in lieu of dismissal" shall mean a resignation by an
Optionee of employment with or service to the Company if (i) the Company has
given prior notice to such Optionee of its intent to dismiss the Optionee for
circumstances that constitute cause, or (ii) within two months of the Optionee's
resignation, the chief operating officer or the chief executive officer of the
Company or the Board of Directors determines, which determination shall be final
and binding, that such resignation was related to an act that would have led to
a termination for cause.
(ii) If an Optionee resigns from the Company, the
right of the Optionee to exercise his or her option shall be suspended for a
period of two months from the date of resignation, unless the chief executive
officer of the Company or the Board of Directors determines otherwise in
writing. Thereafter, unless there is a determination that the Optionee resigned
in lieu of dismissal, the option may be exercised at any time before the earlier
of (i) the expiration date of the option (which shall have been similarly
suspended) or (ii) the expiration of three months after the date of resignation,
for that portion of the Optionee's option that was exercisable at the time of
such resignation (provided the conditions of Section 6.4 and any other
conditions specified in the Option Agreement shall have been met at the date of
exercise of such option).
(c) RETIREMENT. Unless otherwise determined by the Plan
Administrator, if an Optionee's employment or service with the Company is
terminated with the company's approval for reasons of age, the Option may be
exercised at any time before the earlier of (a) the expiration date of the
option or (b) the expiration of three months after the date of such termination
of employment or service, for that portion of the Optionee's option that was
exercisable at the time of such termination of employment or service (provided
the conditions of Section 6.4 and any other conditions specified in the Option
Agreement shall have been met at the date of exercise of such option).
(d) DISABILITY. Unless otherwise determined by the Plan
Administrator, if an Optionee's employment or relationship with the Company
terminates because of a permanent or total disability (as defined in Section
22(e)(3) of the Code), the option may be exercised at any time before the
earlier of (a) the expiration date of the option or (b) the expiration of 12
months after the date of such termination, for up to the full number of shares
of Common Stock covered thereby, including any portion not yet vested (provided
the conditions of Section 6.4 and any other conditions specified in the Option
Agreement shall have been met by the date of exercise of such option).
(e) DEATH. Unless otherwise determined by the Plan
Administrator, in the event of the death of an Optionee while employed by or
providing service to the Company, the option may be exercised at any time before
the earlier of (a) the expiration date of the option or (b) the expiration of 12
months after the date of death by the person or persons to whom such Optionee's
rights under the option
<PAGE>
shall pass by the Optionee's will or by the applicable laws of descent and
distribution, for up to the full number of shares of Common Stock covered
thereby, including any portion not yet vested (provided the conditions of
Section 6.5 and any other conditions specified in the Option Agreement shall
have been met by the date of exercise of such option).
(f) EXTENSION OF EXERCISE PERIOD APPLICABLE TO TERMINATION.
The Plan Administrator, at the time of grant or at any time thereafter, may
extend the one-month, three-month and 12-month exercise periods to any length of
time not longer than the original expiration date of the option, and may
increase the portion of an option that is exercisable, subject to such terms and
conditions as the Plan Administrator may determine; provided, that any extension
of the exercise period or other modification of an Incentive Stock Option shall
be subject to the written agreement and acknowledgment by the Optionee that the
extension or modification disqualifies the option as an Incentive Stock Option.
(g) FAILURE TO EXERCISE OPTION. To the extent that the option
of any deceased Optionee or of any optionee whose employment or service
terminates is not exercised within the applicable period, all rights to purchase
shares of Common Stock pursuant to such options shall cease and terminate.
(h) TRANSFERS; LEAVES. For purposes of this Section 5.5, a
transfer of employment or other relationship between or among the Company and/or
any subsidiaries shall not be deemed to constitute a termination of employment
or other cessation of relationship with the Company or any of its subsidiaries.
For purposes of this Section 5.5, with respect to Incentive Stock Options,
employment shall be deemed to continue while the Optionee is on military leave,
sick leave or other bona fide leave of absence (as determined by the Plan
Administrator) in accordance with the policies of the Company.
6. EXERCISE.
6.1 PROCEDURE. Subject to the provisions of Section 5.3 above, each
option may be exercised in whole or in part; provided, however, that no fewer
than 100 shares (or the remaining shares then purchasable under the option, if
less than 100 shares) may be purchased on any exercise of any option granted
hereunder and that only whole shares will be issued pursuant to the exercise of
any option (the number of 100 shares shall not be changed by any transaction or
action described in Section 8 or Section 11 unless the Plan Administrator
determines that such a change is appropriate). Options shall be exercised by
delivery to the Secretary of the Company or his or her designated agent of
notice of the number of shares with respect to which the option is exercised,
together with payment in full of the exercise price and any applicable
withholding taxes.
6.2 PAYMENT. Payment of the option exercise price shall be made in full
when the notice of exercise of the option is delivered to the Secretary of the
Company or his or her designated agent and shall be in cash or bank certified or
cashier's check or through irrevocable instructions to a stock broker to deliver
the amount of sales proceeds necessary to pay the appropriate exercise price and
withholding tax obligations, all in accordance with applicable governmental
regulations, for the shares of Common Stock being purchased. The Plan
Administrator may determine at the time the option is granted for Incentive
Stock Options, or at an time before exercise for Non-Qualified Stock Options,
that additional forms of payment will be permitted.
6.3 WITHHOLDING. Before the issuance of shares of Common Stock on the
exercise of an option, the Optionee shall pay to the Company the amount of any
applicable federal, state or local tax withholding obligations. The Company may
withhold any distribution in whole or in part until the Company is so paid. The
Company shall have the right to withhold such amount from any other amounts due
or to become due from the Company to the Optionee, including salary (subject to
applicable law) or to retain and withhold a number of shares having a market
value not less than the amount of such taxes required to be withheld by the
Company to reimburse it for any such taxes and cancel (in whole or in part) any
such shares so withheld.
6.4 CONDITIONS PRECEDENT TO EXERCISE. The Plan Administrator may
establish conditions precedent to the exercise of any option, which shall be
described in the relevant Option Agreement.
<PAGE>
7. FOREIGN QUALIFIED GRANTS. Options under this Plan may be granted to officers
and employees of the Company and other person described in Section 4 who reside
in foreign jurisdictions as the Plan Administrator may determine form time to
time. The Board of Directors may adopt supplements to the Plan as needed to
comply with the applicable laws of such foreign jurisdictions and to give
Options favorable treatment under such laws; provided, however, that no award
shall be granted under any such supplement on terms more beneficial to such
Optionees than those permitted by this Plan.
8. CORPORATE MERGERS, ACQUISITIONS, ETC. The Plan Administrator may also grant
options under this Plan having terms, conditions and provisions that vary from
those specified in this Plan provided that such options are granted in
substitution for, or in connection with the assumption of, existing options
granted, awarded or issued by another corporation and assumed or otherwise
agreed to be provided for by the Company pursuant to or by reason of a
transaction involving a corporate merger, consolidation, acquisition of property
or stock, reorganization or liquidation to which the Company is a party.
9. HOLDING PERIOD. Unless otherwise determined by the Plan Administrator, if a
person subject to Section 16 of the Exchange Act exercises an option within six
months of the date of grant of the option, the shares of Common Stock acquired
on exercise of the option may not be sold until six months after the date of
grant of the option.
10. OPTION AGREEMENTS. Options granted under this Plan shall be evidenced by
written stock option agreements (the "Option Agreements") that shall contain
such terms, conditions, limitations and restrictions as the Plan Administrator
shall deem advisable and that are consistent with this Plan. All Option
Agreements shall include or incorporate by reference the applicable terms and
conditions contained in this Plan.
11. ADJUSTMENTS ON CHANGES IN CAPITALIZATION.
11.1 STOCK SPLITS, CAPITAL STOCK ADJUSTMENTS. The aggregate number and
class of shares for which options may be granted under this Plan, the number and
class of shares covered by each outstanding option and the exercise price per
share thereof (but not the total price), and each such option, shall all be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock of the Company resulting from a stock split, stock
dividend or consolidation of shares or any like capital stock adjustment.
11.2 EFFECT OF MERGER, SALE OF ASSETS, LIQUIDATION OR DISSOLUTION.
(a) MERGERS, SALE OF ASSETS, OTHER TRANSACTIONS. In the event
of a merger, consolidation or plan of exchange to which the Company is a party
or a sale of all or substantially all of the Company's assets (each, a
"Transaction"), the Board of Directors, in its sole discretion and to the extent
possible under the structure of the Transaction, shall select one of the
following alternatives for treating outstanding options under this Plan:
(i) Outstanding options shall remain in effect
in accordance with their terms;
(ii) Outstanding options shall be converted into
options to purchase stock in the corporation that is the surviving or acquiring
corporation in the Transaction. The amount, type of securities subject thereto
and exercise price of the converted options shall be determined by the Board of
Directors of the Company, taking into account the relative values of the
companies involved in the Transaction and the exchange rate, if any, used in
determining shares of the surviving corporation to be issued to holders of
shares of the Company. Unless otherwise determined by the Board of Directors,
the converted options shall be vested only to the extent that the vesting
requirements relating to options granted hereunder have been satisfied;
<PAGE>
(iii) The Board of Directors provides a period
before the consummation of the transaction during which outstanding options
shall be exercisable to the extent vested and, on the expiration of such period,
all unexercised options shall immediately terminate. The Board of Directors, in
its sole discretion, may accelerate the vesting of such options so that they are
exercisable in full during such period; or
(iv) The Board of Directors shall take such other
action with respect to outstanding options as the Board deems to be in the best
interests of the Company.
(b) LIQUIDATION; DISSOLUTION. If the Company is
liquidated or dissolved, options shall be treated in accordance with Section
11.2(a)(iii).
11.3 FRACTIONAL SHARES. If the number of shares covered by any option
is adjusted, any fractional shares resulting from such adjustment shall be
disregarded and each such option shall cover only the number of full shares
resulting from such adjustment.
11.4 DETERMINATION OF BOARD TO BE FINAL. All adjustments under this
Section 11 shall be made by the Board of Directors, and its determination as to
what adjustments shall be made, and the extent thereof, shall be final, binding
and conclusive. Unless an Optionee agrees otherwise, any change or adjustment to
an Incentive Stock Option shall be made, if possible, in such a manner so as not
to constitute a "modification," as defined in Section 424(h) of the Code, and so
as not to cause the Optionee's Incentive Stock Option to fail to continue to
qualify as an Incentive Stock Option.
12. SECURITIES REGULATIONS.
Shares of Common Stock shall not be issued with respect to an
option granted under this Plan unless the exercise of such option and the
issuance and delivery of such shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, any applicable state
securities laws, the Securities Act of 1933, as amended, the Exchange Act, the
rules and regulations promulgated thereunder, applicable laws of foreign
countries and other jurisdictions and the requirements of any quotation service
or stock exchange on which the shares may then be listed, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance, including the availability of an exemption from registration for the
issuance and sale of any shares hereunder. The inability of the Company to
obtain, from any regulatory body having jurisdiction, the authority deemed by
the Company's counsel to be necessary for the lawful issuance and sale of any
shares hereunder or the unavailability of an exemption from registration for the
issuance and sale of any shares hereunder shall relieve the Company of any
liability with respect of the nonissuance or sale of such shares as to which
such requisite authority shall not have been obtained.
As a condition to the exercise of an option, the company may
require the Optionee to represent and warrant at the time of any such exercise
that the shares of Common Stock are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any
relevant provision of the aforementioned laws. The Company may place a
stop-transfer order against any shares of Common Stock on the official stock
books and the records of the Company, and a legend may be stamped on stock
certificates to the effect that the shares of Common Stock may not be pledged,
sold or otherwise transferred unless an opinion of counsel is provided
(concurred in by counsel for the Company) stating that such transfer is not in
violation of any applicable law or regulation. The Plan Administrator may also
require such other action or agreement by the Optionees as may from time to time
be necessary to comply with the federal and state securities laws. THE PROVISION
SHALL NOT OBLIGATE THE COMPANY TO UNDERTAKE REGISTRATION OF THE OPTIONS OR STOCK
THEREUNDER.
If any of the Company's capital stock of the same class as the
Common Stock subject to options granted hereunder is listed on a national
securities exchange, all shares of Common Stock issued hereunder if not
previously listed on such exchange shall be authorized by that exchange for
listing thereon before the issuance thereof.
<PAGE>
13. AMENDMENT AND TERMINATION.
13.1 PLAN. The Board of Directors may at any time suspend, amend or
terminate this Plan, provided that, except as set forth in Section 8, the
approval of the Company's shareholders is necessary within twelve months before
or after the adoption by the Board of Directors of any amendment that will:
(a) increase the number of shares of Common Stock to be
reserved for the issuance of options under this Plan;
(b) permit the granting of stock options to a class of persons
other than those now permitted to receive stock options under this Plan; or
(c) require shareholder approval under applicable law,
including Section 16(b) of the Exchange Act.
13.2 OPTIONS. Subject to the requirements of Section 422 of the Code
with respect to Incentive Stock Options and to the terms and conditions and
within the limitations of this Plan, the Plan Administrator may modify or amend
outstanding options granted under this Plan. The modification or amendment of an
outstanding option shall not, without the consent of the Optionee, impair or
diminish any of his or her rights or any of the obligations of the Company under
such option. Except as otherwise provided in this Plan, no outstanding option
shall be terminated without the consent of the Optionee. Unless the Optionee
agrees otherwise, any changes or adjustments made to outstanding Incentive Stock
Options granted under this Plan shall be made in such a manner so as not to
constitute a "modification," as defined in Section 425(h)of the Code, and so as
not to cause any Incentive Stock Option issued hereunder to fail to continue to
qualify as an Incentive Stock Option as defined in Section 422(b) of the Code.
13.3 AUTOMATIC TERMINATION. Unless sooner terminated by the Board of
Directors, this Plan shall terminate ten years from the date on which this Plan
is adopted by the Board. No option may be granted after such termination or
during any suspension of this Plan. The amendment or termination of this Plan
shall not, without the consent of the Optionee, alter or impair any rights or
obligations under any option theretofore granted under this Plan.
14. MISCELLANEOUS.
14.1 TIME OF GRANTING OPTIONS. The date of grant of an option shall,
for all purposes, be the date on which the Company completes the required
corporate action relating to the grant of an option; the execution of an Option
Agreement and the conditions to the exercise of an option shall not defer the
date of grant.
14.2 NO STATUS AS SHAREHOLDER. Neither the Optionee nor any party to
which the Optionee's rights and privileges under the option may pass shall be,
or have any of the rights or privileges of, a shareholder of the Company with
respect to any of the shares of Common Stock issuable on the exercise of any
option granted under this Plan unless and until such option has been exercised
and the issuance (as evidenced by the appropriate entry on the books of the
Company or duly authorized transfer agent of the Company) of the stock
certificate evidencing such shares.
14.3 STATUS AS AN EMPLOYEE. Nothing in this Plan or any option granted
pursuant to this Plan shall confer on any Optionee any right to continue in the
employ of the Company, or to interfere in any way with the right of the Company
to terminate his or her employment or other relationship with the Company at any
time.
14.4 RESERVATION OF SHARES. The Company, during the term of this Plan,
at all times will reserve and keep available such number of shares of Common
Stock as shall be sufficient to satisfy the requirements of this Plan.
<PAGE>
15. EFFECTIVENESS OF THIS PLAN. This Plan shall become effective on the date on
which it is adopted by the Board of Directors of the Company (the "Effective
Date"). No option granted under this Plan to any officer or director of the
Company shall become exercisable until the Plan is approved by the shareholders,
and any option granted before such approval shall be conditioned on and is
subject to such approval.
Adopted by the Board of Directors on __________________________ 1999
and approved by the shareholders on ___________________________, 1999.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 256,524
<SECURITIES> 0
<RECEIVABLES> 251,554
<ALLOWANCES> 0
<INVENTORY> 200,851
<CURRENT-ASSETS> 933,286
<PP&E> 86,169
<DEPRECIATION> 28,837
<TOTAL-ASSETS> 1,490,698
<CURRENT-LIABILITIES> 527,582
<BONDS> 0
0
0
<COMMON> 19,589
<OTHER-SE> 4,274,104
<TOTAL-LIABILITY-AND-EQUITY> 1,490,698
<SALES> 362,510
<TOTAL-REVENUES> 362,510
<CGS> 525,660
<TOTAL-COSTS> 525,660
<OTHER-EXPENSES> 1,553,155
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,382
<INCOME-PRETAX> (1,716,305)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,716,305)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,716,305)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
